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Risk Management
System (Its emerging relevance in modern customs administration)
(December 22, 2003)
By ATTY. ALEX GATICALES
Traditional modes of customs control are
essentially reactive. It is only when goods are formally entered
that customs initiate standard checks through import documentation
review and physical examination - all done at the border.
This means that import clearance has to factor in time spent
in the normal verification process of checking the entry declaration
as to customs value, tariff classification, origin, licensing,
and other related customs issues, before imported goods are
finally released from the piers. The net result would be delay
in the processing of imports, which could be as long as the
time spent completing the verification activity. Meanwhile,
the imported goods languish in the piers piling up real and
opportunity costs.
For sure, the automation of the import clearance process,
particularly on import entry lodgment known as the Automated
Customs Operation System or ACOS, has significantly reduced
clearance time, compared to the old manual filing process.
But automation itself, which has yet to integrate the other
programmable aspects of the clearance process, including electronic
manifest submissions, bank payments through automatic debiting,
and the like, does not address the impact of other traditional
control mechanisms in the field of customs assessment, such
as valuation and tariff classification, origin, permits in
applicable cases, or even enforcement concerns, such as the
bringing in of contrabands or anti-social goods.
Among the areas of customs control, customs value verification
check is critical in trade facilitation. Even under the old
valuation system - the Home Consumption Value and the Export
Value methods - any valuation dispute arising from reference
values (such as the so-called published values, pre-shipment
inspection reports, etc.) utilized by customs then would greatly
impact on the import processing and releasing time. This is
because the release of the goods was conditioned on the final
settlement of such a dispute. The tentative release remedy
available at that time did not provide any real relief to
aggrieved importers as the determination of their import costs
remained hanging, not to mention the cost of money in putting
up cash bonds.
Under the new valuation system - the World Trade Organization
or WTO customs valuation system, otherwise known as the Transaction
Value Method - the process of verifying the accuracy and completeness
of the transaction value or the price paid or payable for
the imported articles becomes doubly difficult if carried
out at the border. Reason being that the effectiveness of
transaction value verification critically depends on certain
import and trade information not available to customs at the
time of the entry clearance. Securing such information requires
looking at the internal business records and processes of
the importer - an activity that cannot be done or completed
without having to eat up substantial processing time. This
is a luxury in time, which just-in-time-based trade and commerce
cannot afford.
For example, a related-party transaction, as the same is defined
and understood under the WTO Valuation Agreement, is one probable
customs issue that could crop up at the border. Resolving
the matter of whether the buyer and the seller in a given
transaction is related or not would call for a closer investigation
and documentation - both being time-consuming. Assuming that
such buyer-seller relationship exists, customs still has to
determine whether the fact of such relationship influenced
or not the price paid or payable for the imported goods. Again,
this would need a separate investigation, data-gathering,
documentation, and analysis. If customs attempts to resolve
such type of an issue at the border, it will surely find itself
overwhelmed by the sheer volume of imports that have to be
pended at the piers at the expense of trade facilitation.
Based on international best customs practices, customs control,
particularly on transaction value verification, is best exercised
in a post audit mode. Rather than determine the completeness
and accuracy of declared transaction value at the border,
customs does the verification after goods have been cleared
and released. With the concomitant requirement for importers
to keep import, trade and business records within a specified
period of time, customs enjoys ample time reviewing the activities
of importers on a per transaction or per account basis, depending
on the desired level of review or inquiry. In this way, clearance
of imported goods are not affected while the interest of government
is protected with the power to check the pertinent import
and company records within the period prescribed by national
legislation.
It is in the foregoing context that the concept of risk management
system acquires significance. Risk management simply means
the organized and systematic identification and elimination,
if not minimization, of risks or hurdles to one's goal. This
includes a determination of the level or importance of risks
in relation to their impact on a given objective.
The inevitability of using the post entry system as the primary
mode of customs control, particularly on transaction value
verification, provides impetus to use intelligence information
for a selective utilization of customs' meager resources.
Under the system, customs defines, through the use of data
systematically gathered from within and without the customs
zone, the risks to government revenue and community interests
and grades them according to the level of impact on its goals
and objectives. The facility enables customs to put priority
and focus on areas where the impact to income and public interest
is greatest. Such an approach optimizes the use of the given
limited resources in ensuring customs compliance.
Applying the risk management principles to the post entry
audit system, customs will be able to target for audit only
those determined to present the highest level of risk to,
and the greatest impact on, customs revenue and other priority
objectives of the administration. Thus, traditional big importers
whose duty contributions are high would earn a low risk grade
in terms of compliance level but would merit a high risk rating
in terms of impact on revenue in case of negligence or declaration
errors. So are companies that claim preferential or zero rate
of duties deserving of a closer look to verify valid entitlement
to such claims.
