The Year That Was
THIS year has been very interesting in terms
of developments in the customs and trade front. We will summarize
these major developments and provide some insights on their
likely impact in the coming months. For those in the trading
community, these developments may be categorized as follows:
(a) Customs Compliance and Revenue Protection
(b) International Trading Agreements
(c) Trade Facilitation and Customs Modernization
Customs Compliance Programs
One major function of customs is the collection of revenues
needed to support the government budget. The increased revenue
target this year and the continuing peso appreciation in the
past months have placed tremendous pressure on customs management
to identify ways to prevent revenue leakages and collect taxes
on past importations.
One major development this year is the more aggressive use
of the ‘visitorial’ power which allows customs
to visit stores and warehouses to confirm if correct taxes
and duties were paid on imported goods. This has resulted
in numerous seizures of traded goods in major shopping malls
and in private warehouses.
Another development is the strengthening of the Post Entry
Audit (PEA) group which caused the issuance of numerous audit
notices. The increased customs audit activities and the launch
of the customs voluntary disclosure program have translated
into additional collections for customs. This year, the PEA
group is expected to collect more than 10 times what it collected
in its first three years of existence.
Similar to the letter-notices issued by the BIR, customs
has also been issuing numerous demand letters against importers
for unsettled obligations. Accordingly, customs has been able
to collect hundreds of millions in additional taxes and duties
through this facility since the middle of the year.
This year also marked the increased presence of the ad-hoc
body (Run Against Smugglers – RATS) tasked to file criminal
cases against smugglers. Overall, we have seen a very aggressive
customs this year, with focus on making importers comply with
customs rules and regulations. We expect the same direction
from customs in the coming year.
Free Trade Agreements (FTAs) and Rules of Origin
Other than the ASEAN Free Trade Agreement (AFTA), the Philippines
has already implemented numerous agreements especially those
with China and Korea. The ASEAN-Japan free trade agreement
has also been signed and should be implemented by next year.
The ongoing negotiations between ASEAN and other countries
(India, New Zealand and Australia) should be also finished
this year or early next.
Preferential trade among signatory countries is generally
governed by a set of trading rules called the Rules of Origin
(ROO). Each free trade agreement has its own set of ROO. With
three more FTAs for approval soon, we expect additional ROO
under these various agreements. For the trading community,
the concern now is that the growing complexity of trade rules
will likely increase the transaction cost of doing business
across borders, notwithstanding that tariffs are decreasing.
Specifically, executive orders and customs rules will have
to be issued to govern the implementation of all these FTAs.
With regard to the executive issuances providing for duty
reductions resulting from AFTA and free trade agreements with
China and Korea, the government has already issued EOs 613,
617, 618, 638 and 639.
Customs Modernization and Trade Facilitation
Early this year, we wrote about the status of the ongoing
P500-million customs modernization program. Customs is now
in the process of implementing the migration from the present
automated system to the AsycudaWorld. Various automation programs
involving customs processes such as entry processing, importer
accreditation, bonds liquidation, bank payment, etc. are in
various stages of implementation.
As we wrote last year, the impact of the customs computerization
program to importers can be felt in the area of trade facilitation
and trade compliance. An enhanced online system with simpler
procedures and documents starting with the filing of import
entry to releasing of the imported goods should result in
time savings and lower transaction costs.
Finally, the planned accession to the Revised Kyoto Convention
this year or early next year is expected to also result in
major changes in the customs regulatory environment. This
early, customs has created an RKC Management Team tasked to
manage the overhaul of the existing Tariff and Customs Code
and current customs rules and regulations.
2008 - What to Expect
Many of the developments outlined above will obviously continue
to next year. In general, all these should result in positive
changes in terms of trade facilitation, lower transaction
costs and enhanced customs compliance.
The author is an international trade consultant, and a licensed
customs broker. He is a lecturer on logistics, indirect tax,
customs and supply chain. Please contact agatonuvero@yahoo.com
for your comments.
Implementation of the Revised
Kyoto Convention (RKC)
THE Bureau of Customs (BoC) has already announced
that the Revised Kyoto Conven-tion (RKC) will be adopted before
the end of the year and will be implemented in the coming
months and years. Known formally as the “The International
Convention on the Simplification and Harmonization of Customs
procedures (Kyoto Convention)”, the original conven-tion
entered into force in 1974.
