100 Companies
Audited by Customs Since June 2004
100 Companies Audited by Customs
Since June 2004, more than 100 companies have been
audited by the Post Entry Audit Group (PEAG) of the
Bureau of Customs. And curiously, many importers are
still unaware that customs has long been empowered
to conduct audit of import transactions within three
years from date of importation. In many public seminars,
a consistent question is why customs needs to conduct
an audit when documents are already inspected or reviewed,
albeit superficially, upon importation. The Audit
Paradigm. We have consistently stated that the PEA
system is a modern methodology which allows customs
to focus its scarce resources on the risk assessment
of importations (e.g. contrabands and misdeclared
importations) and allow the release of most of the
importations without physical inspection and verification
of what has been declared. For example, customs appraisers
do not always verify the value declared in the import
declarations as against actual remittances or payments
to suppliers. Neither do custom examiners conduct
physical inspection to confirm the quantity and description
of goods upon importation. The verifications can now
be made post entry, or after goods are cleared from
customs, by means of a review of import and related
business records. Of course, the audit will not only
involve a single import transaction but will start
with a sampling of import records covering a certain
period of time. In case compliance issues are found
on the sample transactions, customs may conduct a
full audit over all import transactions made on the
selected period. Preparing for Audit. There are yet
no official customs reports on the manner by which
the compliance audits are being conducted. Customs
has likewise been suspiciously silent on the general
findings made on these audits. There are many speculations
on how the audit is being conducted and many importers
fear that the audit is more of a shakedown on smugglers.
These speculations, however, seem to be contradicted
by the fact that many of the auditees are very large
local companies as well as multinational companies.
For the top 1,000 importers, it is not a question
of whether the company will be audited but rather
a question of when. We have provided in the succeeding
discussions the main areas for customs audit preparation.
Customs Broker Selection. Customs brokers are the
importers' first line of defense. Most importers look
at customs operations from a logistics perspective;
rarely do companies look at the compliance requirements
for their import operations. Most of the functions
in import operations are outsourced to custom brokers
and companies seldom verify the correctness and completeness
of what is being declared to customs. On the other
hand, customs brokers are more focused on clearance
operations and, in practice, do not focus on the level
of compliance in its customs operations. That being
the case, companies should therefore ensure that the
customs brokers not only release the imported goods
in the most efficient and fast manner but also in
a compliant manner. One suggestion we usually make
is for importers to check on the reputation of the
customs brokers with customs considering that most
importers and customs brokers who play the field,
so to speak, are known to customs. Internal Controls
and Procedures. Another area that importers should
focus on is the provision for internal controls and
procedures in its import operations. The controls
and procedures should have the following purposes:
a) ensure that tax and duty calculations are correct;
b) confirm the correctness and accuracy of declarations
made under oath in the import entry (IEIRD) and the
supplemental declaration on valuation (SDV); c) verify
that tax and duty payments are actually received by
customs; and d) import records are provided to the
importer for record keeping purpose. In general, these
controls and procedures must be provided in writing
and must be applied to operations by both the import
staff and the customs brokers. The written manual
must be simple enough for easy understanding but should,
however, address the above purposes. For the more
sophisticated companies, part of the controls and
procedures provided is a system commonly known as
Customs Compliance Review (CCR). CCR is basically
a system where external customs and trade experts
conduct a third-party audit of the company's import
transactions. This will involve, among others, identifying
possible compliance issues, risk areas or duty savings
opportunities and, at the same time, providing recommendations
to address the specific compliance issues and risks.
Record Keeping Practices. The PEA system provides
for penalties for (1) failure to keep import and other
related business records as provided in CAO 4-2004
and (2) for failure to give customs auditors access
to those records. For many companies, the absence
of import and related records (financial and accounting
information) is already a given problem and this should
be addressed immediately. For other companies, the
records are normally available but are not easily
accessible to customs. Based on our experience, most
companies' record-keeping systems are typically tooled
for BIR and internal audit, and not for customs audit.
To illustrate, customs normally makes a reference
to the entry number generated by Automated Customs
Operating System (ACOS) when conducting its audit.
On the other hand, importers have their own reference
system for their import transactions (e.g. shipment
number, purchaser order number). To be audit-ready,
it is not enough that the records are available but
more importantly, the record-keeping system must make
the records easily accessible to customs. A licensed
customs broker, the writer is an international trade
and customs consultant and a lecturer of Ateneo Graduate
School of Business and International Trade Centre
(UNCTAD/WTO) on Purchasing and Supply Chain Management.
Please contact agatonuvero@yahoo.com for your comments
or questions.
Penalty for Misdeclaration in the SDV RECENTLY
Penalty for Misdeclaration in the
SDV RECENTLY, there have been reports in some major
dailies about the ongoing customs investigation against
a multi-national com-pany for alleged undervaluation
and supposed misdeclaration in the Supplemental Declaration
on Valuation (SDV), a document submitted together
with the import entry for every importation. Accordingly,
the company has been found to have made false declarations
in the SDV and hence, company officials can be held
liable for fine, imprisonment or both. Under customs
rules and regulations, importers are responsible for
ensuring the accuracy and completeness of declarations
(import entry and SDV) to customs and any misdeclaration,
whether erroneous or fraudulent, exposes the importer
to possible fines and penalties, including criminal
prosecution. In practice, importers have always relied
on their customs brokers for making declarations in
the import entries. The submission of an SDV for every
importation has only been required in 2000, when the
country converted to the WTO Transaction Value (TV)
system. For years, many importers have been penalized
for misdeclarations made in the import entries, whether
by omission or with intent. The recent news report,
if true, is alarming because this is the first time
that a company is going to be charged with false declarations
in the SDV. What is the SDV? The SDV is basically
a single-page document required to be submitted together
with every import entry. It contains information requests
which the customs broker and importer must fill out
and sign prior to submission. The document clearly
states that any "false or inaccurate declaration
is considered a serious crime and punishable by fines,
imprisonment or both". The document itself specifically
requires the following: a) Are the buyer and seller
related under the Transaction Value (TV) System (Section
201, TCCP)? b) Did the relationship influence the
price? c) Does the transaction value of the imported
goods closely approximate the value established under
the TV system? d) Are there any restrictions as to
the disposition or use of the goods by the buyer?
e) Is the sale or price subject to some conditions
or considerations for which a value cannot be determined
with respect to the goods being valued? f) Are there
royalties or license fees related to the imported
goods payable either directly or indirectly as a condition
of sale? g) Is the sale subject to any arrangement
under which part of any proceeds from subsequent resale,
disposal or use accrues directly or indirectly to
the supplier? Additionally, information is also required
in regards to (a) selling commissions, (b) packing
and transport costs, and (c) goods and services supplied
by the buyer free of charge or at a reduced price
for use in connection with production and sale for
export of the imported goods. To most importers and
even brokers, these information requirements are very
technical in nature and very difficult to answer.
Moreover, the purpose of the information required
does not seem to be properly explained. Transaction
Value Defined. The basis of the information required
in the SDV is found in the rules on customs valuation
specifically provided in Section 201, TCCP and in
the implementing rules (e.g. CAO 4-2004). Under the
TV system, the dutiable value of an imported article
is the "transaction value, which shall be the
price actually paid or payable for the goods when
sold for export to the Philippines". Stated otherwise,
the primary basis for determining the customs value
is the price paid or payable for the imported goods
being valued. CAO 4-2004 provides that in determining
the dutiable value certain adjustments may be made
to the "price actually paid or payable"
if not yet included in the invoice price. These adjustments
are as follows: (a) commissions and brokerage fees
(except buying commissions); (b) cost of containers;
(c) cost of packing; (d) assists; (e) royalties and
license fees; (f) subsequent proceeds that directly
or indirectly accrue to the supplier; (g) cost of
transport to the port of entry; (h) loading and handing
charges to the port of entry; and (i) cost of insurance.
