Direct links

*Differing rules on the verification of prices in the Agreement on PSI and

on the valuation of goods in the Agreement on Customs Valuation
*Main obligations of PSI-using countries

CHAPTER 4

Preshipment inspection

Summary

Since about the second half of the twentieth century importers have used the services of
independent inspection companies to certify the quality and quantity of products they
want to import. These inspections, which are conducted in most cases prior to
shipment and in the country of exportation, assure the importer that the goods conform
to the technical specifications and the quality standards laid down in the contract and
that the quantities exported are accurate. The services of such inspection companies are
utilized not only by private business firms, but also by State-owned enterprises and
government departments. In fact, the regulations in many countries require goods
procured by government departments to be inspected and certified for quality and
quantity by independent and competent inspection companies.

Since the mid-1960s, the governments of some developing countries have also been
using the services of preshipment inspection (PSI) companies to inspect goods to be
imported and to verify their prices, prior to shipment and in the exporting countries.
Their basic purpose in doing so is to bring under control the under- or over-invoicing of
imported goods and other unfair or improper practices. Today, over 30 countries in
Africa, Asia and Latin America use these services:

q To carry out physical inspection of the goods to be imported in order to ensure that
they conform to the terms of the contract;
q To verify their prices; and
q To ensure that they are classified by the exporter under the correct tariff
classification of the importing country.
The physical inspection of goods is an integral part of the procedures adopted by PSI
companies to ensure that the prices indicated by the exporter in the invoice reflect the
true value of the goods and that there is no under- or over-invoicing. Such inspections
assure importers that the goods they have ordered meet contractual specifications and
quality standards, thereby reducing possibilities for dispute after the goods arrive at
destination. These inspections also prevent the import of products that are considered
harmful to health and therefore cannot be sold (e.g. banned chemicals and pharmaceu-
tical products, substandard food products) in the exporting countries.

In most PSI-using countries, physical inspection and price verification of almost all
goods prior to exportation is obligatory for imports to be permitted. In one country, the
system is voluntary and importers using PSI services are entitled to have their goods
cleared through Customs without further scrutiny of the value recommended by the
companies concerned.

Almost all PSI-using countries exempt goods valued below a specified threshold from
preshipment inspection.
Chapter 4 – Preshipment inspection 73

Objectives for using PSI services

Contracts for mandatory preshipment inspections can be grouped into two broad
categories according to the purpose for which the services of PSI companies are
employed. In the terminology used by PSI companies, these are foreign exchange
contracts (forex) and customs contracts. The first is usually employed to designate
contracts whose basic objective (and that of the government requiring them) is to
prevent the flight of capital through over-invoicing. The second is used for
contracts undertaken when the governments’ main aim is to prevent slippage of
customs revenue as a result of undervaluation or deliberate misclassification by
traders of goods to be imported under low-duty headings.
Until about a few years ago, the predominant government objective was to
prevent the overvaluation of imports. Traders tend to overvalue imports when
the import trade and foreign exchange transactions are subject to restrictions.
As a result of the steps which developing countries have taken to liberalize their
trade and foreign exchange regimes, traders do not generally have at present any
incentive to overvalue imported goods. The result has been that, as box 13
shows, the majority of the PSI contracts are now customs contracts; their main
aim is to detect the undervaluation of imported goods, with a view to ensuring
that revenue due is fully collected and to controlling customs-related
corruption.
While PSI services are mainly used for the preshipment inspection of imports, a
few governments also utilize them to control the flight of capital through the
undervaluation of exports.

There are currently five PSI companies providing preshipment inspection

services on a worldwide or a regional basis. The largest among them is the Société
générale de surveillance (SGS) of Geneva. It has over 130 affiliated companies,
with a presence in more than 140 countries and a staff of over 30,000. The other
four companies are BIVAC International of Paris, COTECNA of Geneva,
Inchape Testing Services International (ITSI) of London, and the Inspectorate of
the United States. They are all members of the Preshipment Inspection
Committee of the International Federation of Inspection Agencies (IFIA). There
are indications that other companies providing either the same or more or less
similar services may enter the market in the near future.

