On 12 July 2019, a World Trade Organization (WTO) Panel issued its report in the second compliance proceeding in Thailand – Customs and Fiscal Measures on Cigarettes from the Philippines (Second Recourse to Article 21.5 of the DSU by the Philippines) (DS371). This was the Philippines’ second recourse to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) concerning the alleged failure by Thailand to comply with the recommendations and rulings of the Dispute Settlement Body (DSB) in the original proceeding. Specifically, the Philippines challenged the consistency of certain Thai measures relating to the customs valuation of imported cigarettes (for the purposes of levying ad valorem customs duties) with the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (i.e., the “Customs Valuation Agreement” or CVA).

The measures at issue in this second compliance proceeding included: (i) criminal charges filed by the Public Prosecutor in Thailand against an importer of cigarettes from the Philippines, alleging that the importer under-declared the customs values of cigarettes imported in 780 entries between 2002-2003 (the “2002-2003 Charges”); and (ii) 1,052 revised Notices of Assessment (NoAs) issued by Thailand’s Customs Department which rejected the importer’s declared transaction values for cigarettes imported in 1,052 entries between 2001-2003 and determined revised customs values for same.

The Panel found that the 2002-2003 Charges were inconsistent with Articles 1.1, 1.2(a), 6.1, and 7.1 of the CVA due to defects in both (i) the examination of the customs value of the imported cigarettes, and (ii) the information had been used for this purpose. In addition, the Panel found that the Public Prosecutor had acted inconsistently with the obligation to sequentially apply the customs valuation methods in Articles 2 through 7 of the CVA when determining the revised customs values of the imported cigarettes.

Thailand attempted to argue that the 2002-2003 Charges were nonetheless justified under Article XX(d) of the General Agreement on Tariffs and Trade 1994 (GATT 1994) as measures “necessary to secure compliance with laws or regulations” and under Article XX(a) as measures “necessary to protect public morals”. However, this was the same defence that Thailand had raised unsuccessfully in the first compliance proceeding, and the Panel again ruled that the general exceptions in Article XX of the GATT 1994 are not applicable to the obligations set forth in the CVA.

Finally, the Panel declined to rule on the 1,052 NoAs because they had all been withdrawn prior to the Panel’s establishment or within a few months thereafter.

Some of the points of interest in the Panel’s reasoning include the following:

• The procedural obligation in the third sentence of Article 1.2(a) of the CVA applies to any entity making a customs valuation determination (including, e.g., a public prosecutor). However, the nature of the agency and the circumstances in which a determination was made (e.g., a criminal investigation related to alleged fraud) could be highly germane to the appraisal of whether or not this obligation was discharged.

• To comply with the procedural obligation in the third sentence of Article 1.2(a) of the CVA, a customs authority must: (a) give the importer sufficient information regarding the authority’s grounds for doubting the transaction value, such that the importer is able to meaningfully respond to those grounds; and (b) give the importer an opportunity to respond.

• The requirement to adhere to the hierarchical order of the sequential valuation methods set forth in Articles 1 through 7 of the CVA is a legal obligation. The failure to comply with this obligation would constitute an independent basis for finding a violation of the CVA. If a customs authority decides to reject the transaction value under Article 1 of the CVA, another valuation method must be used by observing the sequential order of the methods stipulated in Articles 2, 3, 5, 6 and 7.

• Although there is no express provision that the sequential ordering of the valuation methods in Articles 1 through 6 should be followed again in the context of having recourse to the reasonable flexibilities in Article 7.1, the same sequence should also be observed in applying Article 7, to the extent that it is reasonably possible to do so.

• The balance reflected in the specific provisions of Articles 7.1 and 7.2 of the CVA indicates that the drafters did not intend for another layer of general exceptions in Article XX of the GATT 1994 to also apply. Interpolating the general exceptions in Article XX of the GATT 1994 into the CVA would create additional policy space for Members to use one or more of the valuation bases that go beyond the “reasonable flexibility” already provided for in Article 7.1 and/or which are categorically prohibited by the text of Article 7.2(a) through (g).

• Procedurally, in disputes where the complaining Member is unable to obtain from the responding Member certain information regarding the content of the measures at issue, this will naturally have a bearing on the degree of specificity that could reasonably be expected in identifying the legal basis for the complaint for the purposes of satisfying Article 6.2 of the DSU.

Tereposky & DeRose LLP regularly provides advice and acts as counsel in international trade disputes, including WTO dispute settlement proceedings.