The information as to possible adjustments to the
invoice price is what is being required in the SDV.
The questions provided therefore directly impacts
on the determination of the dutiable value for purposes
of tax and duty calculation. Penalty for False Declarations.
The information requirements in the SDV clearly impacts
on how customs treats the acceptability of the declared
value and on whether certain additions may be made
on said declared value. Any false or inaccurate declarations
in the SDV obviously impacts on the final determination
of the taxes and duties payable. In practice, it is
not uncommon for many companies and customs brokers
to just answer all the questions in the negative and
to simply not verify the accuracy or completeness
of such declarations. Unfortunately, the declarations
directly impact on the valuation treatment of the
goods being valued. Worse, any false or inaccurate
declaration exposes the importer and customs broker
to possible administrative and criminal sanctions.
The ongoing customs investigation should therefore
serve as a warning to both importers and customs brokers
that they should ensure the declarations in the SDV
are accurate and complete and that the signatures
therein are genuine and authorized. Failing that,
they are at great risk for administrative and criminal
penalties. A licensed customs broker, the writer is
an international trade and customs consultant and
a lecturer at the Ateneo Graduate School of Business
and International Trade Centre (UNCTAD/WTO) on Purchasing
and Supply Chain Management. Please contact agatonuvero@yahoo.com
for your comments or questions.
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Duty
Drawback on Exports
PEZA rules generally require that
companies export at least 70% of their export produc-tion
to qualify for registration in an export proces-sing
zone. Many companies, however, export less than 70%
of their production and thus, pay taxes and duties
for imported raw materials subsequently utilized for
export production. How can the company prevent the
payment of taxes and duties on those export materials
or, if paid, how will it secure the refund for such
payment? Below is a discussion on securing duty drawback
available upon exportation of finished products manufactured
from previously imported raw materials (which were
subject to duty payments). Section 106, TCCP. The
provisions of Section 106(c) of the Tariff and Customs
Code (TCCP) as amended, provide the basis for allowing
drawback on duties paid on imported raw materials
upon exportation of products manufactured from such
previously imported materials.
The requirements under the above-mentioned
section are as follows:
a) Payment of duties on imported
raw materials; b) Actual use of such materials in
the production or manufacture of the products exported;
c) Exportation made within 1 year after importation
of such materials; and d) Application or claim for
drawback filed within 6 months from date of exportation.
Procedures and Documents Required.
There are basically two major stages
for claiming duty drawback, to wit: a) Pre-Qualification
and Registration; and b) Filing and Processing of
Drawback Claims Prior to the actual filing and processing
of drawback claims, the company must first register
with the One Stop Shop (OSS) Center of the Department
of Finance (DoF) by submitting the following documents
attached to the registration form: a) SEC, BIR and
BOI registration b) Corporate Secretary's Certificate
as to the company's authorized representatives/signatories
to transact with the OSS Center (including alternate
signatories with their respective specimen signatures)
c) Certified true copies Income Tax Returns and Audited
Financial Statements d) Profile of major suppliers
e) Profile of major buyers/customers f) Clearance
from the Bureau of Customs (BoC) for no pending account/administrative
case with any BOC ports g) Clearance from the Bureau
of Internal Revenue certifying that the company has
no outstanding tax liability The pre-qualification
procedure is part of the annual mandatory pre-qualification
for all claimants conducted by the OSS Center. Once
the company passes the evaluation, the Center shall
issue a qualification certificate, which shall be
used as basis for transacting with the Center. Upon
completion of the above documents, the same shall
be submitted to the Center for pre-screening and processing.
The OSS Center shall send a written communication
to the applicant as to the status of the application
and the date of release of the qualification certificate,
if favorably acted upon. Filing and Processing of
Drawback Claims.
The following documents are required
to support an application for drawback claims: a)
Proof of Importation (e.g. Import Entry Declaration,
BoC Official Receipts, Commercial Invoice and Packing
List and Bill of Lading or Airway Bill) b) Proof of
Exportation (Export Declaration, Export Sales Invoice,
Billing of Lading and Shipment Information Slip) c)
Proof of Exportation d) Formula of Manufacture duly
approved by DOST-ITDI e) BoC Computation Table using
Regular Scheme f) Schedule of Raw Materials Usage
g) Schedule of Importation Going Forward.
To avail of duty drawback, the following
activities must first be performed prior to claiming
duty drawback on exportations: a) Registration application
with the OSS Center; b) Confirmation of capability
to file, support and process the duty drawback claim
(e.g. securing the Shipment Information Slip prior
to exportation); c) Preparation and approval of the
Formula of Manufacture by DOST-ITDI; and d) Preparation
of the documents necessary to support the initial
application based on the formats provided by the OSS
Center (e.g. BoC Computation Table using Regular Scheme,
Schedule of Raw Materials Usage and Schedule of Importation).
Because of the voluminous documents required, some
of the processes mentioned above can be tedious and
burdensome. Companies must therefore ensure that a
checklist of documents has been prepared and completed
before making any of the submissions. A licensed customs
broker, the writer is an international trade and customs
consultant and a regular lecturer on logistics, customs
and cross border trade.
Please contact agatonuvero@yahoo.com
for your comments or questions.
Back to Top
WTO Trade
Facilitation Proposals
THE World Customs Organization (WCO)
recently published a list of proposals to the World
Trade Organization (WTO) to pro-mote facilitation
in the trade of goods across international borders.
WCO and WTO Cooperation. As an intergovernmental organization
with 168-member countries, the WCO is well aware of
its responsibilities in terms of disseminating information
regarding its instruments and work as a means of assisting
WTO Members. Considering that the proposals are undergoing
negotiations, the publication of the list is not intended
to prejudge the negotiations and their outcomes.
The aim is to help secure consistency
between the work of the WTO and WCO and to promote
inter-agency cooperation between the two organizations.
Recognizing the impact of the customs service on the
social and economic development of a country, the
WCO has been at the forefront of customs development
work since its inception in 1952. It has worked with
its member countries to initiate discussions on and
the identification of best customs practices, the
development of instruments and standards, and the
provision of technical support to those members who
lack capacity in terms of engagement and implementation.
Major Works of the WCO. Among its
major works are the HS Convention, the Revised Kyoto
Convention and most recently, the Framework of Standards
to Secure and Facilitate Global Trade. The HS Convention
(International Convention on the Harmonized Commodity
Description and Coding System, which entered into
force in January 1988) aims to facilitate international
trade, facilitate trade statistics related work, reduce
the expense incurred by re-describing, reclassifying
and recording internationally traded goods, and facilitate
the standardization of trade documentation and the
transmission of data.
The revised Kyoto Convention (International
Convention on the Simplification and Harmonization
of Customs Procedures [amended in June 1999]), on
the other hand, is intended to contribute more directly
to trade facilitation. A more recent WCO product,
the Framework of Standards to Secure and Facilitate
Global Trade (adopted in June 2005) encompasses the
important customs task of securing international trade
as well as trade facilitation. It presents a blueprint
of the future customs, realizing the two-fold objectives
of better facilitation and security. These objectives,
while they may appear to be conflicting, are in fact
consistent and mutually supportive.