Background to the negotiations on the PSI Agreement

The extension of PSI services to the mandatory verification of the prices agreed
between importer and exporter was viewed with concern by business and
industry, especially in some developed countries. They were particularly worried
by the fact that they were asked to revise their prices downward when the PSI
companies found contractual prices to be overvalued. They argued that the
criteria used by PSI companies for price comparison was not always known to the
exporters. The lack of transparency not only created uncertainty about the
acceptability of prices negotiated with buyers but also put exporters in a
disadvantageous position, as there were no procedures for appealing to
independent bodies against the decisions of PSI companies. The delays in
carrying out physical inspections and price verifications also delayed shipment,
adding to the exporters’ costs.
The Agreement on Preshipment Inspection, negotiated in the Uruguay Round,
attempts to strike a balance between the concerns expressed by exporting
Agreement on PSI, enterprises in developed countries and the need to safeguard the essential
Article 1 interests of developing countries that consider PSI services useful. It clarifies
74 Chapter 4 – Preshipment inspection

Box 13
Countries/areas using PSI services
Country/area Type of PSI contract
Argentina Customs
Bangladesh Customs
Benin Customs/Forex
Bolivia Forex
Burkina Faso Customs/Forex
Burundi Forex
Cameroon Customs/Forex
Central African Republic Customs/Forex
Colombia Customs
Comoros Customs/Forex
Côte d’Ivoire Customs
Democratic Republic of the Congo Customs
Ecuador Customs
Ghana Customs/Forex
Guinea Customs/Forex
Iran, Islamic Republic of Quality/Quantity
Kenya Customs
Liberia Customs
Madagascar Customs/Forex
Malawi Customs/Forex
Mali Customs
Mauritania Customs/Forex
Mexico Customs
Mozambique Customs/Forex
Niger Customs/Forex
Nigeria Customs/Forex
Paraguay Customs
Peru Customs
Philippines Customs
Rwanda Customs/Forex
Senegal Customs/Forex
Sierra Leone Customs/Forex
Togo Customs
Uganda Customs
United Republic of Tanzania Customs/Forex
Uzbekistan Forex
Zanzibar Forex

that its provisions apply only to preshipment activities carried out in exporting
countries that are “contracted or mandated by the government”. The term
‘preshipment inspection’ is defined as “all activities relating to the verification
of the quality, the quantity, the price, including currency exchange rate and
financial terms and/or the customs classification of goods to be exported”.

Main provisions of the Agreement

Agreement on PSI, The Agreement further recognizes that a number of developing countries use PSI
Preamble services, and allows their use “for as long as and in so far as” they are “necessary to
verify the quality, quantity or price of imported goods”. The basic aim of the
Agreement is to lay down a set of principles and rules which countries using PSI
services and exporting countries have to follow in order to ensure that their
activities do not cause barriers to trade.
 Chapter 4 – Preshipment inspection 75

Obligations of PSI-using countries

The obligations which the Agreement imposes on countries using PSI services
aim at ensuring the reduction or elimination of the practical problems
encountered by exporters as a result of delays by PSI companies in carrying out
physical inspections and price verifications, the lack of transparency in the
procedures they follow, and the treatment of confidential information.
Towards this end, the Agreement contains provisions covering, inter alia:
q Extension of MFN and national treatment,
q Protection of confidential business information,
q Avoidance of unreasonable delays, and
q The use of specific guidelines for conducting price verification.
Box 14 describes the main features of the obligations which the Agreement
imposes on PSI-using countries.