Risk management will also enable customs to systematically
store, retrieve, and analyze data, and track down import behavioral
patterns and trend exceptions for a more effective monitoring
of cargo movement and documentation without the need to screen
and stop imports as they pass through the border. In this
sense, customs control takes a pro-active stance as it would
not unnecessarily stand in the way of a smooth import clearance
process. On the whole, it will provide customs with the opportunity
to raise the level of customs valuation and enforcement control
to an organized, efficient, and accountable discipline.
The author is an international trade and customs specialist.
He is also a partner of the law firm of David Leabres Uvero
Gaticales Sto. Tomas. For your comments, he may be contacted
at alex.gaticales@wtiphils.com
or at (632) 4002145 / 4050021.
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Rules
of origin and marking of imported goods (November 24, 2003)
Scenario. XYZ, a Philippine trading company, is planning to
introduce in the domestic market generic notebook computers
by next year. The notebook computers are to be assembled in
Singapore using electronic parts mostly coming from China,
Singapore and Taiwan (e.g. the adopter is manufactured in
Taiwan). XYZ has two concerns: (1) how will the computers
be marked as to the country of origin; and (2) how can the
company avail of the special tariff rates under the AFTA-CEPT.
To address these concerns, XYX will require an in-depth understanding
of the Philippine rules of origin and marking of imported
goods.
Rules of Origin. Rules of Origin refer to the laws, rules
and regulations of one country to determine the country of
origin of imported goods. In principle, the origin of the
article can affect tariff rate, tariff preference, safeguards
or dumping duty, import quota, admissibility, marking and
in some countries, procurement by government agencies.
Rules of origin may be categorized into two:
(a) Non-Preferential Rules of Origin
(b) Preferential Rules of Origin
Non-Preferential Rules of Origin. Non-Preferential rules refer
to rules applicable for the application of the most-favored
nation (MFN) treatment, dumping, safeguards and countervailing
measures, origin marking requirements and tariff quotas. Non-preferential
rules normally apply in the absence of bilateral or multilateral
agreements.
For goods that are wholly the growth, produce or product of
a country, the "wholly-obtained" criterion is normally
applied. For goods that consist in whole or in part of materials
from more than one country, the "substantial transformation"
is generally applied. In the Philippines, the primary consideration
for the "substantial transformation" criterion is
the tariff shift or the change in classification in the HS
nomenclature (e.g. change in chapter or heading level).
Preferential Rules of Origin. Preferential rules refer to
such rules that grant tariff preferences under certain trading
arrangements among trading partners, bilateral and multilateral
agreements [e.g. AFTA-CEPT, Japan's Generalized System of
Preference (GSP)], or special laws.
Under AFTA-CEPT, 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. Under AFTA, the basis of substantial transformation
is based on a 40% threshold level of the value of the product.
In other words, at least 40% of the value of the imported
product must be considered as originating from ASEAN to avail
of the preferential tariff rates under AFTA-CEPT.
WTO Agreement on Rules of Origin. Recognizing the fact that
most countries have their own unique rules of origin, the
WTO Agreement on Rules of Origin provides for the long-term
goal of harmonizing the rules of origin. The agreement itself
provides for a program based on a set of principles, including
making Non-Preferential rules of origin objective, understandable
and predictable. The program shall be implemented by the WTO
Committee on Rules of Origin with the assistance of a Technical
Committee under the auspices of the World Customs Organization
(WCO).
While the agreement provided for a three-year program after
the Uruguay Round, work has yet to be completed. While substantial
progress has already been made, delays have resulted due to
the complexity of the issues involved. In the meantime, member
countries of the WTO are awaiting the completion of the harmonization
program.
Origin Marking Requirements - Section 303, TCCP. Under Section
303 of the Tariff and Customs Code of the Philippines (TCCP),
every article of foreign origin (or its container) imported
into the Philippines must be "marked in any official
language of the Philippines and in a conspicuous place, as
legibly, indelibly and permanently as the nature of the article
(or container) will permit, in such a manner as to indicate
to an ultimate purchaser in the Philippine the name of the
country of origin of the article".
Stated otherwise, every imported article must indicate its
country of origin when imported into the Philippines. In the
absence of such marking, customs may levy a marking duty of
5% ad valorem on the imported article. In addition, an imported
article that is not properly "marked" shall not
be released from customs custody without first having been
marked in accordance with the rules.