WTO Trade Facilitation Agenda. The
WTO placed trade facilitation on its agenda in 1996
and started negotiations in 2004. The agenda specifically
recognizes as one of the negotiation modalities the
relevant work of the WCO. There have been quite a
significant number of proposals submitted to the WTO
Negotiating Group. A number of these proposals refer
to the instruments and work of the WCO. List of Proposals
for Trade Facilitation.
Below is a list of the proposals
for the trade facilitation agenda currently being
negotiated in the WTO. a) Publication and Availability
of Information (e.g. Publication and Notification
of Trade / Penalty Regulations; Internet Publication;
Inquiry and Information Centers) b) Time Period between
Publication and Implementation c) Consultation and
Commenting on New and Amended Rules d) Advance Rulings
e) Appeal Process f) Fees on Exportation and Importation
g) Formalities in Exportation and Importation h) Prohibition
of Consular Transaction Requirement i) Border Agency
(inter-agency) Coordination j) Release and Clearance
of Goods (Simplified Release) k) Objective criteria
for Tariff Classification l) Matters Related to Goods
in Transit m) Customs Cooperation / Information Exchange
What to Expect. Developments and changes in the customs
and trade front will come from many places.
Obviously, the WTO negotiations on
the trade facilitation agenda will take many more
years. Even then, we expect changes as a result of
the unilateral efforts of the Philippine government
and the Bureau of Customs. Moreover, efforts are being
pushed by the private sector as well as regional trading
blocs particularly ASEAN. We also see numerous technical
assistance programs from the EU, US and Japan to promote
trade facilitation at the border. EU in particular
is pushing for the implementation of a one-stop shop
service at the border, otherwise known as the Single
Window. For the trading and transport community, what
we should expect is a more simplified and transparent
rules and procedures at the border.
Customs online capabilities will
be enhanced, allowing logistics providers and importers
to directly lodge entry online and clear goods without
any human interface and the least cost. This in particular
will come earlier, with the ongoing P500-million computerization
program presently being implemented at the Bureau
of Customs. Part of the program is the migration from
the present customs automated system to the more modern
AsycudaWORLD. Lesser Work Force. With automation,
however, we will unfortunately find out that most
of the work force involved with customs clearance
will become redundant.
Logistics companies with greater
online facilities will be forced to retrench staff
involved in customs documentation and clearance. Companies
solely engaged in customs clearance will become obsolete
as a result of the importer's new capability to directly
transact with customs. Logistics companies will continue
to consolidate and we will see more mergers and acquisition
in the industry. A licensed customs broker, the writer
is an international trade and customs consultant and
a regular lecturer on logistics, customs and cross
border trade. Please contact agatonuvero@yahoo.com
for your comments or questions.
Back to Top
Basis for
Seizure and Forfeiture of Imports
UNDER customs laws and regulations,
a Warrant of Seizure and Detention (WSD) may be issued
against an imported article for violation of tariff
and customs laws. Prior to the issuance of a WSD,
a shipment is normally first 'alerted" and in case
of positive findings, a WSD subsequently issued. The
issuance of a WSD will now result in the conduct of
a forfeiture proceeding against the imported article.
If the importation has been found to have indeed violated
any tariff and customs law, said article will then
be forfeited in favor of the government, without prejudice
to the filing of administrative and criminal actions
against the importer.
Similarly, customs rules expressly
provide that foreign articles openly offered for sale
may be seized for failure to show evidence of payment
of duties and taxes. Undervaluation, Misclassification
and Misdeclaration. Importers have the primary obligation
to ensure that its customs declarations are complete
and accurate. Failing that, the importer may be deemed
to have committed an undervaluation, misclassification
or misdeclaration in its import entry declaration.
Section 2503 of the Tariff and Customs
Code of the Philippines (TCCP), which provides that
"an undervaluation, misdeclaration in weight, measurement
or quantity of more than 30% between the value, weight,
measurement or quantity declared in the entry and
the actual value, weight, quantity or measurement
shall constitute a prima facie evidence of fraud penalized
under Section 2530 of this Code: Provided, further,
That any misdeclared or undeclared imported article/item
found upon examination shall ipso fact be forfeited
in favor of the Government to be disposed of pursuant
to the provisions of the Code." The same section
further provides for administrative and criminal sanctions
against the importer "if the undervaluation, misclassification
or misdeclaration in the import entry is intentional".
Alert Orders.
An Alert Order is normally issued
based on "derogatory information" or suspected violation
of customs laws, rules and regulations by a particular
shipment. The issuance of the order will have the
following implications: a. require the spot-checking
or 100% physical examination of subject shipment;
and b. warn concerned customs officials to exert extra
diligence in examining the shipment and reviewing
the import documents, The order must be issued by
authorized customs officials (Commissioner, Dep. Comm.,
IEG, District Collector, Chief, ESS and Chief, CIIS)
and must be recorded with the Office of the Customs
Commissioner and affixed with the appropriate dry
seal. An Alert Order may result in any of the following
findings and recommendations: a. issuance of a Warrant
for Seizure and Detention (WSD); b. payment of additional
taxes and duties including fine; or c. lifting of
the order. Warrant of Seizure and Forfeiture (WSD).
The issuance of a WSD shall involve the lawful taking
or possession of the imported article by customs and
the seized property shall now be subject to forfeiture.
A WSD is issued only by the District Collector upon
determination of probable cause (violation of customs
laws, rules and procedures).
Upon issuance of a WSD, the District
Collector must: a. report the seizure to the Customs
Commissioner and the Chairman of the Commission on
Audit b. notify the importer in writing; and c. prepare
a description, appraisal and classification of seized
property. Remedies in Forfeiture Proceedings. In the
course of the forfeiture proceeding and when there
is no prima facie evidence of fraud, an importer may
secure the release of goods upon posting of a cash
bond subject to approval of the Commissioner. Section
2307, TCCP provides the manner by which an importer
may offer to settle the case, when there is no fraud
involved, as follows: a. When the case is pending,
by way of payment of fine not lower than 20% but not
exceeding 80% of the landed cost of the imported article;
or b. In case of forfeiture, by way of payment for
the domestic market value of the seized article.
In other words, the importer must
first prove that the violation was not intentional
and fraudulent in order that the remedy of settlement
by fine or redemption will be available. A ruling
allowing settlement will be subject to the approval
of the Commissioner of Customs. Wrongful Issuance
of a WSD. In case a WSD is wrongfully issued, the
District Collector may withdraw the WSD. This rarely
happens though. If a WSD has indeed been wrongly issued,
a common remedy for importers is to file a motion
to quash the WSD for lack of probable cause.
The motion is simply a formal request
for the withdrawal of the WSD based on legal and technical
grounds. The author is an international trade and
customs consultant, and a licensed customs broker.
He is also a regular lecturer on logistics, customs
and international trade. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
Back to Top
Selecting
Your Customs Broker
THERE are basically two arguments
why importers have to be careful when selecting its
customs brokers. One, customs has increasingly become
stricter in implementing its rules resulting in hefty
fines for numerous companies. These fines become part
of the revenue collected by government. Secondly,
the Bureau of Internal Revenue (BIR) has likewise
been very aggressive in conducting audits of the VAT
declarations on import transactions.