In order to meet the growing demands of governments and the
international trading community, the original convention was
subsequently revised and updated in June 1999. The World Customs
Organization (WCO) Council adopted the RKC as the model for
efficient and modern customs procedures in the 21st century.
To date, there are at least 46 countries which are signatories
to the convention.
Customs Best Practices. RKC was designed by the WCO to standardize
and harmonize customs policies and procedures worldwide. RKC
likewise serves to implement customs-related principles developed
by the WTO, such as the agreements contained in Article V
(Freedom of Transit), Article VIII (Fees & Formalities
Connected with Importation and Exportation) and Article X
(Publication & Administration of Trade Regulations) of
the GATT 1994.
RKC consists of the Body of the Convention, the General Annex,
and the Specific Annexes. The Convention and the General Annex
are obligatory to all signatories while the Specific Annex,
which contains standards and recommended practices, is not
obligatory. Accession to the Specific Annex is therefore optional.
As a whole, the convention provides a comprehensive set of
over 600 legal and technical provisions outlining the basic
principles of modern customs procedures and practices.
International Standards. Foremost among the governing principles
of the RKC is the requirement that customs should provide
transparency and predictability for the importing, exporting,
logistics, transport and forwarding industries. The convention
promotes trade facilitation and effective controls through
its legal provisions that detail the application of simple
yet efficient procedures.
Specifically, the RKC provides core principles for the following:
(a) Predictability (standard principles for customs processing
of goods, conveyances and persons moving across borders -
clearance procedures)
(b) Transparency (provides all information relating to customs)
(c) Legal (prevents arbitrary or unfair actions by customs)
(d) Use of information technology
Present State of Play. BoC has already created an RKC Management
Team to push for accession to the convention and to lead the
implementation of the RKC by implementing measures to ensure
compliance with the international agreement. Based on a study
conducted, it is said that only about 55% of existing customs
laws and regulations are compliant with international customs
standards.
Among the measures identified for the RKC implementation
strategy are as follows:
(a) Support for the Senate ratification of the RKC and approval
of legislative measures
(b) Drafting of the omnibus bill to amend the Tariff and Customs
Code of the Philippines (TCCP)
(c) Drafting of the Manuals of Operations to govern the main
areas in customs operations (entry processing, customs bonded
warehouse, administrative and judicial proceedings, transit
goods, etc.)
(d) Infrastructure support (e.g. Information and Communication
Technology)
(e) Provision for human resource training, capacity building
and change management
What to Expect. Obviously, the overhaul of customs laws and
regulations will have wide-ranging effect on almost all aspects
of customs operations. While the changes will not come overnight,
the effect on the business community will be substantial and
far reaching, to say the least. In general, the changes in
the customs laws, regulations and procedures should result
in:
(a) Clarification on the role and function of the declarant
and the customs broker (effectively amending RA 9280)
(b) Transparency and predictability in the disposition of
customs cases
(c) Automation of almost all aspect of the customs clearance
and declaration process (duty payment, assessment and releasing)
(d) Simplified forms, documents and procedures
(e) Special facilities for low-risk and compliant importers
(f) Minimal control and intervention at the border (enhancement
of risk management and post entry audit)
The author is an international trade consultant, and a licensed
customs broker. He is a lecturer on logistics, indirect tax,
customs and supply chain. Please contact agatonuvero@yahoo.com
for your comments.
Legal Issues Involving Customs
Demand Letters
EARLY this year (March 12, 2007 column),
we wrote about how importers are receiving demand letters
from the Liquidation and Billing Division (LBD) of the various
ports for payment of additional assessments on previous importations.
Unlike previous demand letters where the additional assessment
is based on errors in the tax and duty calculation (i.e.,
exchange rate, freight, insurance costs or value declaration),
the demand letters now involve additional assessments amounting
to hundreds and even millions of pesos arising from the rejection
of the declared value and the subsequent use of a substitute
value.
