Impacts and Challenges | Insights |
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Cash flow and liquidity concern Many businesses are facing severe cash flow and liquidity issues with dropped sales and fixed overheads. Customs duties and other import taxes (e.g. consumption tax or sales tax) are either a cost to businesses or a cash flow challenge. |
Immediate opportunities to be explored include potential temporary duty waivers or exemptions introduced to help tie companies over. Also, some countries are experimenting with allowing periodic payment of customs duties, rather than immedite payment upon clearance of goods. Additionally, many countries allow payment of recoverable taxes (such as import VAT) to be deferred, either as a COVID-19 relief measure or as a permanent option. All these options can have immediate saving effects on costs and / or cash flow. From a longer term perspective, importers should consider sustainable customs savings opportunities. From a duty perspective, this can include Free Trade Agreement (FTA) utilisation, customs valuation unbundling, tariff code planning etc. |
Essential goods export consideration Exports of essential goods such as medical supplies and agricultural products are put under restraints in some countries. The restraints can be in the form of outright bans, export quotas, export license requirements or similar. |
It may not be easy for a manufacturer of these products to divert export focused production to customers in domestic markets, for reasons such as product characteristics, standards or labelling, to name but some examples. It is therefore always worthwhile to talk to the regulators to try and obtain individual exemptions from such export restrictions. Although governments want to secure sufficient supplies for their own populations, they are also acutely aware of the pain that their economies are going through. Hence they are unlikely to want their manufacturers and exporters to suffer unnecessarily, and add to the pain of their domestic workforce. Measures may or may not be driven by applied tariff classification codes, and it would be wise for exporters to review and validate such codes, so that any applicable restrictions are not accidentally avoided, nor unnecessarily applied. |
Maintenance of incentive status Many companies have obtained authorisations or been given government incentives to promote the creation of export driven economic activity. This would include the use of special economic zones as well designated facilities aimed at production or processing for export. In most cases, such facilities come with various requirements, such as export targets or required entity ranking. It may not be possible during this time to meet these requirements. Export restrictions, the closure of borders, or reduced manufacturing capacity may reduce the absolute or relative level of exports, in turn leading to a company missing its targets. |
It is not in any territory's interest to undermine foreign investment during times of economic stress. The various agencies, such as Boards of Investment, will look beyond the immediate crisis to safeguard future economic activity once the immediate crisis recedes. Companies withdrawing from the market during this period may not return in a hurry. It is therefore worthwhile for companies operating under these incentive schemes to explore opportunities with investment agencies and even reach out to the customs authorities policing the related requirements, to relax various conditions under these testing circumstances. Buying the organisations some time to meet the necessary targets. |
Customs clearance disruptions for non-essential goods Customs resources on non-essential goods handling are distracted by COVID-19, either as a result of quarantine measures or prioritisation to clear essential goods. Consequently, clearance of non-essential goods can be suspended, granted “provisionally” or with minimum oversight. |
Understanding the likely treatment of imports and exports at this time is essential for any supply chain manager to avoid unnecessary surprises. If there are likely disruptions to clearance, prior discussion with the customs authorities may enable some mutually acceptable resolutions to be found. If goods are cleared without the usual level of oversight, it is more likely that a future customs audit will review such imports in more detail, hence ensuring closer oversight and retention of all related clearance documentation is more important than ever. Longer term, importers and exporters could explore priority clearance programmes, such as AEOs, to enable priority treatment during future crisis. |
Challenges in Free Trade Agreement utilisation - ability in obtaining Certificate of Origin The ability to obtain a Certificate of Origin from the issuing authorities, or have them validate manufacturing cost statements, may be negatively impacted due to lack of resources or restriction of on-site visits for the relevant officers. Preferential treatments in the importing country will hence be negatively impacted. |
Many countries have been introducing electronic means of issuing certificates of origin, albeit it often still on a voluntary basis. Exporters should explore the possibility to use such systems. Alternatively, if products have to be exported without a certificate of origin, most Free Trade Agreements have provisions that allow retrospective applications for certificates of origin to be made within a year from the date of export (and usually to be presented in the destination country within a year from the date of import). This way, the right to claim refunds from the customs authorities in the importing countries can be reserved. |
Challenges in Free Trade Agreement utilisation - implications from change of supplier Manufacturers that export goods under cover of certificates of origin, or self-certify such origin, often rely on supporting documentation from their suppliers to benefit from cumulation rules. These allow them to include the materials from such suppliers as originating in their value-add calculations. If those suppliers are not able to provide the necessary supporting documentation, or if alternative suppliers need to be used that are not in a position to issue such support, it may well be that products exported by those manufacturers no longer meet the relevant rules of origin, or there will be a need to update the cost statements. |