As we have always mentioned, customs
operations is a high-risk activity for importers and
there are many reasons for this. The rules of the
game has changed, and continue to change, putting
importers at a high risk of committing errors in what
is being declared to customs. The VAT payments made
to customs are not always consistent with the VAT
declarations submitted to BIR. Most if not all importers
look at customs operations as a mere logistics activity,
without regard for indirect tax compliance.
Role of Customs Brokers. For importers, customs brokerage
is high impact service and is integral to the supply
chain. While there are numerous customs brokerage
firms willing to provide its service, the selection
of a business partner is most important to importers
for the following reasons:
a) To provide customs clearance and
related services (e.g. transport service);
b) To ensure complete and correct declarations to
customs;
c) To ensure compliance with import rules and regulations
issued by customs and all other government agencies;
and
d) To assist the company in providing complete and
correct VAT declarations to BIR.
General Criteria for a Customs Broker.
As a general rule, there are two (2) main factors
for appraising customs broker as a business or professional
entity:
a) Capability
b) Motivation
A service provider must not only
be capable but must also be motivated to work. The
presence of these two factors will normally ensure
good performance. Motivation is normally assessed
by looking at the following:
a) the value of company's business
to the customs broker; and
b) the overall attractiveness of the business to the
customs broker.
Assessing the Customs Broker Service.
There are four key areas for appraising a particular
"service":
a) Quality
b) Cost or Price
c) Availability of the Service
d) Service Responsiveness
As a unique service and based on
Philippine practices, a customs broker must likewise
have the following qualifications:
a) It must have the necessary technical
competence.
b) It must maintain good relationships with customs.
The reason for this is that customs
is a dynamic field and that customs rules provide
very stiff penalties for errors committed in the declarations.
The rules affecting valuation and classification are
based on international conventions and agreements.
Based on existing practices, customs
will normally be lenient in applying the rules if
the customs broker maintains good "relationship"
with customs. On the other hand, we have seen many
times how customs suddenly becomes strict with the
rules, resulting in the seizure of the shipment or
the imposition of fines. It will only need one serious
error in customs clearance to destroy a record of
good performance.
Making the Final Decision. Once a
short list of suppliers is made, an importer must
also look at the strengths, weaknesses, opportunities
and threats involving each prospective customs broker.
Before making the final decision, the importer must
ask itself the following questions:
a) Is the customs broker capable
(organization and finance)?
b) Is the customs broker motivated?
c) Will the customs broker provide the right service
(quality, cost, availability and service responsiveness)?
d) Is the customs broker technically competent to
address the growing compliance requirements of customs,
BIR and other government agencies?
e) Does the customs broker have good relations with
customs?
f) Do the business practices of the customs broker
adhere to good corporate governance and business ethics?
A licensed customs broker, the author
is an international trade and customs consultant and
a regular lecturer on logistics, customs and cross
border trade. Please contact agatonuvero@yahoo.com
for your comments or questions.
Back to Top
Basis for
Seizure and Forfeiture of Imports
UNDER customs laws and regulations,
a Warrant of Seizure and Detention (WSD) may be issued
against an imported article for violation of tariff
and customs laws. Prior to the issuance of a WSD,
a shipment is normally first 'alerted" and in
case of positive findings, a WSD subsequently issued.
The issuance of a WSD will now result in the conduct
of a forfeiture proceeding against the imported article.
If the importation has been found
to have indeed violated any tariff and customs law,
said article will then be forfeited in favor of the
government, without prejudice to the filing of administrative
and criminal actions against the importer.
Similarly, customs rules expressly
provide that foreign articles openly offered for sale
may be seized for failure to show evidence of payment
of duties and taxes.
Undervaluation, Misclassification
and Misdeclaration. Importers have the primary obligation
to ensure that its customs declarations are complete
and accurate. Failing that, the importer may be deemed
to have committed an undervaluation, misclassification
or misdeclaration in its import entry declaration.
Section 2503 of the Tariff and Customs Code of the
Philippines (TCCP), which provides that
<i>"an undervaluation,
misdeclaration in weight, measurement or quantity
of more than 30% between the value, weight, measurement
or quantity declared in the entry and the actual value,
weight, quantity or measurement shall constitute a
prima facie evidence of fraud penalized under Section
2530 of this Code: Provided, further, That any misdeclared
or undeclared imported article/item found upon examination
shall ipso fact be forfeited in favor of the Government
to be disposed of pursuant to the provisions of the
Code."</i>
The same section further provides
for administrative and criminal sanctions against
the importer "if the undervaluation, misclassification
or misdeclaration in the import entry is intentional".
Alert Orders. An Alert Order is normally
issued based on "derogatory information"
or suspected violation of customs laws, rules and
regulations by a particular shipment. The issuance
of the order will have the following implications:
a. require the spot-checking or 100%
physical examination of subject shipment; and
b. warn concerned customs officials to exert extra
diligence in examining the shipment and reviewing
the import documents,
The order must be issued by authorized
customs officials (Commissioner, Dep. Comm., IEG,
District Collector, Chief, ESS and Chief, CIIS) and
must be recorded with the Office of the Customs Commissioner
and affixed with the appropriate dry seal.
An Alert Order may result in any
of the following findings and recommendations:
a. issuance of a Warrant for Seizure
and Detention (WSD);
b. payment of additional taxes and duties including
fine; or
c. lifting of the order.
Warrant of Seizure and Forfeiture
(WSD). The issuance of a WSD shall involve the lawful
taking or possession of the imported article by customs
and the seized property shall now be subject to forfeiture.
A WSD is issued only by the District Collector upon
determination of probable cause (violation of customs
laws, rules and procedures). Upon issuance of a WSD,
the District Collector must:
a. report the seizure to the Customs
Commissioner and the Chairman of the Commission on
Audit
b. notify the importer in writing; and
c. prepare a description, appraisal and classification
of seized property.
Remedies in Forfeiture Proceedings.
In the course of the forfeiture proceeding and when
there is no prima facie evidence of fraud, an importer
may secure the release of goods upon posting of a
cash bond subject to approval of the Commissioner.
Section 2307, TCCP provides the manner by which an
importer may offer to settle the case, when there
is no fraud involved, as follows:
a. When the case is pending, by way
of payment of fine not lower than 20% but not exceeding
80% of the landed cost of the imported article; or
b. In case of forfeiture, by way
of payment for the domestic market value of the seized
article.
In other words, the importer must
first prove that the violation was not intentional
and fraudulent in order that the remedy of settlement
by fine or redemption will be available. A ruling
allowing settlement will be subject to the approval
of the Commissioner of Customs.
Wrongful Issuance of a WSD. In case
a WSD is wrongfully issued, the District Collector
may withdraw the WSD. This rarely happens though.
If a WSD has indeed been wrongly issued, a common
remedy for importers is to file a motion to quash
the WSD for lack of probable cause. The motion is
simply a formal request for the withdrawal of the
WSD based on legal and technical grounds.
The author is an international trade
and customs consultant, and a licensed customs broker.
He is also a regular lecturer on logistics, customs
and international trade. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
Back to Top
WTO Review
of RP's Import and Export Policy
The WTO Secretariat issued last month
(June 7, 2005) a Trade Policy Review of the Philippines.
Part of the agreements entered under the WTO is that
member countries shall be transparent with their trade
policies and, as such, will be subject to review under
the Trade Policy Review Mechanism to ensure compliance
with commitments under the WTO.
