Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the November 21, 2006 issue of the Bangkok Post.
By Paul Sumner
This is the second article in a four-part series, entitled Inside Automotive. Today we will look into the verification of free trade agreement benefits, and more specifically, the process of proving the origin of goods and how free zones are changing this process.
The origin of goods has always been an important issue, as trading nations give preference to trusted trading partners. This may be through lowering tariffs on imported goods or by reducing non-tariff barriers such as import quotas. Increasingly, free trade agreements are reducing customs duties for goods from certain countries, so the origin of the goods determines what rate of duty the importer must pay. This is particularly important for the auto industry, as high duty rates make regional manufacturing strategies increasingly important.
Why is this a current issue? Revenues from customs duties are falling as free trade lowers tariffs, making it more essential to collect as much duty as possible. It's a challenge for Customs officials to prove a certificate of origin is incorrect, since the information is offshore.
Three recent developments mean that the importer is more likely to be challenged about the origin of goods. The first is that the Asean Free Trade Area rules have recently been amended to allow the receiving authorities to go to the exporting country to verify the origin of the products. This is only likely to happen in extreme cases, but it is an important development. Secondly, a number of the FTAs recently concluded and under negotiation allow for the verification of claims for preferential origin. Thirdly, the introduction of free zones in Thailand means that the free zone users will be making a claim for origin that Thai Customs will be able to directly verify, as all the documents will be in Thailand.
Who bears the responsibility to prove the origin of goods? The exporter bears the cost of acquiring the certificate of origin, and naturally has the information required to do so. The importer gains the tariff benefit, but must bear all the risk if Customs rejects the certificate, even though they lack the information needed to prove the origin of the goods.
Examinations by the importing country are infrequent since they are expensive to conduct. This can make exporters complacent and careless in retaining appropriate evidence to support the claim for preference.
What are the responsibilities of the parties? The exporter is responsible for collecting and submitting the evidence of origin to the issuing authority in the country of export. However, the importer is held liable for incorrect import declarations. This can burden buyers with enormous claims for back duty, interest and penalties in some cases if the origin certificates were incorrectly issued. Just because the certificates were endorsed by the issuing authority does not mean they cannot be retrospectively withdrawn.
What are the implications for free zone users? Free zone users in Thailand can remove manufactured goods at a preferential duty rate. The cost/benefit analysis must note that the duty is paid on the ex-factory price minus local raw materials, so the dutiable value includes local processing. Vehicle manufacturers are a prime beneficiary of this, as the average duty on parts is high and the preferential duty on finished vehicles is low.
What are the implications for suppliers to free zone users? Suppliers into free zones will be asked by importers to confirm that the sub-assemblies they provide are of qualifying origin. Free zone users who take their responsibilities seriously will ask suppliers to formally certify the origin, and they may require documentary disclosure. This may require the manufacturer to ask the supplier to disclose raw material pricing, overhead costs and profitability _ commercially sensitive information that is normally secret. Auto tier one and tier two suppliers will likely be asked to certify the origin of the sub-assemblies.
How will companies trading with overseas entities be affected? Companies importing from related parties will be under increasing pressure to provide information relating to the origin of the goods. Companies who are unwilling to disclose the information will likely face difficulties, and each request will need to be managed on a case-by-case basis.
What is the long-term strategic direction of verification actions? Undoubtedly, origin verifications will be become more frequent, more onerous and ultimately more successful as a revenue collection initiative. Auto companies that are inadequately prepared will face a significant compliance burden. Those that have the evidence, however, will be able to take advantage of the many preferential tariff benefits with the knowledge that the advantage is supportable.
The next article in our Inside Automotive series will look at cost reduction and process improvement.
