Untrapping cash from imports and exports to boost your company

This article was contributed and first published in The Business Times on 16 January 2009

Most if not all importers and exporters are well aware that Singapore is like a “freeport” for them, with few import or export related duties and taxes. Various facilities exist to even delay those duties that are payable, or prevent them from becoming a cost at all for transshipments, such as the Major Exporter and various Licensed Warehouse Scheme.

Therefore, it is not surprising that looking for available cash hidden in import and export activities does not appear to come natural to many Singapore companies, even when they are hit by a stuttering economy. However, rather than expecting some miraculous new advantages from the upcoming Budget, those importers and exporters would do well to re-examine their trade flows in the light of existing opportunities that may have become more attractive in these changed economic times.

Consider the following example: A company (let us call it Tradeco Pte Ltd) buys products made by a supplier in Thailand and stores them in a commercial warehouse in Singapore. No import or excise duty is due but import GST is duly paid. Three months later the products are sold at a 30 percent markup to two customers, one in the United States (US) and the other in Indonesia. The agreed terms of trade are Delivered Duty Paid (DDP), which basically means all costs and risks are Tradeco’s responsibility until the products are delivered to the premises of the customers in the respective countries. Tradeco appoints a low-cost third party provider (3PL) to take the products from the warehouse in Singapore and deliver them to the doorsteps of the customers. The 3PL is paid for all its costs, GST is reclaimed after export and the customers pay the invoice for the goods a few months later.

Not a very exciting example and a pretty standard way of doing business, you may think. Given the current hard times, Tradeco has turned the products around pretty quickly and made a decent profit in the process. But let us examine the example in a little more detail to see whether we can find some hidden cash in the import and export operations.

Free Trade Agreements (FTAs)
Singapore has FTAs with both Indonesia and the United States (US), hence products could be entitled to lower rates of import duty in these countries. As the terms of trade are DDP, these would have meant savings for Tradeco, who have already secured a final sales price.

For the exports to Indonesia, if the relevant certificate of origin can be obtained from the Thai supplier, Singapore Customs can issue a so-called “Back-to-Back” certificate which can be used to pay the lower rates of duty upon importation into Indonesia. For exports to the US, things are not so straightforward. Tradeco may need to perform some processing on the products in Singapore for them to be deemed ‘Singapore origin’ for the purposes of using the US-Singapore FTAs lower duty rates. The duty benefit obtained in the US may well outweigh the extra cost of performing some operations in Singapore.

If Tradeco already looked at the potential use of FTAs and discarded them, they should look again. Most FTAs offer a phased duty reduction for eligible products, and what was not worth the effort two years ago may be worth the effort now. This is particularly true as many countries are looking to increase their standard duty rates, usually known as most-favoured-nation (MFN) rates. These increases can go up to as high as the “bound rates” agreed at the World Trade Organisation. Such increases in MFN rates may make the preferential rate that an FTA offers much more attractive.

If Tradeco’s product is not covered by an FTA, it could be worthwhile to try and have it added. Most FTAs are reviewed regularly, and “he who shouts loudest usually gets heard”.

Customs valuation
As duties are often payable as a percentage of value, DDP is often not an efficient trade term for customs valuation. Although the customer may be happy to receive the product at no effort, Tradeco may be paying duties on a value that includes post-importation costs that need not be subject to duty. Options do exist to separate such costs from the dutiable value. Tradeco may already have a subsidiary in Indonesia and/or the US, or even its own presence. Using such intermediaries often allows a lower import value to be declared, thus reducing all ad-valorem import taxes. As Table 1 shows, any duty savings will offset a corresponding corporate tax increase, usually quite handsomely.

Duty exemptions
Reducing an import related duty bill is desirable as such duties are treated by most companies as costs rather than taxes, hence impacting the bottom line. But should Tradeco be paying duties in the first place? Many countries offer facilities for duty exemption if the importer can demonstrate that a particular product is not available and cannot be produced in the local market. Building a case may not be straightforward, but the potential prize may justify some effort.

Managing a third party provider
And how about Tradeco’s management of the 3PL? Most 3PLs are selected based on speed and cost, both measured directly. This is often not in the best interest of the importer or exporter. For example, the 3PL would usually regard import duties as pass-through costs and trying to use FTAs may involve more time and work, so it has no interest in using them.

Also, a customs officer at the port of import may insist on the use of a customs classification code which attracts a higher rate of duty. The 3PL, with little knowledge of the product and a vested interest in quick clearance, is unlikely to put up much of a fight. No decisions regarding the declaration of customs valuation, classification and origin should be taken by the 3PL without Tradeco’s knowledge and approval. Changing the classification of a product may have an immediate impact on duty rates payable, as well as bring on a host of other problems, such as quota restrictions, licence requirements, anti-dumping duties, etc. It is also surprising how many companies do not know how much import and export duties they may be paying, such is the level of uncontrolled outsourcing of this function to third parties. Experience teaches that it is unlikely that the upside to such uncontrolled outsourcing outweighs the potential downside.

Customs classification
On the topic of customs classification, all the dangers of uncontrolled classification can also be viewed as opportunities for controlled classification, or “tariff engineering”. Minor changes to product or supply chain often allow changes in product classification that significantly reduce a duty bill, or eliminate quota or licence restrictions or anti-dumping duties. Sometimes a review of existing classification codes uncovers opportunities to argue that a different code is more appropriate for a product, leading to similar benefits. Remember that product engineers have little or no knowledge of the impact of their actions on the customs classification of a product. In the food industry, a slight change in recipe could double the amount of import taxes that apply. Tradeco could improve its position by sitting down with the supplier to ensure the most advantageous appropriate customs classification is used.

Conclusion
The example in this article is necessarily simplified, for illustration purposes. At the same time, it has only discussed some of the most obvious opportunities for finding cash. Using an appropriate warehouse to suspend payment of GST in Singapore, for example, would provide a cash flow benefit. Subscribing to the various secure trade schemes may involve some upfront investment, but could be a good tradeoff for shorter clearance times and lower inspection rates.

The Singapore government, as others, has provided many of such facilities in the past, and may very well enhance some of them in the coming Budget. It is up to the importers and exporters like Tradeco to take full advantage. After all, you can take the horse to the water, but you cannot make it drink.