Importing and Exporting and WTO Case Studies

The issues raised by international customs regulations extend far beyond the obvious ones of administrative efficiency and compliance with local laws. Overseas restrictions on imports based on factors such as quality standards and threats to domestic industries can wreck the prospects of hitherto profitable businesses and even lead to the type of international trade dispute that was seen in 2005 when the EU blocked clothing imports from China. The World Trade Organisation (WTO) includes many in-depth case studies from around the world on its web site. Full details can be found at www.wto.org.

The globalisation of commerce may be an aspiration for some and a cause of disasters ranging from regional recessions to climate change for others, but it is certainly increasing. We’re often told that its growth is driven by advances in IT, yet, while virtual technology has improved communications and aided the provision of many services worldwide, consumers still need physical products, which still have to cross national borders.

Any enterprise that relies on imports and exports dare not neglect the laws and logistics involved. Even when companies get these right, they incur other risks. HMV may have pleased
its investors and customers by importing via the Channel Islands to gain tax breaks, but it angered independent music retailers, which are challenging its "unfair" advantage. If your business starts making inroads into a foreign market, it can lead firms in that country to seek trade protection laws. It also exposes you to myriad local regulations, safety checks and complex standards. Similarly, importers may find themselves being pilloried for poor labour practices in their supply chains – as Asda found when it advertised £30 suits made in Bangladesh by employees on £12 a month. Long-distance freighting also raises environmental issues that have prompted protests against supermarkets for bringing apples to the UK from New Zealand, even though the retailers insist that most are shipped, not flown. But before a company ensures that its goods are made and moved in a socially responsible way, it needs to be certain that they can be transported legally, efficiently and cost-effectively. While much of the detail is likely to fall to an operations or commercial manager, the finance department would be well advised to ensure that it’s kept up to speed at both strategic and administrative levels. Finance should also regularly reassess practices, since importing and exporting can entail huge costs, tricky compliance issues and considerable risks – and it’s an area in which radical changes can happen fast.

In the UK, for example, customs procedures have altered dramatically in recent years. Physical anti-smuggling and food safety checks still take place at the border, but most controls are effected well before then. They are now audit-based, whereby customs officers check documents on the trader’s premises. If they find a problem they will raise an assessment and may return to examine older transactions. Astonishingly, it’s often only at this point that companies think to introduce their FD to the compliance aspect of international trade.

For a multinational company the decentralisation of its customs function poses a big challenge. It might have several entities located in a number of countries running diverse processes.

When a company has grown via mergers and acquisitions the customs function may be managed through different systems using various reporting methods. This Tower of Babel creates risks and costs. It is particularly dangerous if the business is subject to Sarbanes-Oxley rules, since controls in some areas may be insufficient or even non-existent.

To ensure peace of mind for any FD of a company involved in international trade, customs management must be part of the company’s business processes.

Furthermore, unlike VAT, duty is not recoverable, so whatever is paid directly affects the bottom line. To achieve savings from what used to be seen as a non-valueadding activity, business performance evaluations should cover the cost-effectiveness of cross-border operations.

Customs transactions can no longer be handled in an office at the back of the warehouse and FDs must be aware of their customs management position.Companies can make substantial savings from customs management using a range of procedures, but it’s wise to consider first a few key elements of compliance. The top level of regulation comes from the World Trade Organisation (WTO), which has a set of legally binding rules that apply to international trade. In addition to national customs laws, trade agreements regulate cross-border transactions between countries. The EU is a customs union, so the Community Customs Code No 2913/92 and its implementing provisions apply across the 27 member states.

Although all EU countries share the same set of regulations, implementation is administered by national customs organisations with some differences. If the UK’s customs procedures are commercially orientated and support trade facilitation initiatives, this is not necessarily the case throughout the EU.

The first step towards compliance is to check systematically the customs declaration called the single administrative document (SAD). Companies often employ agents who will complete and lodge the SAD but, unless they also clear the goods in their own name, which is quite rare, these third parties have no responsibility. This rests with the declarant – usually the company importing or exporting the goods. From a customs viewpoint, the firm should give its agent the necessary information and codes to complete the declaration. Would any

