Complying with global customs regulations

July 2013 | TALKINGPOINT | TRADE & CUSTOMS

financierworldwide.com

FW moderates a discussion on complying with global customs regulations between Himanshu Tewari, a partner at BMR & Associates LLP, William M. Methenitis, global director of Customs and International Trade at Ernst & Young, and Konstantinos Adamantopoulos, a partner at Holman Fenwick Willan LLP.

FW: In recent years, what general developments have you seen in global customs regulations? Would you say the compliance challenges facing companies have increased?

Tewari: Some of the key developments are an increased focus on trade facilitation requiring transparency, simplicity and predictability in global customs compliance processes; increased reliance on self assessment, post clearance audit and risk based intervention leading to increased accountability of business in relation customs compliances; increased focus on global supply chain security leading to introduction of the SAFE framework, AEO program and special compliances related to allied laws in sectors such as pharma, electronics, and so on. Add to these changes the dynamics of business complexity and companies are faced with significant challenge which may require new skill sets, new systems and processes, and added measures to reinforce integrity and safety of the global supply chain.

Methenitis: The environment is far more complex and multi-dimensional. Governments are looking for revenue and indirect taxes produce substantial parts of budgets. In response to the financial crisis, governments are actively looking for ways to stimulate exports, but at the same time are adopting non-tariff barriers in the form of health, safety, and environmental requirements which make importing more complicated. Business issues overlapping with trade are also more common, as with transfer pricing, royalty structures, and supply chain optimisation. Trade compliance professionals have to develop expertise with all of these topics, and companies have to develop more coordinated approaches to align trade strategies with business strategies.

Adamantopoulos: The commencement of serious negotiations on trade facilitation at the WTO and the rise of global free trade, coupled with the emergence of border security concerns about international terrorism has sent a mixed signal to those monitoring global customs developments. For one, countries have shown a definite interest in reducing the international trade community’s regulatory burden in relation to successful customs clearance, however, for another, compliance challenges and the costs involved remain manifold and certainly not merely limited to import tariffs. In fact, the WTO has recently noted that slow clearance procedures, opaque and unnecessary documentary requirements, and a lack of automated procedural requirements often outweigh the costs incurred in relation to import tariffs. Thus, despite increased efforts to reduce procedural costs to companies, it is perceivable that the increasing complexity of trade rules has resulted in an overall increase in compliance costs to companies.

FW: What issues do you regularly see arising with regard to global customs regulations? In your opinion, do firms pay sufficient attention to customs regulations and compliance?

Methenitis: Let me address those questions in reverse order. Companies that address customs regulation only from a compliance perspective are limiting what a high performing trade department can accomplish. Getting compliance right, or stated a better way, properly managing risk, is fundamental. But with that framework in place, optimising duty payments and enabling supply chain speed and efficiency are the clear and achievable goals. Firms that approach the function with the big picture in mind have a strategic advantage. Issues are very diverse, and often centre on valuation, origin, and special programs – areas where there can be big savings, but are subject to special compliance requirements. Effectively using data is a huge concern. And we see a lot of companies reorganising the function, relying significantly on centres of excellence and shared service centres.

Adamantopoulos: Tighter regulatory control cloaked in the name of supply chain security sadly appears to have become an ever-increasing trend for at least some administrations. These policies are unfortunately increasingly justified on the incorrect interpretation that the WCO Framework of Standards requires such actions. This has resulted in even the most diligent firms seeing increasing regulatory compliance costs in the name of national security. The general picture however remains promising: firms become increasingly attentive to customs regulations and compliance. This may partly be due to more transparency of the import and export compliance policies of national authorities, easier accessibility to official gazettes, and international harmonisation of standards. Nonetheless, we do perceive an increasing trend of greater attentiveness to customs regulations and compliance by firms across our client base and credit this to more attentive firms and better planning of their supply chain management rather than other external factors.

Tewari: The increasing complexity and dynamics of global business transactions, combined with a lack of sensitivity to such complexity and its impact on compliance requirements, leads to a broadening of risks – financial risk, business disruption risk and reputational risks – which get embedded in the global supply chain. For example, customs valuation risk arising out of complex financial relationships between related parties, combined with competing interest of different taxes like customs valuation and transfer pricing on the same transaction, is a typical example of unresolved risk not getting required focus and attention within global organisations. Addressing issues such as these requires involvement of cross functional, multidisciplinary teams working towards convergence of competing views, but we do not see enough traction in global companies in developing multifunctional team to address such issues related to customs and trade compliance.