The policy review is the third for
the Philippines since the time it acceded to the WTO.
The report covers the trade policy and practices of
the Philippine government covering trade in goods
and services. It also examines such practices and
describes the country's trade policy-making institutions
and the macroeconomic situation.
A specific section of the review
refers to trade measures affecting import and export.
What are the findings of the WTO secretariat regarding
these measures affecting import and export in the
Philippines?
By and large, the findings and observations
in the review should provide the trading community
with a clear insight on present government trade practices
as well as future policy direction for export and
trade in the Philippines.
General Observations. Among the general
findings of the review are the following;
a. Import barriers remain a major
impediment to freer trade.
b. Tariff remains substantial although
declining. Since late 2003, tariffs have risen from
an average MFN tariff rate of 5.8% in 2003 to 7.4%
in 2004.
c. Non-tariff barriers particularly
relating to licensing and permits affect a number
of goods (e.g. sanitary and health measures).
d. Trade remedy measures (dumping
and safeguards) have been adopted based on the WTO
agreements.
e. International technical standards
have slowly been incorporated into national standards
and technical regulations.
f. Tax and non-tax incentives for
exports exist (e.g. duty exemptions, drawbacks, export-processing
zones, and tax relief).
Measures Affecting Imports. Among
the more important findings on measures affecting
imports are as follows:
a. The Philippines has plans to accede
to the WCO's Revised Kyoto Convention, albeit with
certain reservations.
b. On customs procedures, it is reported
that about 80% of importations are subjected to the
red lane. The reason for this is the alleged serious
smuggling problem and scarce customs resources.
c. Rules of origin apply to importations
availing of preferences under AFTA CEPT. No rules
required for MFN imports.
d. In relation to applied tariffs,
there is a consistent application of higher tariffs
on processed items than on semi-processed goods and
raw materials, albeit with bias towards higher protection
for agricultural than manufactured goods. Still, the
general direction is towards the development of the
manufacturing sector.
e. Since late 2003, the government
has gradually increased the MFN average tariff rate.
f. Tariff quotas remain on 14 product
categories involving some 60 tariff lines. Administration
of the quota system is a complex system.
g. The Philippines' sanitary and
phytosanitary regime seems strict. Imports of agricultural
products, live animals, plants, fish, their products
and by-products must be accompanied by a sanitary,
phytosanitary or health certificate from the country
of origin, and are subject to inspection upon arrival.
Measures Directly Affecting Exports.
Below are some of the more important findings on measures
affecting exports from the Philippines:
a. Exports are covered by an Export
Declaration (ED), filed by the exporter (or representative)
with the BOC or electronically, through one-stop export
documents centers.
b. Regulated exports require export
clearance while certificates of origin are required
for exports under the GSP and AFTA CEPT. Other permits
and licenses are required for regulated exports.
c. Duty drawbacks, refunds or exemptions
are allowed on imported materials manufactured for
export or through the CBW scheme.
d. PEZA and other free trade zones
provide incentives, including tax and duty exemption
on imported articles introduced into the zone and
exported after further processing.
The author is an international trade
and customs consultant, and a licensed customs broker.
He is also a regular lecturer on logistics, customs
and international trade. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
Back to Top
New
Rules for Exporters under AFTA
IN our article written last April
25, 2005, we mentioned the fact that the ASEAN Economic
Ministers have endorsed new rules of origin for products
availing of the preferential tariff rates under CEPT.
While the new rules of origin should have taken effect
January 2005, the "Implementing Guidelines for
Partial Cumulation under ASEAN Cumulative Rules of
Origin" for the implementation of Rule 4(b) of
the new rules was endorsed only on April 26, 2005
during the ASEAN Economic Ministers (AEM) Retreat.
As a whole, the new rules intend
to provide new standards in the method for calculating
local/ASEAN content and guidelines for costing methodologies
and the treatment of locally-procured materials. It
also provides new procedures for verifying local/ASEAN
content calculation.
For many exporters, the common question
is how these new rules will impact on companies exporting
to ASEAN countries.
Background. Under AFTA-CEPT, there
is a set of rules to determine the country of origin
of a product for purposes of availing of the special
rates. The rule on country of origin is based on the
concept of "substantial transformation",
which assigns origin to the country where the last
substantial transformation occurred. Substantial transformation
may be roughly defined on the basis of a change in
tariff heading, achieving a threshold of proportion
of value-added, or on the basis of certain manufacturing
processes. Another basis under AFTA CEPT is a 40%
threshold level of the value of the product.
As previously mentioned, what is
most important with the new rules is that they now
allow the cumulation of materials with less than 40%
but more than 20% ASEAN content for purposes of computing
the local content of the final product. Apparently,
this was not allowed under the old rule, which was
based on the "all or nothing" principle.
Rule 4(b), AFTA CEPT Rules of Origin.
Rule 4(b) of the "Rules of Origin for the CEPT
Scheme for AFTA" provides as follows:
Rules 4. Cumulative Rule of Origin.
(a) Products which comply with origin
requirements provided for in Rule 1 and which are
used in a Member State as inputs for a finished product
eligible for preferential treatment in another Member
State shall be considered as products originating
in the Member State where working or processing of
the finished product has taken place provided that
the aggregate ASEAN content of the final product is
not less than 40%.
(b) If the material has less than
40 percent ASEAN content, the qualifying ASEAN content
shall be in direct proportion to the actual domestic
content provided that it is equal to or more than
the agreed threshold of 20%.
Implementing Guidelines. For the
past several months, the export division of the Bureau
of Customs has been receiving a lot of inquiries as
to the implementation of the new rules on cumulation.
In fact, customs officials were quite surprised that
new rules have in fact been issued and no formal endorsement
has been made to customs by the Philippine representatives
to ASEAN. Thus, for several months, both customs and
exporters have been in a quandary as to the application
of the new rules on cumulation.
With the issuance of the implementing
guidelines, many of the issues and concerns on the
implementation of the cumulative rules should have
been addressed. The implementing guidelines for the
implementation of Rule 4(b) of the AFTA CEPT Rules
of Origin are provided below:
Implementing Guidelines for Partial
Cumulation under ASEAN Cumulative Rules of Origin
(a) to be considered for partial
cumulation, the local/ASEAN content of the materials,
parts or produce originating from the country of last
manufacture should not be less than 20%;
(b) the formula to be used in the
calculation would be similar to the formula for calculating
the 40% local/ASEAN content;
(c) no CEPT preference shall be extended
by the importing member country for that particular
intermediate good;
(d) the export of the intermediate
good shall be accompanied by a valid CO Form D duly
prominently marked or stamped "FOR CUMULATION
PURPOSES ONLY";
(e) the relevant sections of the
Operational Certification Procedures, including Rule
17 on verification, shall be applicable to CO Form
Ds issued for partial cumulation purposes.
Next Steps for Exporters. For exporters
who have previously not qualified for tariff preference
under AFTA CEPT, a review of costing methodologies
should be forthcoming. If previous costing methodologies
failed to qualify under 40% local/ASEAN content requirement
by a few percentage, the cumulation of materials,
parts and products with more than 20% but less than
40% local/ASEAN content may result in reaching the
40% threshold. In addition, those barely above the
40% threshold may add additional percentage points
to cover for possible variables such as currency fluctuations
or price increase of inputs.
The author is an international trade
and customs consultant, and a licensed customs broker.
He is also a regular lecturer on logistics, customs
and international trade. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your comments.
