Trade compliance -- at what cost?

By Michael Fung, 4 October 2012

IN THE CURRENT global economic downturn, many companies have been hit hard with falling orders and rising costs -- a double whammy so to speak. For the immediate short term, there does not appear to be an end in sight to the bad economic news. Many companies are looking to reduce costs, but often neglect to review their international trade activities. There are certainly savings to be made here.

Customs duty and other import-related taxes can be manageable costs, if you assess your operations to determine the different elements. Many companies don’t know the true extent of their import duties and taxes, simply because they are often hidden in the Cost of Goods Sold account. For some companies, the true cost may be higher than the corporate tax cost, particularly during a downturn when profits are reduced.

You can start by looking at your cross border transactions for the past year, which will give you a good snapshot of your international trade activities and costs. Next, you can take proactive steps to determine if these costs can be legitimately reduced, and how best to accomplish it.

Here are a few key areas you may consider reviewing:

Many companies do not take full advantage of available bilateral and multilateral preferential trade agreements, due to concerns about liability for errors, complex qualification rules, increased compliance burden and risks, or just a lack of awareness of the opportunity. A well structured claim for preferential tariff treatment can provide huge cost savings, particularly as the ASEAN rules have been amended to make qualification more straightforward and potentially simpler.

Review the basis of your customs valuation to identify any non-dutiable costs such as advertising, inland freight and insurance, and management fees that may have been included in your declared customs value. If you can unbundle these costs from your customs value, it will create immediate savings. This may either be straightforward or require a restructuring of some of your procedures, but significant savings can be achieved.

Tariff classification of imported and exported products is critical as it determines applicable duties, import/export restrictions and licensing requirements, and the origin rules for preferential tariff treatment for your products. Often, companies do not make a regular review of their tariff classification codes for accuracy and compliance with respective governing regulations. You can potentially be paying more duties and taxes than necessary due to an inaccurate tariff classification.

There are numerous legitimate methods to help reduce the duties and taxes that can be used to support against challenges from Customs. However, it must also be recognized that customs administrations in the region (and other tax collection agencies) will be under growing pressure to collect more revenue; therefore they will put greater focus on collecting import duties and taxes, as well as imposing penalties. Since direct taxes are trending lower, the customs administrations will review indirect taxes with greater focus.

Therefore risk management and audit preparation continue to be important to ensure your operations can pass a customs audit and mitigate any potential penalties. Written policies and procedures are the first step towards managing trade compliance and potential risks.

Ironically, the first area that is usually hit by an economic downturn in terms of resources is trade compliance, since it is often considered a cost rather than an asset within the business (it doesn’t generate revenue, but requires resources). Although this is understandable, it can create issues that quickly escalate into major problems.

Some of these problems include documentation errors or inaccurate information submitted to Customs, which can cause delays in the clearance process of your goods. If these errors continue unchecked, they can trigger a customs audit. Any underpayments of duties can also trigger a customs audit or investigation.

The best way to mitigate risks and manage trade compliance is preparation and regular self-assessments. Policies and procedures can identify procedural gaps and potential risks before they become bigger problems and thus allow the necessary corrective action to be taken before any problem becomes a significant financial liability.

Here are some proactive steps to take:

A review of your accounting or finance records to determine payments that are tied to your import transactions can help to identify potential issues with your customs valuation. Often, there are miscellaneous or unknown payments related to an import transaction, which can raise suspicions from the customs auditors. There may be a valid explanation for such payments, but you will not know whether to review the situation or not if you are not aware of these payments.

If you outsource the process of product classification to your customs broker or other third party service providers; you are still liable for their errors, since you are the importer of record. You should regularly review their tariff classifications for accuracy, as products and regulations may change, which can have an effect on the appropriate tariff classification code. If a tariff classification is not correct, it can create a domino effect that will multiply the number of errors throughout your import transactions. All of these errors can lead to additional costs in terms of underpaid duties or taxes, and possible assessment of penalties by Customs.

Properly understanding your potential risks and how to mitigate them not only reduces the chances of an unwelcome customs audit or penalty assessment (possibly covering five, 10 or even more years) but also helps to reduce the compliance cost of defending a particular position. During an audit or investigation, significant management time and resources are spent on managing it. Therefore, proper preparation will help minimize these additional costs.

Undoubtedly, this is a time of unpredictability and potential risk. However, some risks can be identified, quantified, and with a realistic action plan, mitigated. Customs risks fall into this category.

The author is a manager at the PricewaterhouseCoopers WMS Pte Ltd.-Philippine Branch. PwC refers to PricewaterhouseCoopers WMS Pte Ltd., and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. The Asia Pacific Regional Customs Services can be found at www.pwccustoms.com.

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.