Box 14
Main obligations of PSI-using countries
Non-discrimination. Procedures and criteria should be applied on an equal basis to
all exporters. There should be uniform performance of inspection by all inspectors.
[Agreement on Preshipment Inspection, Article 2.1]
National treatment. Countries using PSI services should not apply national
regulations in a manner that will result in less favourable treatment of the goods being
inspected in comparison to the like domestic product. [Agreement on Preshipment
Inspection, Article 2.2]
Inspection site. Physical inspection should be carried out in the exporting country and,
only if this is not feasible, in the country of manufacture. [Agreement on Preshipment
Inspection, Article 2.3]
Standards. Quality and quantity inspections should be conducted according to the
standards agreed between buyer and seller or, in their absence, international
standards. [Agreement on Preshipment Inspection, Article 2.4]
Transparency. Transparency should be ensured by providing exporters with
information, inter alia, on the laws and regulations of user countries on PSI activities,
and the procedures and criteria used for inspection. [Agreement on Preshipment
Inspection, Article 2.5 to 2.8]
Protection of confidential information. Confidential information should not be
divulged to third parties. [Agreement on Preshipment Inspection, Article 2.5 to 2.13]
Delays. Unreasonable delays should be avoided. [Agreement on Preshipment
Inspection, Article 2.15 to 19]
Price verification. See box 15.
Back to the top

Guidelines for conducting price verification

The Agreement stipulates that in order to determine whether the export price
reflects the correct value of the goods, PSI companies could compare this price
with the prices of identical or similar goods offered for export from the same
country of exportation

– to the country of importation, or

– to other markets.
However, where for price comparison purposes the prices charged for export to
countries other than the country of importation are used, the economic and
other factors that influence the prices charged to different countries should be
76 Chapter 4 – Preshipment inspection

taken into account. In other words, the rules recognize that firms often charge
varying prices for different markets, taking into account demand and growth
potential as well as factors such as per capita income and standards of living in
these markets. An exporting firm may thus charge higher prices for its exports
of, say, shirts to Europe than it does for exports to Africa. The Agreement
stipulates that when third-country prices are used for price-comparison
purposes, the factors responsible for variations in the prices charged to
importers in different countries should be taken into account and PSI
companies should not “arbitrarily impose the lowest price upon the shipment”.
In addition, it states that PSI companies should make appropriate allowances
for certain “applicable adjusting factors” in regard to the export price of the
goods being inspected and the prices of identical or similar goods being used for
price comparison. (See box 15 for details.)

Box 15
Agreement on Preshipment Inspection: Provisions on price
verification
(the text of Article 2:20)
User Members shall ensure that, in order to prevent over- and under-invoicing and
fraud, preshipment inspection entities conduct price verification according to the
following guidelines:
(a) preshipment inspection entities shall only reject a contract price agreed
between an exporter and an importer if they can demonstrate that their findings of
an unsatisfactory price are based on a verification process which is in conformity
with the criteria set out in subparagraphs (b) through (e);
(b) the preshipment inspection entity shall base its price comparison for the
verification of the export price on the price(s) of identical or similar goods offered
for export from the same country of exportation at or about the same time, under
competitive and comparable conditions of sale, in conformity with customary
commercial practices and net of any applicable standard discounts. Such
comparison shall be based on the following:
(i) only prices providing a valid basis of comparison shall be used, taking
into account the relevant economic factors pertaining to the country of
importation and a country or countries used for price comparison;
(ii) the preshipment inspection entity shall not rely upon the price of goods
offered for export to different countries of importation to arbitrarily impose the
lowest price upon the shipment;
(iii) the preshipment inspection entity shall take into account the specific
elements listed in subparagraph (c);
(iv) at any stage in the process described above, the preshipment inspection
entity shall provide the exporter with an opportunity to explain the price;
(c) when conducting price verification, preshipment inspection entities shall make
appropriate allowances for the terms of the sales contract and generally applicable
adjusting factors pertaining to the transaction; these factors shall include but not
be limited to the commercial level and quantity of the sale, delivery periods and
conditions, price escalation clauses, quality specifications, special design features,
special shipping or packing specifications, order size, spot sales, seasonal
influences, licence or other intellectual property fees, and services rendered as part
of the contract if these are not customarily invoiced separately; they shall also
include certain elements relating to the exporter’s price, such as the contractual
relationship between the exporter and importer;
(
Chapter 4 – Preshipment inspection 77

)
(d) the verification of transportation charges shall relate only to the agreed price of
the mode of transport in the country of exportation as indicated in the sales
contract;
(e) the following shall not be used for price verification purposes:
(i) the selling price in the country of importation of goods produced in such
country;
(ii) the price of goods for export from a country other than the country of
exportation;
(iii) the cost of production;
(iv) arbitrary or fictitious prices or values.