OCOM Demand Letters. In recent months, the Office of the
Customs Commissioner (OCOM) has been issuing numerous letters
demanding importers to settle deficiencies in taxes and duties
for past importations made in the last three years, with a
warning that failure to settle the alleged underpayment will
compel customs to hold the delivery or release of future importations
as provided in Section 1508 of the Tariff and Customs Code
of the Philippines (TCCP).
The issuance of these assessment letters by the OCOM is in
addition to the numerous demand letters being issued by the
LBD of the various collection districts as well as the Audit
Notification Letters (ANLs) being issued by the OCOM through
the Post Entry Audit (PEA) group.
Readjustment of Assessment. The issuance of the demand letters
is principally premised on the power of customs to make the
necessary readjustment to the appraisal or classification
of an imported article within a certain period. As a general
rule, the “appraisal, classification or return as finally
passed upon and approved by the Collector shall not be altered
or modified in any manner” as provided under Section
1407 of the TCCP. Stated otherwise, the appraisal or classification
of an importation is deemed final and conclusive after three
years from date of importation except under the following
exceptions:
(1) when within three years (previously within one year)
after payment of duties, upon statement of error as approved
by the Collector pursuant to Section 1707, TCCP;
(2) within 15 days after payment of duties, upon request for
reappraisal or reclassification by the Collector addressed
to the Commissioner, if the appraisal or classification is
“deemed to be low”;
(3) upon request for reappraisal or reclassification by a
third party addressed to the Collector and in the form of
a protest (to be filed within 15 days from release from customs
custody); and
(4) upon demand by the Customs Commissioner after completion
of a compliance audit.
Basis of LBD letters. The issuance of demand letters by the
LBD refers to the first exception under Section 1407, with
such readjustment to be made “within one year after
payment of duties, upon statement of error in conformity with
Section 1707, approved by the Collector”. Section 1707
of the TCCP generally pertains to correction of manifest errors
in invoice or entry in return of weight…or distribution
of charges on invoices. These manifest errors do not involve
legitimate valuation issues which normally should be raised
before the Valuation and Classification Review Committee (VCRC)
upon import processing or during a compliance audit within
three years from date of importation and after release from
customs custody. Also, this exception clearly provides that
only the District Collector can make such demand.
Many of the demand letters being issued now by the LBD involve
the readjustment of the appraisal of previous importations
based on valuation issues not specifically raised before the
VCRC during entry processing and without the conduct of a
post entry audit. Many importers have now raised issues on
the regularity of such demand letters.
With regard to the demand letters issued by OCOM, the same
are accordingly being issued without reference as to the basis
of the reappraisal. Section 1407 provides for strict exceptions
to the general rule that the appraisal of an importation is
deemed finally liquidated after three years from importation.
Under said Section, the Commissioner of Customs may only issue
demand letters after completion of a compliance audit.
Obviously, the demand letters presently issued by OCOM do
not strictly fall under any of the exceptions provided under
Section 1407, TCCP. It is not based on manifest errors and
even if it is, a demand may only be made within one year by
the District Collector himself. The OCOM demand letters also
do not involve shipments cleared within 15 days from date
of issuance of the demand letters. Finally, the same letters
are not issued as a result of completed compliance audits.
Need for New Rules. While we are not saying that the issuance
of the demand letters from LBD and OCOM are without legal
basis, it important for customs to issue new rules and guidelines
to clarify the statutory basis and procedures for the issuance
of such demand letters. As it is, importers are not only subject
to such demand letters but also to customs visitorial powers
(and visits by PASG) or to customs compliance audit. These
various modes of post entry customs intervention are unfortunately
in addition to the numerous customs checks already being performed
upon import entry processing and prior to release of an imported
article from customs custody.
The author is an international trade consultant, and a licensed
customs broker. He is a lecturer on logistics, indirect tax,
customs and supply chain. Please contact agatonuvero@yahoo.com
for your comments.
Rules of Origin Under the
Various FTAs
In our column last August 27, 2007, we provided
an update on the latest duty concessions under the ASEAN Free
Trade Area (AFTA) and the status of the various bilateral
(Japan) and regional (China, Korea, Japan, India, New Zealand
and Australia) Free Trade Agreements (FTAs). Similar to the
AFTA-CEPT, the various FTAs provide for specific Rules of
Origin (ROO) for availing of preferential duty rates.
