Rules, challenges, and policy implications for good-services trade configurations

Customs valuation is inherently related to the application of customs duties, which generally do not apply to services; the rules and concepts to determine the value of traded goods generally account for the value of services embodied in or complementary to goods. (p. 14)
Implicitly under the transaction value method, services inputs are included in the value of traded goods, providing a basis for customs valuations of configurations with embodied services, including inputs that require royalties and licensing fees; the CVA provides rules for calculating the costs of inputs or “assists”, including services, when market forces are distorted so that the price paid fails to reflect the true value of the good. (pp. 14-15)
Trade configurations with embodied services raise a key point of contention, as goods with embodied services are subject to duties while the services themselves if provided alone, would not be subject to duties; goods embodying more services become more expensive as the services increase the value of the good. (p. 15)
One solution is to deduct the value of embodied services from the price of the final good, but this would incur implementation costs, would be challenging to assess, and could disproportionately advantage more developed economies by making their goods less expensive than developing economies producing goods with fewer services; another option is to reduce tariffs and promote trade facilitation for goods that embody high-value services inputs, which would be easier to implement and have no implications for valuation. (p. 16)
CVA rules for services assists may need to be adjusted by 1) updating the scope of the list of assists; 2) clarifying for the origin of the service is determined for purposes of excluding services undertaken in the country of importation; 3) considering whether the differential treatment created by the exclusion rule is consistent with CVA objectives; policy actions, including new guidelines from customs agencies, multilateral discussions, and discussions of relevant administrative jurisprudence should be undertaken to reduce uncertainty and ensure alignment of valuation systems. (pp. 16-17)
Relationships between buyers and sellers and the use of separate services transactions raise questions of whether parties are avoiding duties by selling services under a separate contract when they should be embodied in goods for valuation; one solution is to require more detailed documentation to determine the exact value and nature of services in the good. (p. 17)
Trade configurations with complementary services involve services that are identifiable and separable from goods and can be traded separately; under CVA principles, if complementary services are a “condition of sale” of the good, even if exchanged separately, their value must be included in the customs value; services undertaken after importation should not be calculated in the customs value; commissions and brokerage, and costs of containers and packing services should be included in the customs value; and transport services up to the port or place of importation may be included if decided by each WTO Member. (p. 18)
Assessing “condition of sale” is a key challenge; complementarity can range from necessity to non-essential; where services are required by national regulations, complementarity and condition of sale can amplify trade barriers; the timing of a service can have implications for enforcement which increases uncertainty about the application of the rule; transactions between members of the same multinational enterprises and franchise agreements can affect how condition of sale is evaluated considering internal business strategies and terms under which goods and services sales are conducted between members. (p. 19)
Conducting assessments, considering what complementary services required by regulation can be excluded from customs value, and increasing transparency and accessibility of existing customs rulings and legal decisions can address challenges for providers. (p. 20-21, Box 2)
In trade configurations with substitute services or ancillary goods, services are the only elements sold and no duties are applied; related goods temporarily move across borders to enable services and are subject to rules on temporary admission of goods for a specific purpose found in the Trade Facilitation Agreement and the ATA or “Temporary Admission” system; broader adoption of the ATA would help to reduce burdens for SMEs. (pp. 21-22, Box 3)
ROO relevant for goods-services trade configurations depend on what is identified in the transaction; in configurations with embodied services, only the good is traded and ROO follow the wholly obtained or last substantial transformation rule; wholly obtained rules use lists to identify what can be wholly obtained in one jurisdiction; neither wholly obtained ROO nor ROO based on tariff classification changes or specific process requirements consider the origin of embodied services provided for purposes of determining origin. (pp. 22-23)
Under ROO based on value-added content from a specific jurisdiction, a certain amount of content must be calculated as having come from that jurisdiction; calculation methods are varied and complicated. (pp. 23-24, Box 4)
Embodied services are not well captured in ROO for goods given tradeoffs between accurate accounting for the origin of inputs and ease of applying ROO for goods; if ROO are revised to better account for embodied services then more complex rules should be accompanied by simpler alternatives; rulemakers should allow for open consultations and timely rule development; and discussions in multilateral fora should take place to harmonize and coordinate rules. (pp. 24-25)
ROO for configurations with complementary services are the same as ROO for embodied services where the services and goods are sold as one, but where services are treated separately, separate ROO will apply to services and goods; ROO for configurations with substitute services or ancillary goods only apply to services; GATS disciplines provide a framework and some explicit guidelines for services ROO, but WTO Members have discretion to design their preferential ROO. (pp. 25-26)
Challenges with determining the origin of services under GATS disciplines include lack of robust, consistent, and predictable rules, specifically difficulty in 1) determining the location where services are performed, 2) determining who owns or controls services providers, 3) determining origin in light of multiple providers and where an owner and a performer of the service are of different nationalities; rulemakers should consider economic costs of these challenges and whether they are worth remedying, develop guidelines or standards to correct for defects, promote multilateral discussions to coordinate and harmonize approaches, and increase market openness. (pp. 26-27)
Goods and services configurations present specific challenges to customs valuation and ROO, increasing the risk that valuation systems and ROO become less effective in achieving trade policy objectives and create barriers to trade; reducing import tariffs can remove some barriers; reducing restrictions to services transactions and harmonizing policy responses multilaterally would facilitate trade and reduce the risk of variability and fragmentation; enhancing transparency and access to jurisprudence would increase predictability. (pp. 27-28, Table 2)