Differing rules on the verification of prices in the Agreement on PSI and

on the valuation of goods in the Agreement on Customs Valuation
The main differences in the provisions of the two Agreements
Since one of the main aims of governments in using PSI services is to prevent the
loss of customs revenue from undervaluation of goods, the question arises of how
Customs should use the prices recommended by PSI companies in determining
value for customs purposes. The issue is of importance since under the Brussels
Definition of Value, the system current in all PSI-using countries, customs
authorities have considerable flexibility to use the prices recommended by the
PSI companies in determining customs value. However, these countries are
obliged to change to the system prescribed by the Agreement on Customs Valua-
tion when the delay period available to developing countries for its implementa-
tion expires on 1 January 2000.
The stricter disciplines which the Agreement on Customs Valuation imposes
considerably restrains the rights of Customs to use the price recommendations
of PSI companies. Moreover, the Agreement prohibits countries from using
prices charged by the same exporters to their third markets as a basis for
valuation. By contrast, the PSI Agreement permits them to use such prices but,
as noted earlier, lays down certain guidelines which they must take into account
in recommending prices. (See box 15.) Taking this situation into account, the
Agreement on Customs Valuation clarifies the role of Customs by stating that
the obligations of user member countries “with respect to the services of
preshipment inspection entities (in connection with customs valuation) shall be
the obligations which they have accepted” under the Agreement on Customs
Valuation.

Practical implications of the differences

The aim of the above clarification is to ensure that customs administrations in
countries having recourse to PSI services use the prices recommended by them
only as test values or advisory opinions when checking the truth or accuracy of
the importer’s declared value. Customs could use such recommended prices as
test values even when the recommended prices are arrived at on the basis of the
prices charged by exporters to third-country markets.
Customs however cannot automatically determine dutiable value for levying
customs duties on the basis of prices recommended by a PSI company. An
examination has to be carried out in each case. If on the basis of the
78 Chapter 4 – Preshipment inspection

examination and a comparison of the price declared by the importer and the
one recommended by the PSI company, it finds that the latter reflects the
correct price and the importer does not contest it, the value can be determined
on the basis of that price. In all such cases, it will be necessary to ensure that in
arriving at the recommended price, the PSI company has followed the rules on
adjustments for various elements (e.g. buying commissions and sole agency
commissions) laid down by the Agreement on Customs Valuation.
There will always be a few importers who will contest the PSI-recommended
prices that are acceptable to Customs, and maintain that the prices they have
declared reflect the true value of goods. Such importers have a right to expect
Customs to give them the opportunity to produce documentary and other
evidence to justify their declared price. If, after examining the evidence,
Customs still maintains that the price declared by the importer involves either
under- or over-valuation, it cannot under the provisions of the Agreement on
Customs Valuation determine value on the basis of the PSI-recommended
price.8 It will have to determine it by using the methods laid down in the
Agreement for the determination of value when the transaction value declared
by the importer is not acceptable. These methods, inter alia, provide for the
determination of the value of imported goods on the basis of the value
determined in earlier transactions involving identical or similar goods. When
the value cannot be determined under these methods, it has to be determined
on the basis of price of the imported goods in the domestic market of the
importing country (deductive value) or on the basis of cost of production
Back to the top (computed value).

Obligations of exporting countries

So far the discussion has centred on the obligation which the Agreement on PSI
imposes on countries using PSI services with a view to ensuring that practices
followed and actions taken by PSI companies do not cause barriers to trade.
The Agreement also imposes certain obligations on countries which export to
PSI-using countries. These are designated in the Agreement as ‘exporting
countries’. The main obligations which the Agreement imposes on these
countries are summarized below:
Agreement on PSI, q Non-discrimination. Laws and regulations that may have been adopted to
Article 3:1 govern the operation of PSI services should be applied on a
non-discriminatory basis.
Agreement on PSI, q Transparency. All such laws and regulations should be published.
Article 3:2
As noted earlier, the Agreement visualizes the use of preshipment inspection by
developing countries only on the short term. For the long term, the objective of
these countries should be to reduce reliance on the use of PSI services to detect
customs malpractices and fraud by gradually developing the technical capacities
of their customs administrations to deal with such practices. To assist PSI-using
countries in building up such capacities, the Agreement calls on exporting
Agreement on PSI, countries to provide them with technical assistance, with a view to gradually
Article 3:3. reducing their reliance on PSI services for verifying prices.

