Brief
The basic rule for customs valuation, as we know, is valuation by transaction value, plus some assists that should be added (articles 1(1) and 8(1) of the WCO Customs Valuation Agreement). Most import duties are imposed ad valorem, i.e. as a percentage tax on the value of the goods. Therefore, disputes over customs valuation – be it the value of the goods or inclusion/ exclusion of a certain assist – are very common in almost all jurisdictions worldwide.
The Israeli customs authority has, as I believe, invented an original tool to gain more information about specific goods valuation process, even before officially starting an audit. The tool is called the “importer’s affidavit” [1]. As far as I know, there is no similar requirement in other jurisdictions.
Section 65.B of the Israeli Customs Ordinance of 1957 states the following: “The person lodging an import declaration must answer all questions relating to the goods listed in the declaration when requested to do so by a customs officer”. Section 1(a) of the Israeli Customs (Valuation of Goods) Regulations 1970 states that “the owner of a dutiable good must submit a statement concerning that good to the collector of customs together with the import declaration”.
On this basis, the Israel Customs Authority requires every commercial importer (imports of more than USD 5,000) to submit an “importer’s affidavit”. The importer’s affidavit must be submitted annually, with a separate document for each supplier. For example, if the importer has 20 different suppliers, he must submit 20 affidavits per year. An importer who does not submit an affidavit cannot import.
The importer’s affidavit consists of three sections: two sections relate to the technical details of the importer and the supplier, and the third section is the most interesting, containing ten questions about the relationship between the importer and the supplier. If the business relationship between importer and supplier changes during the year, a new affidavit must be submitted.
What are the ten questions?
Question No. 1: “Are there any restrictions on you as an importer regarding the sale of the goods or their use? If yes: Are the restrictions imposed or required by law in Israel? Do the restrictions relate to the geographical areas in which the goods can be sold? Do the restrictions not materially affect the value of the goods?”
The legal basis for this is Article 1(1)(a) of the GATT Valuation Agreement.
For example, if Israeli law requires the goods to be labelled in Hebrew or not to be sold to minors, or if the importer cannot sell in Gaza and the West Bank due to contractual obligations, then I do not think that these restrictions invalidate the declared value.
The most important question is the last one, but the negative wording can be ambiguous. I would rephrase the question positively: “Did the restrictions significantly affect the value?”
Question No. 2: “Is not the sale of the good or its price subject to conditions or consideration which cannot be determined for the purposes of valuing the good?”
The legal basis for this is Article 1(1)(b) of the GATT Valuation Agreement.
Some examples of this “condition” as set out in the WCO documents are when the exporter fixes the export price only if the importer buys additional goods from him; when the imported foodstuffs are unfinished goods and the importer undertakes to re-export them to the supplier after further processing.
An interesting case was decided in Israel in 2007. An importer of alcoholic beverages had promised his supplier to find him additional customers in Israel, in return for which the supplier granted him a lower import price. The Israeli customs authority claimed that this promise was a condition that could not be assessed. The Israeli court rejected this claim and confirmed the declared value. It was decided that a vague promise is not a condition for customs purposes.
As before, the negative wording of the question can be ambiguous. I think that the question should have been formulated positively and divided into two sub-questions: “Is the sale of the goods or their price subject to a condition or consideration? and “Can the condition or consideration be determined?”
Question No. 3: “Is it possible to attribute to the seller of the goods any proceeds from the subsequent resale of the goods or your use of them, except for the expenses and amounts detailed in question 6?”
The legal basis for this is Articles 1(1)(c) and 8(1)(d) of the GATT Valuation Agreement.
An interesting question may arise regarding year-end transfer pricing adjustments between related parties. In other words, if an importer from a related supplier knows that at the end of the year, they may be asked to pay additional money to the supplier, are these proceeds considered for the purposes of this question?
Question No. 4: “Are there any special relationships between you and the foreign supplier? If so, have these relationships affected the transaction value?”
The legal basis for this is Articles 1(1)(d) and 1(2) of the GATT Valuation Agreement.