FW: In what ways has the growing complexity of trade rules, trade preference agreements and audit initiatives made import and export compliance an increasing burden for companies?

Adamantopoulos: Above all, the growing complexity of trade rules, trade preference agreements, and audit initiatives introduce an element of uncertainty into firms’ global supply chains. Uncertainty then results in a potentially avoidable loss of economic gains. Reporting duplication, delays, and changing compliance requirements arising from trade preference agreements, particularly as goods navigate through the Asian ‘spaghetti bowl’ of FTAs, have substantially increased the burden for companies. Some issues, on the other hand, may be due to a human error which arose from asymmetric requirements at local, EU or international level committed when dealing with thousands of international transactions. All this affects the ‘Speed-to-Market’ advantage, cost advantage, and delivery reliability of a successful global supply chain. Keeping up-to-date with these developments and updating existing compliance models therefore has led to significant expenses for companies with global supply chains and complicated import and export compliance on a global scale.

Tewari: The International trade regime is changing. The multiplicity of trade laws and allied regulations, the divergence of customs practice across jurisdictions, the dynamism of business environment, the changing nature of trade flow, changing factors in trade flow especially increasing number of FTAs influencing the flow of goods, and the need for building up risk free customs compliances all requires a totally new approach to managing international trade in goods. Add to this the increased responsibility and accountability on account of self assessment, and on-site post clearance audit related initiatives, and the whole world of international trade compliance appears to be getting reinvented. The pace of these changes is fast and the magnitude of change is dramatic. It will take a few years before companies are able to tick the boxes and say ‘Our systems and staff are ready for the emerging new world of customs and trade compliance.’

Methenitis: Complexity makes both risk and reward greater. Heightened audit and enforcement activity magnifies both. Free trade agreements (FTAs) are a great example. With the Doha Round hopelessly stalled, FTAs are growing exponentially. The WTO reports 546 FTA notifications as of January, with more than 350 in force, and this does not count unilateral preference agreements, like GSP or AGOA. The rules of origin, which determine duty preference eligibility, vary by agreement. Optimising use of available FTAs can be a sizeable task – for example, a Mexican manufacturer supplying global markets has to be concerned with meeting the different rules of origin for FTAs with the US, EU, and Japan, as well as markets throughout Latin America. Developing an optimisation strategy requires close coordination with sourcing and production planning, and, of course, must be an ongoing, sustainable process, as new product development, sourcing changes, and new free trade agreement opportunities continue to arise. Customs authorities are well aware of the complexity and difficulty in complying. The newly revised audit plan begun by Mexican customs is focused on FTA compliance.

FW: What advice can you give to firms on developing a global customs compliance management strategy? What challenges do firms often face when implementing and updating such a plan?

Tewari: We advise firms to develop a global perspective on customs and trade compliance. Systems and processes should allow for operating consistently and efficiently in mature customs jurisdictions, while allowing flexibility and adaptability for operating in not-so-mature customs jurisdictions. Developing standard operating procedures for each country and having a new country customs compliance evaluation procedure are integral starting points for managing this complexity across jurisdictions. Audit-based controls, risk-based monitoring of compliances, and a regular customs broker oversight program are other important elements of the strategy which is the bedrock for monitoring of compliances and facilitating the opportunity of voluntary disclosures, thus mitigating adverse financial or penal consequences. Investments in training and the development of multi-cultural, inter-disciplinary, empowered team of professionals who are aware of the business dynamics and who understand the impact of business changes in customs compliance requirement is a sine qua none of a global customs compliance strategy.

Methenitis: Be relevant. Understand how to define and measure impact in ways that are meaningful to the business, and do it on a regular basis. One of the biggest challenges is finding and maintaining the right balance between centralisation and local autonomy. Ten years ago many companies were moving toward a centralised model, but in our experience that view is no longer advocated by high performers. There are benefits to scale, but the key is being selective; recognising those processes that are conducive to standardisation, and recognising the benefits of local variance. As priorities can shift, the structure needs to be agile enough to accommodate change.

Adamantopoulos: Preparation and cost prediction models are key, especially when it comes to global customs compliance management strategies. Complex trade rules can often be overwhelming when implementing a global customs compliance management plan. In this regard, our strategy is to first draw up a full picture of the compliance environment within which the firm intends to operate. The next step involves analysing transactions and developing standard operating procedures that mitigate compliance costs – even for multi-destination transactions involving, for instance, customs transit and inward processing operations. Particularly when implementing and updating compliance management plans, firms must be prepared to face issues unforeseeable at the planning stage and be prepared to swerve to an alternative flow model. Either way, it is pertinent that the firm’s global supply-chain remains educated about complying with the applicable export and import laws and regulations, so as to avoid incurring penalties for violations.