As a core principle, the information underlying an application for a certificate of origin from the authoriteis, or a decision to self-certify, has to be reviewed regulalry to make sure it is up to date and correct. That way, preferential tariffs will not be claimed incorrectly, as that could lead to retrospective duty bills and penalties that can not usually be recovered from customers. Although not using FTA benefits where they are available is not clever from a competitive point of view, claiming them where they are not due could cause an existential threat. Hence, the qualifying status of exported products should be monitored very closely so as not to claim originating status incorrectly. Where FTAs are used extenisvely, automating that process can create significant value and return on investment. |
Customs implications on obsolete stock handling Many companies have ended up with significant reduction in demand for products, which is leading to obsolete stock. Such stock may need to be sold at potentially significant losses, or even destroyed. |
Selling stock at a loss may lead to challenges from custom authorities, either at point of import or export, or during a subsequent audit. Many authorities do not normally allow goods to leave a warehouse at a lower value than they were entered. Upon importation, temporarily different prices may set dangerous precedents for future importations, or be challenged during future audits. In addition, limited risk distributors may face significant year-end transfer pricing adjustments that need to be disclosed to customs authorities. If stocks need to be destroyed, care should be taken that this is done under custom supervision where required, for example when they are stored under bond. |
Customs valuation implications on cross-border residual profits remittance Despite the overall slow-down in business, some importers still achieve a stronger profit in certain markets. Some of the reasons for this include enhanced demand for their products, efficient control on costs, etc. The strong profit may lead to the need for remittance of residual profits overseas. |
The nature of the remittance can vary depending on the reasons causing the strong return, as well as in-country regulatory requirements. Some types of remittance also affect the import price or customs value declared, for example this can be an adjustment of the historical import price or an intangible payment agreement in relation to imported goods. In such situations, importers are obliged to revisit the customs value declared and disclose the adjustments, and possibly provide a supplementary declaration as well. In some territories, there is an established procedure to follow (e.g. voluntary disclosure program in Singapore), while in other territories the discussion will be handled on a case-by-case scenario (e.g. in China). |
Potential tariff increase in some territories Some authorities are imposing or thinking about imposing additional customs duties because of pressure to increase revenue. Industry groupings are lobbying against this in countries such as India, Philippines and the United Arab Emirates. |
Companies should explore possibilities to mitigate such duty impacts before they happen, and look for more opportunities to optimise their import processes and achieve real savings. This includes participation in any lobbying efforts or seeking opportunities in the traditional savings areas such as Free Trade Agreement (FTA), bonded facilities, merit-based exemptions etc. |
Responding to customs queries Existing disputes have been put on hold due to lack of manpower or ability to have meetings with the customs authorities. While "the clock is stopped", back duties, penalties and interest charges are accumulating. On the other hand, some disputes are fast-tracked to resolution, with a quicker issuance of assessment notices to importers. This is sometimes done without giving importers or exporters appropriate opportunity to explain and discuss preliminary audit findings that were issued before lockdowns. |
Importers and exporters should start thinking and preparing for a possibly challenging landscape in future discussions with Customs about imports and exports, both those that happened during the lockdown periods and those that will happen in future. Agreeing to a swift dispute resolution may feel attractive now, but potentially creates difficulties for the future. For example, agreeing to a small uplift to a declared customs value may be interpreted by the authorities as the importer agreeing that a transaction value approach is not appropriate for their imports, and hence current and future invoice values can be ignored by the authorities as a basis for customs valuation determination. Nothing replaces proper planning and documentation of the support for declared customs values. Revisiting the root causes for historic assessments and developing potential (new) strategies to manage both the existing and future disputes with the authorities woudl be a good idea. |
COVID-19 measures may last and have longer-term implications New customs and international trade compliance and management measures have been published during COVID-19. Some of them may last and have longer-term implications. It is not so clear at the moment how adequate such new measures are, and how adequate they are going to be if cross-border trade indeed changes as significantly and permanently as many observers seem to expect. |
It clearly will be futile to try and predict the precise future for cross-border trade. But it is valuable to consider the options, how likely they are, and what can be done to prepare for as many of them as possible. A phased approach includes first looking at how global trade may be reshaped. Then looking at actions that will likely be taken by the customs and trade authorities to manage this change and to continue to meet revenue targets. Lastly, it is for companies’ to determine their best preparation or response through as many "no-regrets" actions as possible. |