Rules of Origin (ROO). As mentioned, each of the FTAs provides
for its own ROO to avail of preferential duty rates. ROO generally
refer to the laws, rules and regulations of one country to
determine the country of origin of imported goods. These rules
set the principles to determine the economic content and nationality
of the imported product. Country of origin normally refers
to the country where a particular product is obtained, produced
or manufactured. 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. ROO may be categorized
into two:
(a) Non-Preferential Rules of Origin:
Certificate of Origin (CO) for General Merchandise (White
CO)
(b) Preferential Rules of Origin:
Generalized System of Preferences GSP (Form A)
ASEAN-Common Effective Preferential Tariff (Form D)
ASEAN-CHINA Free Trade Agreement (Form E)
ASEAN-KOREA Free Trade Agreement (Form AK)
Preferential and Non-Preferential ROO. Non-Preferential rules
refer to rules applicable for the application of the most-favored
nation (MFN) treatment or to implement measures and instruments
of commercial policy (e.g., anti-dumping, countervailing,
safeguards, marking requirements and tariff quotas). Non-preferential
rules also normally apply in the absence of bilateral or multilateral
agreements.
Preferential rules refer to such rules that grant tariff
preferences under certain trading arrangements among trading
partners, bilateral and multilateral agreements, or special
laws. These rules determine whether imported products shall
be subjected to MFN treatment or preferential treatment [e.g.
AFTA-CEPT, Japan’s Generalized System of Preferences
(GSP)]. Preferential rules use two basic criteria, i.e., “wholly
obtained” or “substantial transformation”.
ROO Criteria. For goods that are wholly the growth, produce
or product of a country, the “wholly-obtained”
criterion is normally applied. For those that consist in whole
or in part of materials from more than one country, the “substantial
transformation” is generally applied.
Products entirely grown, extracted from the soil or harvested
within the exporting country, or manufactured there exclusively
by virtue of the total absence of the use of any imported
components or materials may be considered “wholly-obtained”.
On the other hand, products manufactured from wholly or partly
from imported materials or components, including materials
of unknown origin, are considered as originating in the exporting
country if these materials, parts or components have undergone
“substantial transformation” there. This criterion
has three rules:
(a) Value Added (VA) Rule
(b) Change in tariff classification (CTC) Rule
(c) Process Rule (“chemical reaction rule”)
Under the various FTAs, the rules of origin may provide for
a general criterion/rule (e.g. VA or CTC rule) as well as
product-specific rules.
Varying ROO. Under AFTA-CEPT, the basis of substantial transformation
is based on the tariff shift or the 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. Under ASEAN-China agreement (ACFTA), articles must
either be wholly obtained or produced (e.g. agricultural products)
or must at least contain 40% regional value content for a
Certificate of Origin (Form E) to be issued. In addition,
there are alternative product specific rules, that is, change
of tariff classification for 42 tariff lines and process criterion
for additional 320 tariff lines.
In the case of the ASEAN-Korea Agreement (AKFTA), articles
must likewise be wholly obtained or produced (e.g. agricultural
products), or must undergo substantial transformation (e.g.,
change of tariff heading up to the 4th digit or at least contain
40% regional value content) for a Certificate of Origin (Form
AK) to be issued. Additional alternative product specific
rules are provided for certain articles such as live animals,
meat and milk products (wholly obtained or produced) and steel
(change of tariff headings).
Transaction Costs. Accordingly, the ongoing negotia-tions
between ASEAN and other countries (Japan, India, New Zealand
and Australia) should be finished before the end of the year.
With four more FTAs to be agreed soon, we expect additional
rules of origin under these various agreements. For the trading
community, the concern now is that the growing complexity
of trade rules will likely increase the transac-tion cost
of doing business across borders, notwithstan-ding the decreasing
tariffs.
The author is an international trade consultant, and a licensed
customs broker. He is a lecturer on logistics, indirect tax,
customs and supply chain. Please contact agatonuvero@yahoo.com
for your comments.
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