CUSTOMS COMPLIANCE FOR IN HOUSE COUNSEL
Customs and supply chain compliance does not necessarily take up a lot of day to day time of an in-house counsel. Generally, it is an area that is left to logistics and supply chain managers. This is not a great compliance scenario, as supply chain management is usually measured by outcomes regarding speed and cost – no legal compliance.
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The risks are high. If a customs legal issue arises it can bring a complete stop to your supply chain. Nothing will get the attention of an organisation’s leadership like the inability to enter goods into a country. This issue becomes especially alarming given the Australian Border Force reports an export declaration error rate of approximately 50% and an import declaration rate of about 25%.
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Benefits of Good Customs Compliance
While it should not become a day to day task, it is important to periodically review your organisation’s level of customs compliance. Good customs compliance is important for the following reasons:
· Supply chain certainty
· Ability to obtain trade facilitation benefits, like Australian Trusted Trader Membership
· Ensure that the correct customs duty is being paid (this includes identifying under utilisation of concessions)
· Avoid fines and greater intervention in your supply chain. Importantly, fines are issues on a strict liability basis without the need for the Australian Border Force to prove an offence
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Common Customs Compliance Risks
Incorrect use of concessions
Customs duty is payable on many Australian imports. However, there are a range of concessions available to reduce the duty to zero. Like most areas of taxation, the application of concessions is a matter of self-assessment. The use of concessions may be audited less than every 4 years. It is possible that your organisation is claiming millions in concessions with little oversight of whether the imports qualify.
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A common risk is the claiming of a free trade agreement where the goods do not qualify. Reasons goods may not qualify are (a) the goods do not meet the complex rules of origin, (b) the origin document (certificate of origin) is non-compliant or the goods do not meet rules regarding indirect consignments.
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Another common concession used by Australian importers is a tariff concession order. These concessions have very strict wording and goods must precisely fit within that wording to qualify. For example, a concession applying to a food processer will not apply if that food processer is imported with a bonus vegetable peeler. A slight change in goods may mean that a tariff concession order does not apply. There needs to be systems in place to identify the times when use of concessions should be reviewed.
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Incorrect tariff classification
All imported goods receive an 8 digit tariff classification. There are about 9000 potential classifications that apply. Much turns on the tariff classification including the general duty rate, what concessions apply, whether dumping duties apply and even whether the goods are a prohibited import.
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Tariff classification can be difficult. Often the supply chain focus is only of classifications that attract duty, with the optimistic assumption being that all duty free classifications are correct. Naturally, the Australian Border Force will focus on the areas where they can identify underpaid duty – this will be the current duty free classifications.
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Binding rulings can be obtained regarding tariff classifications. Where the volume of goods is significant, or the consequences of incorrect classification is high, there should be a system for obtaining binding rulings.
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Prohibited imports and exports
Australia has some very strict, and absolute rules regarding the import and export of certain goods. Goods that may be permitted without the need for a permit in some countries may be completely prohibited by Australia.
In respect of imports, an example is any good that contains traces of asbestos. While other countries may permit imports that contain very minor levels of asbestos, with Australia there is no permitted level. If the Australian Border Force suspects that goods contain asbestos, the goods will be initially held at the border and then tested. Even if the goods are released, the costs of holding and testing the goods can have a big impact. If the goods do contain asbestos, the importer can expect the goods to be destroyed and fines issued.
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Another example is the export of duel use goods. These are goods that can have both a civilian and military use. Many countries, allow these goods to be exported without a permit to allied countries. However, Australia requires a permit for the export of all duel use goods. It can be the case that a good could be exported from the US to Australia without a permit, but if that same good was to be returned to the US, an Australian permit would be required.
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Assumptions cannot be made that because a good is not controlled by one jurisdiction, Australia will adopt the same position.
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Customs valuation
The amount of customs duty, dumping duty or GST payable on imported goods is determined by both the tax rate and the customs value of the goods. The customs value can be a complex issue, particularly where the transaction is between related parties. An incorrect customs value can result in a false statement having been made to the Australian Government and possibly an underpayment of taxes.
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Issues that often impact customs valuation are transfer pricing adjustments, royalties, buying commissions, use of pro forma invoices and contributions to the goods made by the purchaser.
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Recommendations
The customs function in an organisation is often owned by logistics and supply chain personnel. If you want to ensure a high level of customs compliance there needs to be involvement by the legal team. While the focus will naturally be on supply chain speed and cost, our experience is that the biggest impact of poor compliance is increased costs and delays in clearing goods. To the extent that the legal team increases compliance, it will increase the predictability of the supply chain and enable the organisation to access a greater range of trade facilitation benefits.