FD give an agent the freedom to fill out and send a VAT return without any details or supervision? When customs officers accept the SAD they produce entry acceptance advice. This document is particularly important at export to support the VAT zero rating or duty refund. If it becomes difficult to obtain these documents, and if the business pays the agent, a useful trick is to tie its payment of the agent’s invoice to the receipt of the documents. One thing to remember
is that most errors on a customs declaration can be corrected easily by asking the agent to do a post-clearance. Like VAT declarations, the SAD uses a coding system common to all EU members. A product is identified with a six-digit commodity code from the Harmonised System, a worldwide nomenclature allowing products to be recognised with precision in any language. In the EU the code has four extra digits for VAT and statistical purposes. Commodity codes indicate whether products are subject to import restrictions, such as licences and quotas, and will inform the calculation of duty. Using the incorrect code might not only mean that you declare the wrong product; it might also mean that customs applies a higher rate than necessary. Product classification follows a strict procedure detailed in the customs tariff and UK businesses can receive free advice on it from customs. In the case of an audit, it’s useful to have on file the process by which the code has been chosen, as well as supporting documents such as commercial brochures. Some companies give their agent a list of commodity codes for
their products, while others ask the agent to contact them to obtain the correct code for each import. The declared value is another element to check. Valuation is the determination of the taxable base and it is not the invoice price. It comprises the price payable for the goods, the cost of international freight and insurance. The price for the goods is determined using a specific technique. Some costs, such as royalties and licence fees, are liable to duty but might not appear
on the invoice. This is an area where valuation for import can conflict with transfer pricing arrangements. In the UK, HM Revenue & Customs has specialist valuation audit teams to
check the accuracy of values declared by importers.

The keys to customs compliance are knowledge and control. ISO-registered companies can add customs management to their quality audit. This makes the function more visible and ensures that any case of non-compliance is corrected. Large businesses should bring customs to the attention of their internal audit team. With compliance covered by business processes,
FDs can concentrate on generating savings. Most importers have a deferment account with customs allowing for a monthly payment of duty and taxes. This is secured by a bank guarantee proportional to the monthly account limit. Because it affects the amount of borrowing available to the company, the limit should be reviewed regularly in light of the business activity. Some large companies with multiple sites have a deferment account for each location and keep these open long after a location has stopped importing. Consolidating all the deferment accounts into one, using a trader unique reference number to identify the importing location, is a good way to
reduce borrowing and centralise control.

Potential savings can lurk behind the invoice value. Some intangible costs may not be liable for duty. Delivery within the EU should be excluded, for instance – as should commissions to agents. It is worth isolating the taxable elements, particularly for highly taxed products, but it’s critical to consider any transfer pricing implications during this exercise. For firms that trade through agents, the use of an earlier sale is a valuation method for transactions handled by a middleman.
Available in the EU and US, it removes this third party’s costs from the transaction value. The duty is calculated on the price between manufacturer and middleman instead of between middleman and importer, thereby reducing the taxable base.

When imported goods are defective or do not comply with the order – eg, over-shipments – they are returned to the supplier or destroyed. In such cases a refund of the import duty may be available under the “refund for rejected import” procedure. If goods are likely to be stored for a long time, customs warehousing delays the tax point from having a benefit on the cash
flow. The warehouse can be on the company’s premises and the inventory can be managed through its IT system. The goods can also be revalued – for instance, in an industry where supply prices fluctuate. A lower value obviously reduces the amount of duty. For manufacturing, under the regime of “processing under customs control”, firms can apply the duty rate of the finished product to the parts they import. This is effective in telecoms, for example, where components can be liable to duty but finished goods are subject to a zero rate. With this so-called inward processing relief, manufacturers can avoid duty and import VAT on goods imported for processing before being re-exported. Sometimes they can also save tax on production losses and consumables. Sourcing products from a country with a preferential trade agreement will result in a reduced (often nil) rate of duty. In such cases the supplier must provide a certificate of origin. Origin is a complex concept. The status of origin is acquired not simply by shipping the product from a country, but by the amount of local value included in the ex-works price.
Today there are many more procedures and combinations available to reduce or remove duties, but, as rates of duty fall globally, future savings are likely to be found in the administrative
costs of customs clearance. International trade is going through big changes, largely influenced by security concerns.

Since the concept of the authorised economic operator (AEO) was created in the US after the September 11 terrorist attacks of 2001, customs officers have turned to risk management to separate compliant firms from the rest. To achieve AEO status a company must undergo a rigorous audit of business accounts and processes. Once approved, it becomes a trusted trader and its AEO status ensures swift customs clearance. Companies without this designation must wait in the queue. The EU plans to introduce a similar scheme in the near future.
Another change to watch out for in the EU is the amendment of the Community Customs Code. The revised code will streamline a number of procedures. The “single European authorisation” should allow traders to import products into any country in the EU while presenting all their customs declarations in their home nation. This will dramatically reduce clearance costs for trans-European traders. It should also offer collateral benefits by allowing them to consolidate this backoffice function, perhaps within an existing shared-services centre, improving their control over the customs management function. Customs compliance is not only a compulsory requirement; it is now a competitive advantage.