FW: What is the concept of Globally Networked Customs (GNC) and how will it impact compliance related to global trade flow in the future?

Methenitis: GNC is a standard way for customs authorities to exchange information. Protocols, standards, and guidelines are being developed by the World Customs Organisation (WCO) to enable bilateral or multilateral agreements for exchange. There are two tracks, one commercial, and one for enforcement. Conceptually, on the commercial side, more and better access to data in common or uniform formats should help with trade facilitation. Part of the issue, of course, is what type of data will be shared, and how privacy will be protected. There is also concern in the trade community about how data will be used. There is a lot of work to be done on the details. What does seem clear at this point is that ‘big data’ is going to be a challenge both internally, and externally – internally in trying to capture and apply meaningful analytics to data which will allow the business to make better and faster decision, and externally in understanding that governments will have similar challenges in looking at other data sets, and may not always reach correct conclusions.

Adamantopoulos: The Global Networked Customs (GNC) concept stands for a standardised, rationalised and harmonised way for customs authorities to exchange information, mostly on a bilateral level, but also multilaterally between customs unions for instance. The vision behind this concept implies the creation of an interconnected and interoperable electronic customs network that will ensure seamless, real-time, and paperless flows of information. The GNC as a method for exchanging information will remain voluntary, but aligned with existing instruments and based on WCO Protocols, Standards and Guidelines.The GNC concept will impact on trade flow compliance, because it creates standardised data requirements for export, transit, and import; interconnected and aligned customs databases; mutual recognition and coordination protocols to eliminate unnecessary duplication of controls – such as for the valuation of goods, rules of origin, and the protection of intellectual property rights; and a set of maximum trader standards for a system of mutual recognition for AEOs.

Tewari: Globally Networked Customs (GNC) is a building block for Customs Vision for the 21st century as articulated by the WCO. GNC’s focused id on customs-to-customs cooperation, leading to trade facilitation, better customs controls and help boost legitimate international trade transactions. GNC will impact the flow of information between trade partner countries and may eventually lead to evolution of systems where the export document of the exporting country will automatically turn into documents of import in the importing country thus cutting down the risk of undervaluation the single largest concern for Customs in India) mis-declaration by vested interest, and so on. GNC is also an important lever in the Economic competitiveness package introduced by WCO in 2012 but it has a long way to go before it becomes a reality. Once implemented it would have a radical impact on the role of intermediaries in international trade.

FW: Given the growing emphasis on ‘self assessment’ and ‘post clearance audit’ as the WCO’s preferred method for ensuring trade facilitation and customs compliance, what is the impact of this on supply chain risk management structures and customs compliance controls within global organisations?

Adamantopoulos: Policies like ‘self assessment’ and ‘post clearance audit’ fall within the greater umbrella of improving efficiency in the clearance procedures, as well as improving supply chain security, without fundamentally altering the working procedures of the parties involved. This encourages the business community to work in partnership with the customs authorities. On the one hand, this has the effect of facilitating trade and improving efficiency in the clearance processes. On the other hand, the programs also encourage the business community to become aware and pay attention to customs regulations and compliance. Overall however, trade facilitation and customs compliance programs are not standalone processes, but aim to be individually embedded in a wider facilitation context that allows speedy and simplified clearance procedures in all customs-related regimes which require a regularly functioning relationship between the customs authorities and the business community – such as border clearance, warehousing procedures, and so on.

Tewari: Self assessment and a post clearance audit will fundamentally change the nature, denomination, span and impact of customs compliance disputes. The full impact of the forces unleashed by these changes will be felt by business over an extended period of time. This will eventually become an area of focus for the CXO’s who are responsible for managing risk as issues arising out of tax and customs compliance may have the potential to impact reputation, business continuity and stock prices of global organisation. The involvement of the CXO team, an inter-disciplinary approach on customs issues, and an emphasis on data-based decisions –including data analytics to identify the ‘big data’ – and controls will be the foundation of customs compliance controls of the future. Customs compliance controls will require assessment, monitoring and exception-based reporting of information at various stages of movement of goods – for instance the pre-import stage, import stage and post import stage. The analysis of supply chain data will form an input to the risk management structure at a systemic and transaction level.