Back to Top
Liberializing the Distribution
Sector under the WTO
ABOUT two weeks ago, the Philippine
government proposed the opening of six service sectors
to foreign investment as part of its commitment to
the WTO under the General Agreement on Trade in Services
(GATS). The announcement was made mainly because of
the May 31 deadline for developing countries to submit
their revised list of service sectors to be liberalized.
Accordingly, the service sectors to be liberalized
are:
(a) computer and computer-related
services
(b) construction services
(c) distribution services (commission agents' services)
(d) energy services
(e) environmental services (sewerage)
(f) tourism services
The Philippines previously committed
to liberalize the financial, communication, tourism
and transport services. With the opening of the mining
industry to foreign industry, the government has excluded
certain sectors from the initial list.
To many, what is the implication
of this commitment to both the trading community and
the service sector industry? What is the concept of
"trade in services"? What is included in
the definition of distribution services / commission
agent?
WTO Agreement on Trade in Services.
A common misconception is that the agreements under
the WTO only involve the trade in goods. Unfortunately,
the WTO is a general agreement covering both trade
in goods and services. It operates a system of trade
rules resulting from decades of negotiations and agreements
among trading countries. From the original 15-point
agenda in 1986, the present set of agreements now
covers over 30 items ranging from customs valuation
and intellectual property to maritime, telecommunication
and financial services. The agreements are essentially
contracts that bind the countries in regards to their
trade policies.
As a background, the various agreements,
annexes, decisions and understanding under the WTO
framework are generally categorized in four main areas:
(a) umbrella agreement creating the
WTO;
(b) agreements on three broad areas of trade (goods,
services and intellectual property);
(c) agreement on dispute settlement; and
(d) agreement on trade policy review.
The agreements on trade cover three
main areas. The main agreement governing trade in
goods is covered by the General Agreement on Tariffs
and Trade (GATT). The main agreement for trade in
services is the General Agreement on Trade in Services
(GATS) while that for intellectual property is the
agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS).
Liberalizing the Service Sectors.
Under the WTO framework, the GATS contains the broad
principles governing trade services in the following
sectors: movement of natural persons, air transport
and shipping, financial services and telecommunication
In addition to the general agreement,
there are additional extra agreements and annexes
together with list of commitments of individual countries.
Part of the GATS therefore is the individual commitment
of all member countries of the WTO on service sectors
to be open to foreign investment or ownership. These
commitments by individual countries under GATS state
how much access foreign service providers can have
for specific services and which sectors are disallowed
to foreigners or are not given the "most favored-nation"
principle of non-discrimination.
As mentioned, the Philippine government
has committed to liberalizing the distribution service
(commission agent service). Stated otherwise, the
government has committed to open this area of distribution
service to foreign players. Foreign nationals will
have the same rights as Filipinos to engage in this
sub-sector.
While the timelines and exact details
of the Philippine commitment to liberalize the service
sectors are yet to be negotiated and finalized, the
six identified service sectors should now take extra
attention with regard to future developments in this
area of international negotiations.
Implication to the Trade Distribution Industry. The
concept of distribution covers services such as distributing
products, commission agents' services, wholesaling,
retailing, franchising, sales away from a fixed location,
as well as related subordinated activities, such as
inventory management or repair and maintenance services.
Related to the concept of distribution are services
such as rental and leasing services, air courier services,
freight forwarding, and packing services. Within the
WTO negotiation framework, "distribution sector"
specifically refers to commission agents' services,
wholesale trade services, retailing services and franchising.
While the commitment to liberalize
the distribution sector is supposedly limited to the
commission agents' services, we have yet to see the
details of what has really been committed under the
WTO framework. It may be that this initial commitment
is a first step towards liberalizing the other areas
of the distribution industry.
We have to be reminded that the WTO
framework supports the liberalization of sectors that
have previously disallowed foreign players. While
air transport and shipping are already governed by
the broad principles of GATS, the distribution sector
is part of the ongoing new services negotiations and
future agreements will likely impact on the domestic
industry.
The author is an international trade
and customs consultant, and a licensed customs broker.
He is also a regular lecturer on logistics, customs
and international trade. Please contact aouvero@dlugms.com
or (632) 4050021 / 29 for your questions.
Back to Top
Why Companies Are
Not Ready for Customs Audit
THE
Bureau of Customs (BoC) has of late issued another set of Audit Notification Letters
(ANLs) pursuant to the Post Entry Audit (PEA) system provided under RA 9135 and
its implementing rules. Previously, the issuance of ANLs was focused on the Top
1,000 importers, most of which are big local traders and multinational companies
(MNCs). One interesting development with the recent issuances is the focus on
both the Top 1,000 companies as well as on industry groups.
Present
State of Play. In the first quarter of this year, we had the opportunity to provide
assistance in a foreign-funded technical assistance program to assess current
operations of the PEA system. During this time, we interfaced with both the PEA
Group and some of the auditees. Similarly, we had the opportunity to assist companies
in preparing themselves for customs audit.
In the meantime
that customs has been aggressively implementing the PEA system, many companies
are at a loss on how the customs audit is being conducted and how they can prepare
for such an audit.
What are the specific issues involved
in an audit? What are the records subject to customs audit? How are customs audits
related to ongoing BIR audits on VAT declarations on importations? How does customs
conduct the audit?
Compliance Issues. Based on what
we have seen, customs will basically look at whether taxes and duties have been
properly paid on importations. In relation to this, customs auditors will look
at the following concerns, among others:
a. Availability
of Import Records and Financial Records to support the declarations to customs
and the payments made to suppliers;
b. VAT payments
to customs as against VAT declarations to BIR;
c. Inventory
Costs of importations verified against declarations to BIR;
d.
Value declarations as against actual remittances to suppliers;
e.
Tariff Clas-sification and Duty Rates of importations;
f.
Quantity Dis-crepancies between Declared Customs Volumes as against Actual Records;
g. Eligibility to Avail of Tariff Preference, Duty
Drawbacks and Tariff Exemptions;
h. Liquidation of
Customs Bonded Warehouse Materials;
i. Payment of Correct
Duties and Taxes on Materials Procured from PEZA and other Free Trade Zone (e.g.
Clark and Subic) entities; and
j. Availability of permits
and licenses on regulated impor-tations.
In addition
to the above issues, customs will look at the "audit readiness" of the company
in terms of record keeping. Contrary to the usual notion that the "records" refer
simply to import records, customs will actually look at all and any records that
relate to declarations to customs. That is the logic behind the voluminous records
being requested by customs. Customs will also look at the internal company controls
and procedures to assess the level of risks in the company's trading transactions.
Present Situation of Companies. In many of the companies
that we have interfaced, many have the basic problem of not maintaining their
records of importations. This is obviously an immediate problem for companies
being presently audited considering that failure to keep records of importations
makes the company liable to a 20% penalty based on the value of importations without
records. In addition to the absence of import records, many companies have a problem
locating and accessing the necessary financial and accounting information to support
the value declarations to customs.
Even for companies
that pride themselves to have compliant practices and the best record keeping
practices, most if not all are not ready for a customs audit. A company's record
keeping and audit best practices are normally fine tuned to address the requirements
of an internal revenue audit but not a customs audit. Customs audit is certainly
different from a BIR audit. The records and information required by customs are
totally different from the requirements of BIR.
