The reasons for value manipulation are well known. In the developing countries, where the import duty rates are usually high, the importers tend to undervalue the consignments to reduce their duty liability. Some countries also maintain quantitative restrictions based on value. Some others maintain a regime of exchange control.
Over valuation of imported cargo is also resorted to repatriate higher amounts of foreign exchange to make compensatory payments on other consignments. Normally over-valuation is noticed in respect of goods, attracting state-subsidised items, zero, or lower rates of import duty to launder money abroad.
Over valuation of imported goods is also noticed as a means of circumventing sliding rates of antidumping duty. In the case of export goods, over valuation is usually noticed for obtaining higher amounts of export incentives whereas under-valuation is resorted to for parking funds abroad.
Manipulation in customs value not only causes revenue loss but also creates a hostile trading environment for honest traders, by distorting the market. Value manipulation also provides an easier route for money laundering.
Adoption of a valuation system based on the WTO Agreement on Customs Valuations, with its emphasis on acceptance of transaction value, provides a greater scope for mis-declaring the customs value, particularly in a developing country scenario. Customs administrations in developing countries are usually ill equipped and lack trained personnel and financial resources, and hence find it difficult to cope with problems of value manipulation. Existence of corrupt elements in some administrations does not make the task any easier.
THE WAYS OF VALUE MANIPULATION ARE ALSO WELL KNOWN. SOME OF THESE ARE:
-- False invoicing, double invoicing, and third-country invoicing.
-- Misdeclaration of description, quantity, quality or grade of the imported goods.
-- Misdeclaration of freight and insurance charges.
-- Non-declaration of other dutiable charges.
-- Artificial Splitting of value for part consignments.
-- Suppression of related party transactions.
-- Transfer pricing etc.
This list is only illustrative and is no way an exhaustive list of all the modes of manipulating customs value. Keeping in view the basic reasons for value manipulation and the various ways this is done, this paper attempts to present a list of possible responses to such manipulation from a perspective of developing countries in particular.
Since high duty rates make manipulation in value more lucrative, reduction in duty rates is a possible solution. However, countries, which depend greatly on import taxes, may find it difficult to reduce duties beyond a point in the short run, though reduction in duty can also be partly compensated by way of greater yield from the resultant larger volume of imports at lower rates. In fact, checks on under-valuation and lowering of duty rates can go hand-in hand, as one leads to the other.
During last month a meeting of Engineering Development Board committee on the Sewing Machine Industry development was held in Board office in Islamabad wherein Senior Vice President of Lahore Sewing Machine Manufacturers and Traders Group Mr Ghulam Sarwar Chishti said that sewing machines and parts are imported at 80% lower value than the actual, and due to this reason, for the past fifty years, the sewing machine industry could not progress.
It is high time for Chairman CBR to look in to this manipulation and member Customs, Director General Customs Intelligence should be directed to judge the import value of domestic sewing machines and parts under market prices, to find out irregularities. It was emphasised that heavy under-invoicing occurred due to the CARE system of clearance, if customs authorities restrict the import of domestic sewing machines and parts under the CARE system, they can control under invoicing at large.
Reduction in import duty and greater reliance on it is ideal for curbing value-manipulation at which the import stage, is necessary. Many countries have irrational duty structures. On similar items, duty rates vary widely without any reason. Some times goods imported together are charged at varying duty rates (eg hardware and software).
In such a situation, the importer tends to artificially increase the value of goods, attracting zero or lower rates of duty and reduces the value for higher rated goods. The solution lies in rationalising the duty structure to a few uniform duty rates. The optimal tax theory also supports uniform duty rates on grounds of economic efficiency.
Much has been written about the merits of ad valorem duties over specific levies. However, even the most advanced countries have not given up the use of specific duties as can be seen from their tariffs. For specific items prone to gross under valuation, use of specific levies for short durations is an ideal solution.
However, when specific duties are imposed, the customs administration must closely monitor changes in the price levels and should have the flexibility to change the levels of specific duty either upward or downward.
Specific levies may not be ideal for a very diverse product group. WTO Member countries, which have bound their tariffs in terms of ad valorem duties, have also to ensure that specific levies do not exceed the tariff bindings.
For a product group which is characterised by large differences in quality and characteristics, a composite duty rate with both specific and ad valorem components may be more suitable, instead of a purely specific duty. While the specific duty component would ensure certain assured amounts of revenue, the ad valorem component would yield higher revenue on a high value product.
Some administrations have also used sliding rates of duties, with duty rates increasing for lower value items. While this kind of duty can curb under valuation, it can be regressive for genuinely low priced goods.
Fixed values such as standard values, minimum values and tariff values have been used by different customs administrations for curbing under-valuation and also for simplifying the assessment process when the market price of certain goods fluctuates widely.
Importance of a sound legal framework to tackle under-valuation can hardly be emphasised. The laws of a country must provide for declaration of the value, as well as retention of documents for a reasonable period, without which it would be difficult to investigate under-valuation cases and sustain penal actions in the Court of Law.
