Elements of Transaction Value
Concept of Price Actually Paid or Payable (PAPP)
- The Interpretative Note to Article 1 (Note to Paragraph 2 of 4th schedule of EACCMA) provides that the price actually paid or payable is the total payment made, or to be made, by the buyer to or for the benefit of the seller for the imported goods.
- It further clarifies this term by indicating that the PAPP includes all payments actually made or to be made as a condition of sale for the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller (ANNEX III 7).
- The term “paid” or “payable” means that if the goods are paid for before valuation, the price paid will be used as a basis for valuation. If not paid, then the price to be paid will be used.
- The Interpretative Note to Article 1 specifies that the payment need not necessarily take the form of a transfer of money.
- Payment may also be made by letter of credit or negotiable instruments.
Direct and Indirect Payments
(a) Direct Payments
These are payments already made at the time of customs valuation of the imported goods. An example; a buyer in country P and a seller in country M enter into a contract to supply an industrial machine at 20 Million cu. At the time of customs valuation, the buyer had made the total payment as per contract.
(b) Indirect Payments
These are payments made by the buyer whether in whole or in part in the settlement of a debt owed by the seller. An example of an indirect payment would be where the price is reduced due to a debt owed by the seller to the buyer. In this case, the PAPP would be the sum of all payments, direct and indirect. Another form of indirect payment would be the settlement by the buyer of a debt owed by the seller to a third party.
Flow of Dividends
- The flow of dividends or other payments from the buyer to the seller that do not relate to the imported goods are not part of the customs value (Interpretative Note to Article 1).
- However, we must make a distinction between dividends and proceeds as dividends will not be added to the PAPP but proceeds will be added as an adjustment under Article 8.1(d).
- In general, proceeds are profits realized on the resale of the imported goods and are thus directly related to the imported goods.
- Dividends, while also considered as “profit”, are paid out to stockholders or shareholders. These dividends relate to the firm’s overall business and not just to the sale of the imported goods. Hence, they are not directly related to the imported goods.
Activities undertaken by the buyer on his or her own account
- The Interpretative Note to Article 1 (Note to Paragraph 2 of the 4th Schedule of EACCMA) also specifies that activities, other than those for which an adjustment can be made under Article 8 (Paragraph 9 of 4th schedule of EACCMA), which are undertaken by the buyer on his or her own account are not considered an indirect payment although they might be regarded as for the benefit to the seller. This would include such activities as:
- Market studies and market research;
- Advertising brand or trademark under which goods are going to be sold;
- Preparation of showrooms;
- Participation in trade fairs and exhibitions;
- Testing of machinery and equipment; and
- Costs to obtain an irrevocable and confirmed letter of credit.
Discounts and Credits
- Discounts are general reductions of the PAPP when certain conditions put by the seller are met. Such conditions may include prompt payment, quantity bought, etc. The PAPP is established after deducting any legitimate (meaning supported by quantifiable and verifiable data) cash or quantity discounts. The most common discounts include cash discount and quantity discount.
Cash discounts
- These discounts are granted to buyers for payment in cash or payment made within a specified period e.g., 5% for a payment made within 10 days of receipt of the invoice and, for Customs purposes, the discounts must be freely available to all buyers. There should be a schedule to support the discount levels (Advisory Opinion 5.1 to 5.3).
- Cash discounts can cause difficulties as they are usually effected after importation has occurred. However, the transaction value method requires the use of the PAPP and legitimate cash discounts can therefore be accepted as a deduction as the discounted price is in fact, the PAPP.
Quantity discounts
- Quantity discounts are deductions from the price, allowed according to the quantities purchased at once or over a period of time.
- Sellers often encourage buyers to purchase in bulk as their costs are proportionately reduced.
- For valuation purposes, it is the quantity which has determined the unit price of the goods being valued when they were sold for export to the country of importation that is relevant.
- In order to be accepted by Customs, discounts must be freely available to all buyers. Quantity discounts can be established prior or subsequent to the importation of the goods (Advisory Opinion 15.1).
Credits
- Under normal business transactions, it’s expected that the quantity paid in the invoice is the quantity delivered. If there is any shortfall it is expected that the buyer could be refunded the amount equivalent to the shortfall.
- However, in practice, the seller usually supplies excess of the product in the next consignment but decrease the price by the amount equivalent to what was not delivered earlier. In a way the supplier was granted a credit in the current transaction.
- The decision on whether or not to apply the credit to the previous shipment must be taken independently of the shipment being valued.
- Any adjustment made to the value of the previous shipment will depend on national legislation.
Concept of sale
- The Agreement” contains no definition of “sale”. It merely indicates that “a sale is a specific commercial operation satisfying certain requirements and conditions” (Advisory opinion1.1).
- It implies a transfer of ownership of the goods for some form of consideration.
- Hence a sale necessarily requires an agreement between a seller, who agrees to transfer the ownership of the goods in exchange for a specified price, and a buyer, who agrees to purchase those goods for a specified price.