8 This applies even when the PSI company has arrived at the price by adhering to the rules of
the Agreement on Customs Valuation.
Chapter 4 – Preshipment inspection 79

Consideration of complaints and settlement of disputes

Agreement on PSI, One of the major criticisms made by exporters of PSI activities was the absence
Article 2:21; Article 4 of an institutional mechanism for considering complaints on arbitrary or wrong
decisions. To facilitate the consideration of such grievances, the Agreement
establishes a three-tier mechanism.
First, the Agreement calls on PSI entities to designate officials to whom
exporters can appeal against the decisions of PSI entities.
Second, it establishes an independent review entity (IE) to which both
exporters and PSI entities can submit grievances. The IE is constituted jointly
by WTO, the International Chamber of Commerce (ICC, which represents the
interests of exporters), and the International Federation of Inspection Agencies
(IFIA, which represents the interests of PSI companies). WTO is responsible for
the administration of the IE.
Third, the Agreement recognizes the right of the governments of countries
using PSI services and of the exporting countries to invoke WTO dispute
settlement procedures, if they consider that the rules of the Agreement are not
being adhered to.
A complaint can be submitted to the IE by an exporting enterprise or by a PSI
company. Once a complaint is filed, the IE is expected to appoint, with the
agreement of the parties to the complaint, either a single trade expert or a
three-member panel. Where a panel is constituted, one member is nominated
by ICC, the second by IFIA and the third, who should be a trade expert and who
will act as chairman, by the IE itself. The panel is required to make a decision,
by a majority vote, within eight working days from the filing of the dispute.
Both parties to the dispute are required to make financial deposits to cover
expenditures incurred by the panel.
These procedures have, however, not been so far invoked either by exporters or
by PSI companies.

Review of the provisions of the Agreement

Agreement on PSI, Recommendations adopted to clarify the rules of the Agreement
Article 6
The Agreement provides that its provisions should be reviewed at the end of the
second year of its operation. To carry out such a review the General Council has
appointed a Working Party on Preshipment Inspection.
The work done by the Party has resulted in the adoption of recommendations
clarifying and improving the provisions in the Agreement. These are set out
below.9
q Responsibility for determining dutiable value should rest with Customs. Price
verification by PSI entities for customs purposes should be limited to
providing technical advice to facilitate the determination of customs value
by the user Member. In this regard, the ultimate responsibility for customs
valuation and revenue collection should rest with user Members. All
activities of PSI entities should be monitored by user Members who should
be encouraged to reflect this in national legislation or administrative
regulations.

9 Source: “Report of the Working Party on Preshipment Inspection to the General Council”,
2 December 1997 (WTO document G/L/214).
80 Chapter 4 – Preshipment inspection