In the scenario provided above, it is obvious that the country
of origin of the two main computer components (e.g. notebook
and adopter) refer to different countries. An added issue
is whether the assembled notebook computer qualifies for tariff
preference under AFTA-CEPT.
The Future - Harmonized Rules of Origin. Upon completion of
the harmonization program and its adoption by member-countries
of the WTO, it is expected that a single origin can be determined
for all products under a non-preferential commercial trading
arrangement. Hopefully, this should provide consistency in
the origin determination between trading countries. In the
long term, a harmonized rules of origin will be widely appreciated
similar to that of the harmonized nomenclature system.
The author is an international trade and customs specialist,
and a licensed customs broker. He is also a partner of the
law firm of David Leabres Uvero Gaticales Sto. Tomas. For
your comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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CAO
8-2003: Selection of companies for customs audit (November
18, 2003)
Customs Auditors. In a previous article on the Post Entry
Audit (PEA) system, we mentioned that the Bureau of Customs
(BoC) advertised in major newspapers a list of 65 vacancies
under the Post Entry Audit (PEA) group. After conducting qualifying
examinations and interviews, the BoC has now appointed the
members of the PEA group and is now conducting trainings for
said auditors.
New Customs Issuance. A few weeks back, the
BoC issued Customs Administrative Order (CAO) No. 8-2003 dated
October 10, 2003 and entitled "Selection Criteria for
Post Entry Audit". This new issuance now provides the
criteria and procedures for the selection of importers to
be subjected to customs audit based on a risk management approach.
In addition, this supports previous issuance such as Executive
Order No. 160 (Creating the Post Entry Audit Group in the
Bureau of Customs) and Customs Memorandum Order No. 11-2003
(Policies, Rules, Regulations and Procedures in the Selection
and Appointment of Personnel to the Post Entry Audit Group).
A customs audit will normally involve the
examination, inspection, verification and investigation of
the document flow, financial flow, goods inventory and business
processes relating to the imported articles. The areas for
audit may involve, among others, record keeping, reported
(and unreported) value, classification, quantity and tariff
preferences (e.g. AFTA Form D, AFMA, etc.). CAO 8-2003 specifically
provides that the audit of importers shall be based on a "computer-aided
risk management system" and shall include the audit of
their customs brokers. The audit of customs brokers shall
be for the purpose of validating the audit of the importer
and to fill in information gaps discovered in the course of
the audit.
Selection Process of Auditees. Section 3
of CAO 8-2003 states that a company shall be selected based
on, among others, the following criteria:
a) Relative magnitude of revenue;
b) The rates of duties of the imports;
c) The compliance track record of the firm; and
d) An assessment of the risk to revenue of the firm's import
activities.
The choice of companies for customs audit
shall come from:
a) The recommendation of the PEA Group;
b) An analysis of the results of the interim audit and examination
of selected entries prior to final liquidation;
c) Importers who volunteer to be audited under the Voluntary
Compliance Program;
d) Companies with errors detected in their import declarations;
e) A random sample of SGL accredited members; and
f) The Recommendation of District Collectors as a result of
a VCRC review.
Criteria for Audit Priority. Once companies
have been pre-selected for possible audit, the PEA group shall
rank the selected companies in terms of priority using the
following criteria:
a) Importer and Industry classification;
b) Attributes of import shipments (e.g. nature of the commodity,
classification, valuation, country of origin, tariff preferences,
quota, etc.);
c) Volume of Imports and Revenue Impact;
d) Track record of importer; and
e) Importer's relationship with suppliers (e.g. related party
transactions).
Voluntary Compliance Program. While companies
may be selected for audit based on the above procedures and
criteria, an importer has the option to volunteer for customs
audit. Under the Voluntary Compliance Program, the following
importers may volunteer for audit:
a) Importers who volunteered for audit to qualify for the
Super Green Lane (SGL) program and other trade facilitation
programs; and
b) Companies who volunteer for audit upon approval of the
Commissioner.
Need for Compliance Self-Assessment. In the
last three years, we have seen significant changes in the
customs rules governing the importation of goods (e.g. the
Transactional Value method and the PEA system). The myriad
and complex government regulations now governing imports and
exports, commonly referred to as "customs laws",
has forced many companies with significant trading transactions
to create customs compliance units within the company. The
main function of this unit is to ensure compliance with relevant
customs and trade laws, and to conduct regular compliance
assessments of customs operations. The purpose of the assessment
is to prepare the company for possible customs audit. Specifically,
the compliance assessment should be able to: (a) identify
and assess areas of non-compliance; (b) quantify possible
financial exposures and penalties; (c) identify solutions
and remedies to prevent or minimize the exposures and penalties;
and (d) identify possible duty and tax savings opportunities.