Customs considerations on building stronger global supply chains The COVID-19 situation, on the back of an emerging US-China trade war, has shown us how vulnerable global supply chains and trade can be. Many companies have started to consider diversifying sourcing in order to reduce the risks of over-reliance on a single nation or a few key suppliers. This includes exploration of new local and regional suppliers as well as measures to shorten supply chains and reduce transit and customs clearance times. |
A diversified sourcing approach may benefit companies with increased utilisation of Free Trade Agreements, but may also put existing FTA benefits at risk. Meanwhile, more diversified supply chains will likely make customs management more complex. There will be additional pressure on import price comparisons, more complicated preferential origin management, more likelihood of inconsistent use of tariff classification and widely differentiating labelling requirements, to name but a few. While customs regulations often follow the principles of global frameworks, local interpretations and practices from Customs will still lead to different requirements for different markets. Hence companies should revisit and adapt their customs compliance processes before any new supply chains are established. |
Implications from a more digitalised border One result from COVID-19 is our growing dependence on technology, whether it is online food ordering or a virtual meeting with colleagues. For global trade, the way borders are managed is also impacted by technology. The idea of a smarter border, which hinges around minimising physical customs and other border formalities, doing more electronically before and after goods cross a border, is already being touted by many governments and may be more relevant and prevalent than ever. |
Practical implications for a more digitalised border and customs compliance supervision will for example include the use of digital signatures, electronic submission and endorsement of customs declarations, e-certificate of origins, digital letters of undertaking or bank guarantees etc. More importantly, business need to find new ways of working based on digital supply chains and enhanced trade facilitation to keep goods moving as efficiently and smoothly as possible. This includes identifying key actions needed to ensure smooth customs procedures with limited human intervention. Maintaining compliance and obtaining a “trusted trader” status, or its equivalent, may become imperative to make international supply chains and cross border trade activities possible, let alone secure and efficient. |
Increased use of technology on Customs supervision Technology does not just bring a smarter border for international trade, but also introduces tools which authorities can leverage to spot outliers suggesting non-compliance in a more efficient way. The World Customs Organisation has recently put a team of data analytics experts together to develop an opensource AI model to help facilitate how customs authorities can screen large amounts of transaction level import data to better manage compliance. At country level, customs authorities will likely increase future audits on historical compliance as well, as most of the audits or discussions were interrupted or suspended due to COVID-19. Some countries are looking into leveraging technologies in tracking non-compliance or handling audits. For example, Philippines Customs is looking for ways to carry out audit reviews and voluntary disclosures in a contactless environment. |
Increased customs audit activity and introduction of technology tools for use by customs authorities mean a heavier burden on importers and exporters to ensure compliance management. In addition, as Customs are learning fast to use and leverage technology to analyse transaction level data to challenge companies more aggressively in a contactless environment, it may become increasingly difficult for importers and exporters to contest customs’ reassessments or defend their position if they are not prepared. Implementing equivalently smart, or even smarter procedures and systems for daily operations, using data analytics and visualisation for regular self assessment and preparation of supporting documentation will all become necessary in the near future. |
Key message | Effective period |
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The Government has introduced a Temporary By-Law providing tariff relief on a range of Personal Protective Equipment (PPE) and medical items. The Temporary By-Law will cover Item 57 to Schedule 4 of the Customs Tariff Act 1995 (Customs Tariff Act) provides a Free rate of customs duty for hygiene or medical products imported to treat, diagnose or prevent the spread of the coronavirus that causes the disease COVID-19. Use of the Item and by-law will not affect other taxes and charges that may be payable on the imported goods. The goods must meet the requirements of the item to access the concessional rate of customs duty. | Extended until 30/06/2021 |
Non-commercial export of certain goods that help in the control of COVID-19 is temporarily prohibited. This includes personal protective equipment and sanitisers. There are exemptions but certain conditions have to be met before these goods can be exported. | 08/03/2020 for 3 months |
The Trade Minister announced a new AUD 170 million COVID-19 rescue package aimed at providing relief to Australia's export sector. The package includes a $110 million International Freight Assistance Mechanism designed to assist Australia’s agriculture and fisheries sectors in securing freight flights into major Asia Pacific export markets, with returning flights bringing back vital medical supplies, medicines and equipment. AUD 50 million will also be injected into the Export Market Development Grants, allowing exporters to claim additional reimbursements for the costs associated with marketing and developing their products in new markets. |
Frank Debets
Gary Dutton
Alex Qian
Asta Nie
Worldtrade Management Services Leader, China, PwC Asia Pacific Customs and Trade
+86 (21) 2323 2269
Helen Y Han
Nathan Pan
William Marshall
Nitin Vijaivergia
Rahul Shukla
Enna Budiman
Robert Olson
Chandrasegaran Perumal
Ruben Zorge
Young-Mo Lee
Paul Sumner
Pham Van Vinh