Methenitis: The self assessment initiatives undertaken by a number of countries consistent with the WCO Authorised Economic Operators framework are driving strong alignment of the customs function with firm wide enterprise risk management. This is a very positive development, which makes customs risks clearer to the organisation, and provides those without a customs background a frame of reference to better understand risk. And, with more mutual recognition initiatives, participation in these programs may become a practical requirement to have an effective global supply chain.

FW: What action can firms expect to face in the event of non-compliance with customs regulations, and what penalties are available to customs officials? Are firms facing harsher enforcement action in today’s more scrutinised business environment?

Tewari: In a self assessment regime, the repeated nature of non-compliance has the potential to be interpreted as intentional and wilful, leading to invocation of penal provisions. In extreme cases, quantum of penalties can be severe and may go as high as five times the value of the goods involved in non-compliance. Also, penalties and fines in the case of non-compliance on customs issues are on the company, as the owner of the customs process and the goods, as well as on the goods involved in the non-compliance, which increases the quantum of financial risk for non-compliance. Besides the financial aspect of non-compliance, there is a risk to business continuity in cases of the seizure of goods involved in non-compliance. The reputation of the company may also suffer, which may impact on stock prices. In our view, increased trade facilitation is not only likely to lead to stricter enforcement action by the authorities but may also lead to the increased possibility of detection of non-compliance because of today’s more scrutinised business environment.

Methenitis: The available penalties have not changed so much as the customs authorities more strategic focus on enforcement and access to data. I visited one client recently who is simultaneously undergoing customs audit in four of their six largest markets – the EU, Japan, Canada, and the US – which would have been unheard of a few years ago. Mexico’s new audit approach uses sampling techniques, which will allow audits to occur at significantly more companies, perhaps three times as many, as in past years. Korean customs has very sophisticated ways of analysing data. Enforcement is definitely on the upswing, and I do not see that trend reversing. Equally important, the collateral risk of violation of these rules seems to be expanding, whether it is concerns with customs violations creating additional violations of anti-bribery or foreign corrupt practices provisions, or of reputational risk that can be created by a direct violation, or by a violation made by a supply chain partner.

Adamantopoulos: Dealing with non-compliance principally falls within the competence of the state in which non-compliance occurred. Yet, the General Annex of the Revised Kyoto Convention prescribes that customs penalties must be not be greater than is necessary for the discouragement of repetition, effectively preventing the imposition of substantial penalties for minor breaches. Penalties are not limited to fines however, so that customs can also reject or deny entry, detain goods, or enter these into, for example, a bonded warehouse until the defect is corrected. Similarly, property may be seized where non-compliance is due to, for example, undeclared or smuggled property. In some member states such as Italy, violators of customs laws can also go to jail. Still, customs authorities in the EU prefer settlements to burdensomely enforcing harsh penalties. The uncharacteristic observation is therefore that despite greater detection, firms are – on average – not exposed to harsher enforcement action than previously.

FW: What pressures do customs compliance requirements add to firms’ global supply chains, and how can this affect their business?

Methenitis: If set up and operating properly, the customs compliance requirements should be transparent to the business operations. Well organised departments which manage these processes won’t add any pressure to the supply chain, they will relieve pressure by delivering more value in supply chain certainty and in cost reduction, both from duties and from process efficiency. Some businesses do this very well, and as is evident from your question, some not well at all. Later this summer, as part of EY’s series on leading practices for customs and trade departments, we will be doing some benchmarking to better identify common traits of high performing trade functions, and I expect those results will be very valuable to a wide variety of companies involved in international trade.

Adamantopoulos: Pressures arising from compliance requirements are manifold, yet similar for most firms with global supply chains. Recurring pressures in relation to customs compliance requirements are time and cost-related, which fall within the broader umbrella of compliance uncertainty. Compliance uncertainty is, in return, caused by the systemic duplication and delays in international supply chains such as multiple reporting requirements, inspections or simply the inefficient clearance of goods at the incoming or exporting port. In addition, pressures relating to differing standards on safety and security of the freight and the crew also impact on global supply chains. All this places stress on contract and delivery negotiations, often resulting in a loss of ‘Speed-to-Market’ reliability. While many customs compliance requirement-related pressures can be minimised through cost-analysis and model structuring, compliance requirement pressure brought about by unforeseeable circumstances cannot be minimised in advance, but only catered for and conclusively responded to through effective preparation on the part of the internationally-operating firm.

Tewari: Global supply chains face the pressures of increased accountability and ownership of implementation of customs regulations in the context of their business. Accordingly, awareness of laws and regulations impacting the movement of goods across national boundaries, the ability to interpret the laws and regulations governing such movement, and the undertaking ownership of complying with a matrix of such laws will be an added responsibility of the global supply chain. In the intervening period, while businesses develop the skill set to handle such compliances, prevention, identification and mitigation of supply chain risks arising out of unintended non-compliances through competent and skilled external third party assistance should be explored.