In the Philippines, we have seen a few companies
conduct internal compliance assessments of their trading operations.
One compliance self-assessment resulted in the identification
and quantification of the financial exposures of the company.
To avoid possible fines and other penalties, the company voluntarily
disclosed and paid additional taxes and duties. The disclosure
was proactively made prior to the conduct of a customs audit
and even prior to receipt of any audit notice.
The author is an international trade and
customs specialist, and a licensed customs broker. He is also
a partner of the law firm of David Leabres Uvero Gaticales
Sto. Tomas. For your comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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Understanding
the WTO: Trade Rules and Agreements (3) (October
27,2003)
This is the last of our initial series of
articles on the WTO. Our previous two articles discussed the
nature, concept and principles of the WTO. Below is a summary
of the major agreements (also known as trade rules), which
have been acceded to by member countries under the WTO framework.
Main Areas of Agreement. It has often been
said that WTO trading system is rule-based, trading rules
that have been negotiated and agreed upon by member-countries.
The formal establishment of the WTO itself resulted from the
"Uruguay Round of Multilateral Agreements", which
is composed of at least 60 agreements, annexes, decisions
and understanding. In general, these various agreements and
documents can be categorized into the following main areas:
a)
umbrella agreement creating the WTO;
b) agreements on 3 broad areas of trade (goods, services and
intellectual property)
c) agreement on dispute settlement; and
d) agreement on trade policy review.
Agreements
on Trade Areas. As mentioned above, the WTO framework covers
three broad areas of trade involving goods, services and intellectual
property. 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).
Trade
in Goods / GATT. The specific trade sectors or issues covered
by GATT are as follows:
a)
Agriculture
b) Product Standards and Safety (Health Regulations on Farm
Products / Sanitary and Pytosanitary Measures and Technical
Barriers to Trade)
c) Textiles and Clothing
d) Investment Measures
e) Trade Remedy Measures (Anti-dumping, Safeguards and, Subsidies)
f) Customs Valuation, Import Licensing, Pre-shipment Inspection
and Rules of Origin
While
the GATT contains the broad principles governing trade in
goods, there are extra agreements and annexes governing specific
sectors and issues. In addition, there are detailed and lengthy
schedules of commitments of individual countries on each specific
product. Under the GATT, these commitments take the form of
commitments on tariffs and are binding on the individual countries.
Trade in Services / GATS. The GATS contains the broad principles
governing trade services in the following sectors:
a)
Movement of Natural Persons
b) Air Transport and Shipping
c) Financial Services
d) Telecommunication
In
addition to the general agreement, there are additional extra
agreements and annexes together with list of commitments of
individual countries. The commitments made by individual countries
under GATS state how much access can foreign service providers
have for specific services and which sectors are disallowed
to foreigners or are not given the "most favored-nation"
principle of non-discrimination.
Intellectual
Property / TRIPS Agreement. The general agreement governing
the protection and enforcement of intellectual property is
the Trade-Relates Aspects of Intellectual Property Rights
(TRIPS) Agreement. This agreement does not have additional
agreements or annexes at present. The areas covered under
this agreement are as follows:
a)
Copyrights and related rights
b) Trademarks and Service Marks
c) Patents and Industrial Designs (including layout designs
of integrated circuits)
d) Geographical Indications
e) Undisclosed Information (including trade secrets)
Dispute
Settlement and Trade Policy Review. The agreements on dispute
settlement and trade policy reviews governs the agreements
on trade in goods, services and intellectual property (GATT,
GATS and TRIPS) including all the extra agreements, annexes
and individual country commitments.
The
Dispute Settlement process provides the legal procedure for
resolving trade disputes and difference among trading countries
within the WTO framework. The disputes normally raised by
countries involve the interpretation and application of the
various agreements resulting from conflicting interests.
To
ensure transparency and predictability in the trade laws of
individual countries, the Trade Policy Review mechanism requires
that each country "notify" the WTO of its trade
measures, policies and laws. The WTO then reviews these trade
policies and practices to ensure that each country comply
with the WTO rules and disciplines and with individual country
commitments.
The
author is an international trade and customs specialist, and
a licensed customs broker. He is also a partner of the law
firm of David Leabres Uvero Gaticales Sto. Tomas. For your
comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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Understanding
the WTO: Principles of the trading system (2)
(October 13, 2003)
IN
this second part of our series of articles on the WTO, we
will discuss the principles of the multilateral system governing
trade in goods and services.