How
Do You Prepare? Companies must first ensure that import records (e.g. import entry,
commercial invoice, packing list, bill of lading) are kept within three years
from importation. Additionally, companies must ensure that financial and accounting
records for value declarations to customs are not only available but also readily
accessible to customs.
Secondly, companies must ensure
that their import transactions are compliant with customs rules and regulations.
This poses a problem to many for three main reasons: (1) companies look at customs
operations more from a logistics perspective rather than from an indirect tax
compliance concern; (2) customs operations are normally outsourced to logistics
companies mostly not concerned with compliance issues; and (3) companies do not
have internal knowledge and competence for ensuring customs and trade compliance.
The author is an international trade and customs consultant,
and a licensed customs broker. He is also a regular lecturer on logistics, customs
and international trade. Please contact aouvero@dlugms.com or (632) 4050021 /
29 for your questions.
Back to Top
Misconceptions about
RA 9280 (2)
THERE seems to be only two positions on RA
9280 - those for it and those against. Obviously,
most licensed customs brokers support the law while
those engaged in corporate practice are mostly against
it. To date, there are still various conflicting interpretations
as to RA 9280 and its implementing rules and regulations
(IRR).
This two-part series does not intend to answer all
the questions given the varying interpretations of
the law. What we intend to do is to clarify the issues
and hopefully, provide readers with inputs to help
them make their own informed decisions and not simply
rely on hearsay and biased views.
Below is a continuation of the frequently asked questions
and our suggested answers and opinions (which we hope
is as objective as we can be):
What happens when the IRR of RA 9280 takes effect
on March 27, 2005? Upon effectivity of the IRR of
RA 9280, the public should in general be bound by
its provisions and any violation may result in possible
administrative complaints (for licensed customs brokers)
and/or criminal complaints (for both professional
and non-professional).
This is certainly a very sensitive issue. For those
who believe that RA 9280 and its IRR expressly prohibit
existing corporate practice, there seem to be a lot
of ongoing violations of the law. For one, licensed
individuals allowing themselves to continue as principal
or alternate brokers of corporations may be in violation
of the law.
Secondly, customs personnel and officials allowing
corporate practice may also be deemed to have violated
the law. Of course, there are contrary opinions to
the above and this is not as easy and simple as it
looks.
The Bureau of Customs (BoC) has already issued numerous
memoranda effectively allowing continued operation
of corporations pending issuance of its Customs Administrative
Order (CAO).
On the other hand, there are reports that the draft
CAO expressly prohibits corporations from registering
with the BoC as a customs broker. While most companies
have already renewed their registration with customs
and even as they have prepared their own contingency
plans, much is at stake on the issuance of the CAO.
What are the penalties for violating RA 9280 and its
rules? Persons violating RA 9280 and its rules may
be found liable administratively and criminally. For
licensed customs brokers, an administrative case may
be filed before the Professional Regulatory Board
(PRB) and in case of positive findings, the professional
license of the individual may be suspended, revoked
or cancelled.
The administrative case may be filed separately from
the criminal case to be filed in the regular courts.
A criminal case may result in fines and/or imprisonment.
For non-licensed individuals deemed to have violated
RA 9280 and its rules, a criminal complaint may be
filed in court and the penalty may similarly involve
fines and/or imprisonment.
What are the new requirements to practice the Customs
Broker profession? Under the rules, the PRB is tasked
to supervise the customs broker profession and is
authorized to issue the certificate of registration
and professional identification cards. We should wait
for the guidelines to be issued by the PRB on the
issuance of the certificate of registration of professional
identification cards.
What is important to note is that in the future, licensed
individuals will not be allowed to register with BoC
without such documents. While the issuance of such
documents is a matter of course, it would seem that
the PRB, in the exercise of its power of supervision,
may not issue the same on valid grounds, for example,
if there is an existing administrative or criminal
complaint against the individual for violation of
RA 9280.
What is the continuing professional education for
customs brokers? Many professionals registered with
the Professional Regulation Commission (PRC) are required
to have continuing professional education as a requirement
for being allowed to continue practicing the profession.
For lawyers, the Supreme Court requires all lawyers
to finish 36 units/hours of professional education
every three years. We expect a similar program for
customs brokers to be provided soon. The PRB should
be issuing rules and guidelines soon to implement
the continuing education program.
What is the role of the Bureau of Customs as far as
customs brokers are concerned? The Bureau of Customs
obviously retains its administrative power and functions
over customs operations and as such, customs brokers
practicing their profession can be subject to supervision
and control by the BoC in so far as the practice will
impact on revenue collection and compliance with customs
laws and regulations. For one, the BoC retains its
power to conduct audit of customs brokers under RA
9135.
Also, to ensure the protection of revenues and compliance
with customs laws, BoC may subject customs brokers
to additional rules. For example, customs may require
customs brokers to submit periodically additional
information and records in regards to importations
being cleared with customs. In the future, we foresee
both importers and customs brokers being subject to
reportorial requirements, similar to the requirements
made by BIR.
How much should Customs Brokers charge as Professional
Fees? Both RA 9280 and its IRR are silent on the rates
for professional fees. However, the code of ethics
for customs brokers requires that professional fees
be charged on the basis of the standard rates adopted
by the PRB.
Accordingly, the PRB has adopted the CAO on customs
brokerage charges as the standard for professional
fees. The issue here is whether the standard rates
are mandatory and whether failure to charge such rates
constitutes unethical practice which is a ground for
possible revocation or cancellation of the license
if an administrative complaint is filed.
While the wording in the code of ethics indicates
that the standard rates are mandatory, there are some
who are of the opinion that the non-application of
rates is not necessarily unethical and as such, the
rates should only serve as a guide.
Back to Top
Latest
Developments in ASEAN
AS a result of the failure of WTO members countries
to enter into major agreements during the ministerial
meeting in Cancun, Mexico two years ago, the focus
of many countries and regional groupings have been
towards bilateral and regional trade arrangements.
These arrangements ostensibly will
impact on the trading community in the short and medium
term. In the Asia-Pacific region, many of the trade
negotiations involve the ASEAN member countries and
the major trading countries of Asia. Specifically,
the regional agreements between ASEAN and the big
three Asian countries (China, Japan and Korea) are
in various stage of negotiations or implementation.
The RP-China bilateral trade agreement
is now being implemented, with the early harvest program
soon to be implemented. The RP-Japan agreement is
scheduled for approval by September this year. For
ASEAN, efforts continue towards further reducing tariffs
for goods and harmonizing rules governing trade in
services. While China and India have become growth
engines, attracting most of the foreign direct investments
in the region, ASEAN remains attractive with its 520
million inhabitants and with a total GDP of US$700
billion. AFTA-CEPT.
As a background, ASEAN Free Trade
Area (AFTA) involves the removal of obstacles to free
trade among the 10-member states of ASEAN. It includes
the lowering of tariff rates and the removal of quantitative
restrictions and other non-tariff barriers that limit
or prevent the entry of imported goods. While the
intent of AFTA is create an integrated market for
ASEAN's half billion people, the ultimate objective
is to increase the region's competitive edge as a
production base for the world market.
The main instrument for making ASEAN
a free trade area is the Common Effective Preferential
Tariff Scheme (AFTA-CEPT), which hopes to reduce intra-regional
tariffs and remove non-tariff barriers. For the ASEAN
5 (RP, Malaysia, Thailand, Indonesia and Singapore),
99% of products lines in the inclusion list are already
in the 0-5% duty rates.
