THE adoption of the WTO Agreement on Customs Valuation (ACV) in January 2000 and the Post Entry Audit (PEA) system in June 2001 has brought about significant changes in how importers deal with customs. Prior to those developments, the responsibility to determine the correct valuation, classification and quantity of imported goods rested on customs. These developments have now brought about a new paradigm where the importer is now responsible for ensuring the completeness and accuracy of declarations to customs. In addition, importers are now required to keep import and related business records for customs audit purposes.
Birth Pains of the PEA. Since last year, customs has been aggressively implementing the PEA system and to date, there are now at least 50 companies being subject to compliance audit. These early, the experiences of both customs auditors and the audited companies have already magnified the birth pains and process gaps in implementing a new system. The inexperienced customs auditors are for the first time presented with challenges of the actual audit. These challenges are made more difficult with insufficient training in compliance sampling and audit techniques, and the lack of understanding of international trading arrangements, transfer pricing and the ACV.
On the other hand, companies have been caught off guard with the issuance of the audit notices and the subsequent conduct of formal audits. Among the major concerns raised by the audited companies is the lack of guidelines from customs on how the trading community should address the compliance requirements and the seeming inexperience and lack of focus of the auditors.
A New Corporate Need. Amidst all these, a growing consensus among major companies is that management has to somehow make the company “audit ready” even in the absence of compliance programs provided by customs to help the trading community. The emerging need for corporate management and governance in relation to customs and trade compliance can roughly be classified as follows:
- Internal Customs Compliance system
- Record Keeping Compliance system
- Customs Brokers Selection and Management
- Risk Management of Trading Operations
In countries where the ACV and the PEA have been in place for decades already, companies have adapted by providing controls to ensure customs compliance and to minimize the risk of customs audit. In addition, companies have put in places programs that will ensure the “audit readiness” of the company’s trading and record-keeping operations.
Internal Customs Compliance Programs. An Internal Customs Compliance system is basically a system of procedures and controls applicable to concerned units of the company (e.g. import, finance, transport, etc.) as well as the third-party suppliers (e.g. customs brokers and freight forwarders).
This system may include annual compliance and risk assessment of the company’s import operations. Record Keeping Compliance system refers to procedures and controls for maintaining electronic and manual records, and making the same accessible to customs.
Customs Brokers Selection and Management refer to the program for selecting and managing external customs brokers not only for addressing logistics requirements but also to comply with the compliance and information requirements of the PEA system.
Customs Compliance Manager (CCM). For some of the major companies operating worldwide, customs compliance units have been established both on a national and regional level to address the trade and customs compliance requirements of cross border transactions. It is not uncommon for a multinational company, particularly the automotive and electronic sectors, to appoint Customs or Trade Compliance Managers on a regional basis (e.g. Asia Pacific).
Depending on the complexity of the business operations with customs impact (i.e., trading, bonded warehousing, manufacturing, free trade zones), some companies may even assign a customs compliance unit.
Based on practices in developed countries and those of large multinational companies operating in this part of Asia and the Pacific, a Customs Compliance Manager is most likely a former customs official from a developed country with extensive background and experience in logistics, customs and international trade.
The reason for the requirement of government customs service in a developed country is simply because the ACV and PEA, as well as other international rules, have long been practiced in the developed countries. For most ASEAN countries, the ACV and PEA have just been implemented in the past 4 years.
Customs Brokers as Customs and Trade Compliance Managers. In the Philippines, a CCM will likely be a customs broker with extensive training and experience in international finance, trade, logistics and risk management. Considering that most customs brokers have been focused more on customs clearance and local transport logistics, extensive training will be required from customs brokers for them to be able to manage the corporate need for customs compliance. In other words, customs brokers have to reinvent themselves to be able to address these corporate needs.
In the meantime and while companies are building their internal capabilities to address customs compliance, outsourcing the compliance requirements to customs and trade consultants will be necessary. Major tax and audit companies and a few law firms in the country are now offering customs and trade advisory services. The challenge now for customs brokers is how they will make themselves relevant to the corporate management of trading operations.