FW: What are your predictions for the next 12-18 months? Is there any notable regulatory or legislative change on the horizon?

Adamantopoulos: The coming years will continue to see a significant push by the EU towards closer cooperation on supply chain security and related risk management. The EU-Canada Supply Chain Security Agreement signed on 3 March 2013 is a notable example of the kind of changes that await more formal steps and rest on the horizon until sufficient political will for such action is available. The basis however for future regulatory change certainly exists: the EU-Japan, the EU-China, and other Joint Customs Cooperation Committees (JCCC) already provide for a regular opportunity to take further steps towards closer customs cooperation. A full AEO recognition with China is on the horizon and closer supply chain security and related risk management agreements with India likely. Still, this cannot be achieved within the coming 12-18 months and is likely to take years, so companies will have to remain patient for the moment.

Tewari: Some of the global initiatives of WCO – for example self assessment, post clearance audit, AEO programs, and so on, will gather momentum. Industry will become more aware of the impact of these paradigm changes. Specifically, the increasing number of bilateral Mutual Recognition Agreements (MRA) between significant trading partner countries could help with wider acceptability, participation and penetration of AEO program. We will also see the emergence of new specialisations in the customs compliance space, such as the emergence of Origin Management as a specialised field for claiming of benefits under free trade agreements. We also expect more consultative discussions between stakeholders on customs-business partnerships, for example larger role for bodies like the Private Sector Consultative Group (PSCG) formed at WCO level, in strengthening the customs-business partnership.

Methenitis: The Transatlantic Trade and Investment Partnership – the proposed US-EU Free Trade Agreement – is a game-changer, not only for the countries involved, but for global trade. TTIP is intended to address non-tariff barriers and harmonise differences in regulation and standards, which if successful, may effectively create de-facto global standards in the absence of further movement at the WTO. Just the beginning of negotiations has created a big stir in a number of developing countries that to date have been moving very slowly on FTA opportunities. These countries can now envision a scenario in which they will be left on the sidelines, with barriers to doing business that are not present in other countries. WCO initiatives are also having significant influence, as evident from the trade facilitation efforts around AEO and GNC. The WCO’s Technical Committee on Customs Valuation is working on very important topics with broad business impact, including aligning customs value and transfer pricing rules, and how intangibles – royalties, software, distribution rights – should be evaluated to determine if they are properly included in dutiable value of tangible product imports. Companies which plan carefully will have a clear strategic advantage.

Himanshu Tewari is a partner at BMR & Associates LLP. He specializes in the practice area of Customs and International Trade Compliance. He has 20 years of experience on Customs and Trade compliance field as a revenue officer, as an industry professional and as an advisor in consulting role. His area of specialization includes customs valuation planning, customs duty planning, risk identification and risk mitigation in the movement of goods across international borders foreign trade policy, free trade agreements, thought leadership and advocacy on Customs and trade policy related matters. Mr Tewari can be contacted on +91 22 3021 7099 or by email: himanshu.tewari@bmradvisors.com.

William M. Methenitis is global director of Customs and International Trade at Ernst & Young. He has advised businesses on import, export and international trade issues for over 30 years, including counselling companies on global export and import regimes, tariff and indirect tax strategic planning, international acquisitions, joint ventures, and plant location and tax incentive projects. Mr Methenitis actively advises businesses on the complex, overlapping customs valuation and transfer pricing regimes. Mr Methenitis can be contacted on +1 (214) 969 8585 or by email: william.methenitis@ey.com.

Dr Konstantinos Adamantopoulos is a partner at Holman Fenwick Willan LLP. He is a dual qualified Greek and Belgian lawyer, specialising in EU trade law, EU competition law, including merger control, and State aid. He has worked extensively and has in depth expertise in the telecommunications, energy, mining-commodities, aviation and construction/public works sectors. Dr Adamantopoulos has authored a number of publications on European law and policy and has presented at conferences on aspects of EU competition, State aid, trade and air transport law. He regularly lectures on EU law. He can be contacted on +32 (0) 2643 3401 or by email: Konstantinos.Adamantopoulos@hfw.com.

THE PANELLISTS

Himanshu Tewari

BMR & Associates LLP

William M. Methenitis

Ernst & Young

Konstantinos Adamantopoulos

Holman Fenwick Willan LLP