Many developing countries have also found it useful to write into their valuation law, the WTO Ministerial Decision on the rejection of declared value in doubtful cases. The valuation laws of some countries specifically provide for shifting the burden of proof to the importers, and also provide for deterrent penal provisions to deal with cases of gross under-valuation. In some national laws, there are also provisions to shift the burden on to the importers to show that the relationship has not influenced the price. Such provisions enable customs administrations to adequately deal with cases of manipulations.
A legal provision to take over goods by the customs at the declared value, backed by an efficient system of auctioning such goods, can also be an effective deterrent to under-valuation.
In the absence of an adequate valuation database, it is next to impossible for any customs administration to carry out a reasonable check regarding the truth and accuracy of declared value. Use of some of the methods of valuation also depends on past data of identical and similar imports. Building of a valuation database requires considerable resources and time.
Moreover, a valuation database gets outdated within a short time span due to changes in the market price. Yet, the past data also helps in establishing cases of value manipulation over a period of time.
An ideal valuation database should not only have transaction data from different ports, airports and land customs stations, but it should also have access to published price information from reputed commodity journals, which report current market prices based on actual transactions.
A database certainly helps in testing the truth and accuracy of declared values. Availability of current valuation data with customs also discourages importers from declaring false values. Use of a price matrix can also identify outliers for greater scrutiny.
Establishment of a valuation database and customs modernisation are inconceivable without adequate investment in Information Technology. Enormous amount of data is required to be analysed and compared with the declared values, which can only be done by employing adequate computing resources.
It is, therefore, imperative that a customs administration, wanting to tackle large-scale value misdeclaration, should be adequately equipped with the necessary computer hardware and software.
Since proper valuation depends on determination of the correct description, quantity, quality, grade and specification of the imported goods, Customs administrations must also invest in acquiring modern equipment such as container scanners to help in detection of misdeclaration leading to value manipulation.
Developing countries may have a resource constraint in providing the necessary equipment. An alternative solution can be found by either outsourcing jobs, such as scanning and inspection, to private enterprises or by building resources on a community ownership basis (joint ownership of public and private bodies).
Many customs administrations, in developing countries in particular, still persist with pre-clearance physical checks for customs assessment. While a physical check by a trained customs official of integrity had its own utility in the past, persisting with such checks in the modern world leads to port congestion, detention of containers, higher transaction costs and is detrimental to the economy as a whole.
Moreover, when a physical pre-clearance checking system has to depend upon inefficient and corrupt officials, the system leads to more leakages, delays and a high cost to the economy. Such a system in any case cannot cope with large scale under-valuation. Checks on documents relating to a singe consignment cannot also reveal parallel payments made through double invoicing over a period of time.
The solution lies in changing the transaction-based assessment system to a system, which is based on risk assessment and post clearance audit, coupled with a sound intelligence gathering system.
All these three areas require attention to supplement and reinforce the benefits that can be derived from each of these. The risk assessment parameters have to be designed using local inputs in each country and on a dynamic basis.
It is important to note that risk factors are not uniform across countries, or even across commodity sectors. Moreover, they keep changing over time. The post clearance audit system also depends on the expertise of Customs personnel deployed on audit work.
It has a limitation in deferring revenue realisation to a future date in the event of deficiencies discovered in audit. No customs administration can do without a sound intelligence gathering system and its necessity for checking under-valuation is vital since most of the customs frauds today relate to under valuation cases.
Training in valuation rules is a pre-requisite but is not sufficient for detection of under valuation. It is very important to have customs officials specialising in particular commodity markets. It is far easier to master the elaborate valuation rules than to develop expertise in specific commodity markets, and to be able to monitor the international price trends in such markets.
Most customs administrations follow a regular policy of rotation and transfer, which is highly detrimental to development of commodity specialisation. Apart from developing commodity specialisation, customs officials also need to develop intelligence gathering and enforcement skills to successfully detect valuation frauds and prosecute the offenders.
Phenomenal increase in intra-firm trade and trade between affiliates of multinational firms in recent years also requires development of special skills to deal with related party transactions and transfer pricing.
Valuation frauds involve transactions across at least two countries and sometimes involve intermediate countries through which either the goods transit or in which invoices are raised.
Tackling valuation frauds, therefore, requires co-operation between the customs and trade officials of importing, exporting and intermediate countries. Such co-operation can be enlisted through bilateral agreements, though a multi-lateral arrangement is obviously a far more desirable solution.
The international trading community and Member nations of the WTO must negotiate on a priority basis introduction of a single administrative document for export and import purposes.
This would be one single big step in facilitating genuine trade, curbing value manipulation, reducing scope for money laundering and illicit trade. It will also drastically reduce transaction cost and obviate the need for filing the same information relating to one consignment over and over again to various authorities in the exporting, transiting and importing countries thereby reducing the scope for mistakes and manipulations.
Suspected cases of value manipulation can be verified abroad, either by engaging foreign sources or by posting officials abroad. Developing countries may, however, find such an option costly apart from resistance from foreign authorities. Lack of legal powers to carry out inquires on foreign territory without the support of the foreign administration also deters use of such an option.
(The writer is Chairman Sewing Machine Rehabilitation and Development Committee Engineering Development Board, Ministry of Industries and Production.)
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