The
WTO and the ASEAN. Last October 7, 2003, leaders of the ASEAN
signed a plan to transform the region into a giant free trade
zone similar to that of the European Union. ASEAN member countries
also subsequently signed various trade agreements with China,
Japan, Korea and India. This latest plan highlights the failure
of last month's world trade talks held in Cancun, Mexico to
arrive at significant new agreements.
Amid
these developments, it is now more important for the Philippine
trading community to understand how a free trade system works
and the principles governing such trading system. The same
principles apply for the WTO and the regional trading blocs
such as the European Union, the North American Free Trade
Area and the ASEAN Free Trade Area. In addition, as the WTO
agreements cover a wide array of activities (e.g. agriculture,
banking, textile, product standards, intellectual property,
food sanitation regulation, customs valuation, etc.), it is
necessary to get a clear understanding of the fundamental
principles running through all these agreements.
Trade
without Discrimination. Under the WTO, member countries must
not discriminate against any of their trading partners. This
principle is embodied in the concepts of "most favored
nation (MFN)" and "national treatment. Under the
MFN clause, if one country grants special rates to another,
it must do the same to all other countries. In other words,
each country must treat all other members as a "most
favored" trading partner.
Under
the concept of "national treatment", a member country
must treat local and imported goods equally, at least after
the imported goods have been cleared from customs custody.
This concept likewise applies to trade in services and in
the protection of intellectual property rights.
There
are, however, certain exceptions to the concept of trade without
discrimination. In particular, the WTO agreements allow countries
to form regional trading blocs (e.g. AFTA, European Union
and NAFTA) to provide special privileges for trade in goods
and services among member countries within the bloc. Likewise,
special market access may be given to developing countries.
The
WTO agreements also allow countries to avail of "trade
remedy measures" to protect their domestic industries.
To illustrate, while tariff rates must uniformly apply to
all importations regardless of origin, exceptions are allowed
in case of: (a) actions against dumping; (b) special "countervailing
duties" to offset subsidies; and (c) emergency measures
to temporarily limit imports to "safeguard" domestic
industries. (Author's Note: Please refer to previous articles
on trade remedy measures dated March 17, 2003 and May 25,
2003.)
Protection
only through Tariffs. This principle provides that protection
of domestic industries and markets must be made only through
customs tariffs and not through other commercial measures.
This is to make the protection transparent and clear and to
promote market access and export competition. Prior to the
WTO, countries were allowed to provide export subsidies and
import restrictions (e.g. import quotas). Under the new system,
subsidies and quantitative restrictions are no longer allowed
and non-tariff barriers are to be removed through tariffication,
i.e., replacing an import quota with an import tariff rate.
To
illustrate, the Philippines previously imposed quantitative
restrictions on numerous agricultural products. At present,
importations of agricultural products are merely subject to
in-quota/out-quota rates. Thus, importations made outside
of the quota are subject to higher rates while importations
within the quota are given lower rates.
Freer
Trade. The reduction or removal of trade barriers (tariff
and non-tariff) clearly promotes trade among trading partners.
Among the barriers to trade are customs tariffs, quotas and
import bans. Since the creation of GATT in 1948, there had
been numerous rounds of trade negotiations to address the
issue of trade barriers. As a result of these negotiations,
tariff rates have continuously gone down. In contrast to developed
countries, developing countries are, however, allowed to gradually
reduce their tariff rates for a longer period.
In
recent years, the discussion on trade barriers has included
the subject of intellectual property and services. A parallel
development in the Philippines is the gradual opening up of
the services sector. In the last decade, among the liberalized
industries have been insurance, banking and retail. These
industries now allow foreigners to engage in similar services
in the domestic market.
Predictability
and Fair Competition. A stable, predictable and transparent
rule on trade in goods and services is one of the requirements
for trade under a multilateral trading system. When a country
agrees to open its market, it binds itself to that commitment.
Hence, if it agrees to a ceiling for tariff rates on imported
articles, it cannot unilaterally increase its rates beyond
the ceiling without attracting reciprocal action from other
countries. The WTO system therefore seeks to promote fair
trade among member countries even if it allows countries to
maintain tariffs and exercise measures to protect domestic
industries under limited conditions.
Our
third and last article will discuss the various agreements
under the WTO.
The
author is an international trade and customs specialist, and
a licensed customs broker. He is also a partner of the law
firm of David Leabres Uvero Gaticales Sto. Tomas. For your
comments, he may be contacted at agaton.uvero@wtiphils.com
or at (632) 4002145 / 4050021.
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