For related party transactions, the importer must demonstrate to the satisfaction of Customs that the import price was not lower because of this relationship. Among other things, the importer may be asked to submit a TP study.
Question No. 5: “In addition to the transaction value indicated on the supplier’s invoice, are you subject to additional payments such as: commissions and brokerage fees, except for buying commissions? Cost of containers? Packaging and labor costs? Royalties and license fees related to the goods? Other costs?”
The legal basis for this is Articles 8(1)(a) and 8(1)(c) of the GATT Valuation Agreement.
As we know, not all additional payments to the transaction value constitute a part of the customs value. This question attempts to determine which additions are dutiable.
Question No. 6: “Have you directly or indirectly provided services or means of production, plans, technical assistance, equipment, materials, machinery of any kind free of charge or at a reduced price in connection with the production of goods and their sale for export?”
The legal basis for this is Article 8(1)(b) of the GATT Valuation Agreement.
The rationale is that if the importer provides these services, the import price may be lower, as the importer did not have to pay separately for these services for the same manufacturer/ supplier.
Question No. 7: “Have permanent financing arrangements been made between you and the overseas supplier in connection with the import of the goods? If so: (1) Are the interest charges separate from the transaction price? (2) Were the financing arrangements made in writing?”
The legal basis is Decision 3.1 of the Technical Committee on Customs Valuation (TCCV): “Treatment of interest charges in the Customs value of imported goods”. (1995)
If certain conditions are met, then interest charges, paid by importer to the supplier, do not constitute part of the transaction value.
In Israel, there is a further condition, noted in section 132(d)(3) of the Customs Ordinance, according to which the importer must prove that the declared interest rate does not exceed the level accepted in similar transactions in the country where the financing was provided.
Questions No. 8 and 9: “Is there a written agreement between you and the supplier abroad? Are there other written consents concerning imports from the supplier abroad?”
If the customs authority doubts the declared value, it requires further evidence, such as an agreement on correspondence. See, inter alia, TCCV Case Study 13.1, Application of Customs Valuation Committee Decision 6.1, where the importer claimed that there was no contract or correspondence with the supplier, which led to his position being rejected.
Question No. 10: “Were discounts granted on the transaction price that do not appear on the supplier’s invoice?”
The legal basis for this is, among others, TCCV Advisory Opinion 15.1 – Treatment of Volume Discounts, as well as Advisory Opinions 5.1, 5.2, 5.3, which deal with discounts.
In Israel, certain discounts are not applicable for customs purposes. Section 132(e) of the Customs Ordinance states that “discounts granted after release from customs supervision shall not be taken into account in determining the transaction value of such goods”. This section states that retroactive price reductions that are not known at the time of release by the Customs authorities are not taken into account.
An interesting case was decided in Israel in 2020, in which an importer of car parts received a conditional discount. The importer was granted a lower import price only if he managed to sell a certain amount of turnover in Israel. If he fails to do so, the discount is withdrawn and he must pay the supplier. The customs authorities rejected the declared price. However, the court accepted the importer’s claim and recognized this type of discount.
Concluding notes
The importer’s affidavit is a unique tool for the State of Israel. It allows the customs authorities to obtain preliminary information regarding the valuation of specific goods, even before starting an official audit.
At the end of the affidavit, the importer declares and signs that all details are true, complete and correct, and that he/she will be subject to the penalties provided for by law should it turn out otherwise.
The answers given in this affidavit will be stored in the Customs database and can be used against the importer at any time, in serious cases even for criminal proceedings.
As we have seen, some of the questions are difficult to understand, some are legally worded, some are ambiguous. Also, an importer may be unsure who should sign it, is it the CEO, the CFO, the import manager, the logistics manager, etc.?
After all, the affidavit is a legal document that should be read carefully and consulted with professionals before signing and submitting it.
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[1] State of Israel/ Ministry of Finance, Tax Authority, Importer’s Annual Affidavit (Customs Form No. 138) https://www.gov.il/he/service/submission-of-an-annual-importers-affidavit (Hebrew)