The rest of ASEAN like Cambodia,
Myanmar, Laos and Vietnam have 80% of their products
moved to inclusion list; with 66% of those in the
list already in the 0-5% range. Japan, US and the
EU remain as the largest trading partners of ASEAN,
with Japan as the largest source of imports. Intra-ASEAN
trade has increased 4.2% (export) and 1.6% (imports)
in 2003. New Rules of Origin. Under AFTA-CEPT, there
is a set of rules to determine the country of origin
of a product for purposes of availing of the special
rates.
To prevent transshipment of goods
originating from non-ASEAN states, it is not enough
that the goods were exported from a member state.
The rule on country of origin is based on the concept
of "substantial transfor-mation", which
assigns origin to the country where the last substantial
transformation occurred. Substantial transformation
may be roughly defined on the basis of a change in
tariff heading, achieving a threshold of proportion
of value-added, or on the basis of certain manufacturing
processes. The basis of substantial transformation
is a 40% threshold level of the value of the product.
For products availing of the preferential tariff rates
under CEPT, a new rules of origin has been issued
with effect from January 2005.
The new rules intend to provide new
standards in the method for calculating local/ASEAN
content and guidelines for costing methodologies and
the treatment of locally-procured materials. It also
provides new procedures for verifying local/ASEAN
content calculation.
What is most important with the new
rules is that it now allows the cumulation of materials
with less than 40% but more than 20% ASEAN content
for purposes of computing the local content of the
final product. Apparently, this was not allowed under
the old rule, which was based on the "all or
nothing" principle. In addition to the new rules
of origin, special substantial transformation rules
have been issued for several product sectors (e.g.
wheat flour, iron and steel). ASEAN+3.
The ongoing regional trade negotiations
between ASEAN and the three major trading countries
in Asia (Japan, China and Korea) will involve a wide-ranging
area for economic cooperation, including trade and
investment. The trade agreements are ongoing with
plans for early harvest programs. Already, there are
discussions on the prospects of creating an East Asia
Free Trade Area in the not so distant future. According
to studies, the US will potentially be the biggest
loser once ASEAN+3 evolves into a fully integrated
common market. AEC - The Future of ASEAN.
The ASEAN Economic Community (AEC)
is one of the three pillars under the ASEAN Community
concept, which includes the ASEAN Security Community
(ASC) and the ASEAN Socio-Cultural Community (ASCC).
With the prior establishment of the building blocks
towards ASEAN economic integration, the movement towards
an AEC by 2020 is the most logical step in the economic
ladder. Policy makers foresee an AEC established towards
the direction of an "FTA plus" arrangement.
An FTA Plus arrangement is basically a zero-tariff
free trade agreement with additional benefits akin
to a common market.
Most of the initiatives toward the
creation of the AEC are to be submitted by end of
this year. Even as these initiatives are being finalized,
the various building blocks for economic integration
are being established not only for ASEAN but for the
major trading countries of East Asia.
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Foreign
Currency Risks in International Trade
FOR importers and exporters, the foreign currency
risk involved in trading goods across borders is quite
difficult to understand and manage. The risk of loss
while imported articles are in transit is easily managed
by securing a marine insurance coverage. In case of
foreign currency fluctuations, what are the risks
and how exactly do you manage them?
To illustrate, a local company which
sells its goods locally buys its articles from the
US. The imported article is normally denominated in
US dollars. At the time the importer ordered the goods
from the US, the exchange rate was PhP54 per US dollar.
The goods arrived two weeks later and by then the
exchange rate was PhP56 per US dollar. Obviously,
the importer will pay more in Philippine peso to the
supplier. In addition, the importer will have to pay
higher taxes and duties considering that the dutiable
value will be higher when converted to Philippine
peso.
How will the importer recover the
higher cost of the imported goods? Normally, the importer
will sell the goods at a higher price to recover the
higher cost. But this is not always the case. If the
importer has previously agreed to sell the goods to
a buyer at the old price, the importer will certainly
have to incur the added costs as a result of the depreciation
of the Philippine peso. In many instances, the importer
is likewise unable to increase its price due to stiff
competition from sellers of similar goods. How will
the importer manage the foreign currency risks inherent
in international trading transactions?
Background of Foreign Exchange. Prior to 1984, the
Philippines was using a managed float system for its
foreign currency exchange, effectively allowing the
peso to trade 4.5% below and above the guiding rate
set by the Central Bank (CB). In other words, while
the exchange rate is allowed to float, it is not allowed
to fluctuate beyond the 4.5% range. In 1984, the CB
liberalized the foreign exchange market. This resulted
in local banks being allowed to trade foreign currency
among themselves based on prevailing market conditions
and without government intervention.
By 1993, the exchange rate stood
at PhP25 to a dollar. The exchange rate remained quite
stable until the regional crisis in 1997 which resulted
in an exchange rate of PhP40 to a dollar by 1998.
Foreign Currency Risks. There are many types of foreign
currency risks but the most typical involves transaction
risks in international trade. We have illustrated
this in our example above where the peso depreciated
from the date the import order was placed to the date
of payment to the supplier. It may happen also that
the peso appreciates during that period, in which
case the importer gains as a result in the lower peso
price payable to the supplier and the lower duties
and taxes.
For international traders, there
are other risks involved. One would be the translation
risks involved when a local company has international
businesses which would be reported locally. The earnings
overseas may increase or decrease when translated
to the Philippine peso.
Strategic Risks for Exporters. The
other kind of risk refers to strategic exposures that
may result from foreign currency changes in other
markets. To illustrate, many governments particularly
the US is of the position that the Chinese currency
is undervalued such that its exports are a lot cheaper
than exports from other countries. If China will appreciate
its currency, its exports will be priced a little
higher such that other countries may be able to compete
more.
For international traders, both
exporters and importers, foreign currency risks impact
not only on specific trading transactions but also
on how the company will conduct its purchase and supply
strategy both in the medium and long term. For exporters
in particular, foreign currency risks will impact
not only on the cost of imported raw materials but
also on how it will price its goods in the export
market. Pricing the goods in the export market not
only depends on the costs of inputs but also on the
pricing of competitive products from other export
markets, particularly China.
Certainly, managing foreign currency risks is a lot
more complicated for exporters than for importers
who are simply doing business exclusively for the
domestic market.
Shifting the Risk Offshore. An importer
selling exclusively in the domestic market certainly
will not concern itself with currency risks in the
export market.
Still, an importer generally has
two ways to manage its foreign currency risks. The
first strategy is to shift the risk offshore by agreeing
with the supplier that the selling price is in peso
even if it will be converted to US dollar at the prevailing
exchange rates upon payment. To illustrate, the importer
can negotiate to buy the goods at PhP100 per piece.
Upon arrival of the goods, the supplier will pay the
supplier by exchanging the PhP100 into US dollar based
on prevailing rate and remitting the converted amount.
In this particular case, the risk is transferred to
the supplier and the seller may gain or lose from
the currency fluctuation depending on the prevailing
exchange rate at the time of payment.
Forward Transactions. A second strategy
is for the importer to buy foreign exchange through
forward transactions instead of buying "on the
spot". Forward transactions refer to an agreed
sale of a foreign exchange to be made more than two
business days away and at some specified future date.
To cover the foreign currency requirements of an importation,
an importer may agree with a bank for the latter to
provide the foreign currency at a certain date (to
pay the supplier) based on a pre-agreed exchange rate.
The pre-agreed rate is normally based on the prevailing
rate with some adjustments, which may | 