q Making publicly available price verification criteria. A user Member should be

required to:
– Make publicly available a single set of price verification criteria, and
– Inform exporters and importers of the applicable valuation methodology.
The price verification criteria should include the customs valuation
methodology, as specified in user Members’ national legislation or
administrative regulations, used when providing technical advice on customs
valuation. In this regard, user Members should encourage PSI entities to utilize
electronic means for purposes of providing the required information to
exporters and importers.
User Members should ensure that requests for information do not go beyond
that required by the provisions of the Agreement on Preshipment Inspection.
Reciprocally, exporter members should inform user Members when they become
aware that the PSI entities’ requests for information go beyond these Articles.
q Site for inspection. User Members should ensure that PSI entities are
encouraged to establish local focal points in countries where they do not
have physical, on-site representation.
q Use of electronic means of communication. The establishment of Web sites by
IFIA and by PSI entities with on-line services would enhance the efficiency
of PSI operations in such areas as procedures, methods, inspection criteria,
responses to enquiries, and dissemination of other usable, essential
information by importers and exporters. In addition to providing hard
copies, PSI entities should be encouraged to communicate Clean Reports of
Findings (CRFs) to importers and exporters through electronic means.
q Avoidance of delays. User Members should ensure that PSI entities issue CRFs
to importers and exporters immediately on receipt of the final documents
and completion of inspection. In no case should the issue of a CRF exceed
five working days after an inspection. If a CRF has not been issued, the user
Member should ensure that the PSI entity puts out a detailed written
explanation specifying the reasons for non-issuance.
q Protection of confidential information. User Members should ensure that
contracts with PSI entities or national implementing legislation or
administrative regulations specify procedures to be undertaken by such
entities to limit the confidential business information they seek from
exporters to that provided for under the Agreement and to ensure that any
such information obtained by PSI entities is not used for any other purpose
than PSI activities for the user Members. Any breach of the rule of
confidentiality by the PSI entity is an action that may be brought against the
PSI entity in the appropriate judicial or administrative forum of the user
Member.
q Fee structures. User Members should ensure that contracts with PSI entities
or national implementing legislation or administrative regulations provide
for fee structures that do not create incentives for potential conflicts of
interest in any way that may be inconsistent with the objectives of the
Agreement. Additionally, contracts with PSI entities or national
implementing legislation or administrative regulations should specify that
PSI entities should not inspect transactions involving products in which a
PSI entity or its related company may have a commercial interest.
q Consideration of complaints from exporters. Members should ensure that the PSI
entity, when responding to a dispute on price verification, provides a
detailed written explanation within 10 days of receipt of the complaint,
setting forth the basis of its opinion of value by reference to the specific
applicable elements of the price verification criteria.
Chapter 4 – Preshipment inspection 81

q Use of a model contract. Members must ensure that contracts are in conformity
with the provisions of the PSI Agreement and are encouraged to consider
following wherever possible the model contract that has been developed by
the Working Party.
q Selectivity and risk assessment. Members should examine incorporating the
principles of selectivity and risk assessment in their contracts.
q PSI auditing. Members considering having their PSI programmes audited
should be guided by the principles that have been developed by the Working
Party or ensure that, when alternative criteria are used, the principles of the
PSI Agreement are respected.
q Technical assistance. Developed countries must ensure that developing
countries receive the necessary technical assistance for domestic capacity
building in order that the transition from PSI can be made.

Future monitoring
Future monitoring of the Agreement on PSI will be undertaken initially by the
Committee on Customs Valuation, where PSI will be a standing agenda item.

Business implications
It is important to note that the Agreement provides that countries using the
services of PSI companies for verification of prices should do so only for
temporary periods of time. The long-term objective should be gradually to
reduce their dependence on the use of these services, by developing the
capacities of their customs officials to detect cases of undervaluation and other
customs malpractices.
The clarifications of the rules of the PSI Agreement described above seek to
reduce further, if not completely eliminate, the difficulties enterprises
experience in exporting to countries using PSI services. In addition, the
Agreement has created a mechanism for the consideration of complaints. This
will enable exporters who believe that their prices have been revised arbitrarily
by the verifying inspector to complain to a designated senior official of the
inspecting company and, if they are not satisfied, to bring the matter up for
consideration by the independent review entity, which has been established
under the Agreement.
Governments of PSI-using countries benefit from the increased customs
revenue resulting from the detection of undervaluation and from the decline in
the flight of capital through overvaluation. The employment of PSI services also
brings indirect benefits to business enterprises. First, it speeds up the clearance
of goods. Second, the use of PSI services lowers the level of customs-related
corruption, thereby reducing demands for under-the-table payments for
imported goods to be cleared. As has been said, one of the objectives of
governments using PSI services is to bring customs-related corruption under
control. Third, when verifying prices, PSI companies carry out physical
inspections of goods to be imported in order to ensure that they conform to the
conditions stipulated in contracts between importers and exporters in regard to
quality and quantity. Except therefore in cases of low-value imports, which are
not inspected, importers obtain an assurance that the goods they will receive
will be in conformity with the terms of their contracts. However, as PSI
companies enter into contracts with governments, importers have no right of
recourse to these companies if they (the importers) ultimately find that the
imported goods do not, in fact, meet the terms of their contracts.