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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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