Release date: June 15, 2010
Guest: Andrew Vanderwal
Running time: 9:33 minutes
Canadian companies in the business of importing or exporting goods are interested in Canada's free trade agreements and ensuring they comply with them. In this episode, Andrew Vanderwal, PwC's resident trade and origin management professional, discusses the complexities associated with free trade compliance and origin management.
Learn about free trade agreements as they apply to Canada, free trade compliance costs and the challenges associated with free trade agreement compliance.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry Lewandowski: Here with us today is Andrew Vanderwal, a partner with PwC Canada’s Trade Management group based in Toronto and a specialist in qualification and compliance with free trade arrangements. Andrew has been with PwC Canada for 11 years and has helped many large multinationals with complex origin and free trade compliance problems. Today, Andrew will discuss the complexities associated with free trade compliance and origin management.
Thanks for joining us Andrew.
Andrew: Thank you, Gerry. Glad to be here.
Gerry: Andrew, we are seeing Canada increasingly negotiating more free trade agreements. What is the current environment around international trade agreements?
Andrew: Well, we’ve found that it has gotten harder than ever to get international agreement though the multilateral trade route. The latest round of multilateral trade negotiations has been stuck for the better part of a decade. So, instead, what countries are doing is they are working to gain the benefits of trade liberalization by negotiating more limited bilateral agreements.
Now these bilateral arrangements are being created faster than ever before and at this point, we see countries like the US, Mexico and Korea each having free trade agreements with over a dozen different countries.
Canada has been working hard to keep up with all of this. We’ve recently reached an agreement with Columbia. We’re negotiating one with the EU and we’re trying to join negotiations for an agreement with US and Asia Pacific countries.
While, It wasn’t intended to be this way. The US initially planned to create an ever expanding regional free trade area, but when that didn’t work they scaled back and started negotiating separate bilateral deals instead. So, instead of a hemispheric free trade area, we now have a spaghetti bowl of bilateral free trade agreements, each with separate compliance requirements.
Gerry: What does this mean for businesses doing trade with other countries?
Andrew: Well, free trade is all about larger markets and increased competition. So, as such, the most obvious and immediate implications of all these free trade agreements are the increased export market opportunities and increased import competition.
Companies need to factor in free trade when deciding where to produce. By locating their production in one of the free trade partner countries, they will get free trade access to the free trade partner countries as well.
So let’s say you wanted to have free trade access to both the EU and the US markets from a single production location. Well, if Canada managed to complete the free trade agreement it is currently negotiating with the EU, if you produced in Canada, you potentially could have duty free access to both the US and EU markets.
However, it’s important to bear in mind that the free trade rules that Canada will have with the EU will be different than those with the US. So, the same product might very well qualify for both, but each will have very separate compliance requirements. And this example highlights the complexity that free trade introduces. To take advantage of the duty free status offered by free trade, companies face surprisingly high compliance costs.
Gerry: What are these free trade compliance costs?
Andrew: Well, there’s a few categories. First, there’s the cost of determining how each product qualifies for free trade. Each of the trade agreements are designed to allow free trade only for products that qualify as originating. There are very detailed rules that spell out how a company has to go about determining and proving that their products qualify under these free trade rules.
Often, companies have to collect origin certification from their suppliers in order for their own products to qualify. Then they have to analyze their bills of material to see if there is enough domestic value. All this can add up to a lot of work. And to make matters worse, companies also have to go through this exercise for each and every separate free trade agreement as each of these agreements have separate rules. And then they have to do it all over again each year.
The next category of cost is risk. Each time a company gains an import tax reduction and other benefits for free trade, they run the risk that claim that they make for free trade won’t hold up to audit regulatory authorities. And if their free trade claims are disallowed they face the prospect of retroactive duty costs, penalties and possibly strained relations with suppliers and customers that are affected by this.
And the third category of cost is in competitiveness. If a company’s products don’t qualify for free trade, but yet their competitors' do, they are then at a cost disadvantage and can lose market share.
Also free trade also throws another level of complexity into sourcing and production decisions that wasn’t there before. If a company, for example, finds a lower cost source of supply outside of a free trade area, they have to be very careful that the increased foreign content doesn’t result in their own production ceasing to qualify for free trade.
Gerry: Andrew, how are companies responding to these challenges?
Andrew: We see the full spectrum in how companies respond. At one end are those that make free trade claims but really aren’t doing enough to back up these claims with proof of origin. Now these companies might be saving short term on some compliance costs but run a significant risk of penalties and retroactive costs.
In the middle there are the majority, which are the companies that have developed various ad hoc approaches in separate divisions and plants. And then at the other end there are those that have invested heavily in developing internal systems to automate free trade and/or have outsourced much of the free trade processes to outside service providers. Sometimes these companies end up actually making more work of it than necessary.
Gerry: So what would you suggest a company do to meet these challenges?
Andrew: Ignoring free trade won’t work, as that would put a company at a competitive disadvantage and it would annoy customers that want to benefit from free trade.
We suggest a company approach this by first taking a good look at what they’re doing now and comparing that with some of the examples of best practices in their industry.
Ultimately, what companies need to do is make sure they have the right processes and tools in place to manage free trade as efficiently as possible.
Gerry: So what can PwC do to help?
Andrew: We have trade professionals in major markets around the world experienced in helping companies with free trade regulatory compliance.
We can help assess what is being done now by a company’s various businesses and compare that with what is being done by others in their industry and across other industries. We then can come up with recommendations on how they can implement an origin management program that would result in them efficiently meeting their origin objectives without doing more than necessary.
We have also developed a web-based program called OriginCompliance which helps companies automate free trade processes and workflows. When companies have a significant volume of workflow associated with origin processing, we look to see how they can benefit from automation.
Gerry: So I understand PwC has developed an origin management technology?
Andrew: Yes, in response to our client needs, we created a program called OriginCompliance™ to help them with free trade. IT was brought to market 10 years ago and we’ve been developing it further ever since.
Now this OriginCompliance™ program has a supplier solicitation module to help companies gather supplier certification online, and an origin analysis module for companies to process their bills of materials against specific free trade rules.
Both modules provide users with prioritized workflows and tools to execute them efficiently. Overall, the program helps our clients establish a consistent, efficient and complaint free trade process.
Gerry: So if I heard you correctly, free trade compliance can be difficult, but is manageable.
Andrew: Absolutely. With the right tools and processes, free trade benefits far outweigh costs.
Gerry: For additional information on compliance for free trade agreements, visit pwc.com/ca/origin compliance.
Andrew: Thank you, Gerry.
Gerry: You’re quite welcome, Andrew.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.