16.1 Customs clearance and import duties

International trade transactions always involve at least two customs clearances, one upon

export and one upon import.

The customs clearance responsibility has four components:

  1. the responsibility to obtain necessary licences and provide information and declarations;
  2. the responsibility to pay official duties and taxes where they apply;
  3. assumption of the risk that customs clearance may be physically or legally impossible; and
  4. a responsibility to maintain accurate, accessible records.

The choice of Incoterm determines who, as between exporter and importer, has the responsibility for export or import clearance. For example, the Ex Works (EXW) Incoterm places both export and import customs clearance duties on the buyer. The “F” and “C” terms - such as Free Carrier (FCA), Free on Board (FOB), CFR or Cost and Freight; or Cost Insurance Freight (CIF) - split the customs responsibilities between seller and buyer: the seller must effect export customs clearance, while the importer is responsible for import customs clearance and payment of duties. With the Delivered Duty Paid (DDP) term, both export and import customs clearance are the seller’s responsibility. It is important to point out the EXW terms do not absolve the seller from assuring that the export controls have been complied with. Similarly, DDP does not absolve the importer from laws prohibiting the importation of denied commodities.

16.2 World Customs Organization and the Harmonized Tariff System

The World Customs Organization (WCO) is an intergovernmental organization based in Brussels that was founded in 1952 as the Customs Cooperation Council (CCC). Today it[Page220:]comprises over 177 member countries and promotes the standardization of customs procedures worldwide.

One of the activities the WCO is best known for its supervision of the Harmonized Commodity Description and Coding System (HS) of tariff nomenclature, generally known as the Harmonized System or Harmonized Tariff System (HTS). The HTS is an internationally standardized system of names and numbers for classifying traded products.

Under the HS Convention, each country’s customs authority is obliged to base its tariff schedules on the HS nomenclature, although the country may set its own duty or import tax rates. The HTS is organized into 21 sections and 96 chapters comprising 200,000 entries, under which all goods are assigned to categories according to numerical codes. All products can be classified in the existing HTS utilizing the General Rules of Interpretation. The so-called Chapter 98 is reserved for the special use of each country.

It is not unusual for a particular piece of merchandise to fall between two official customs classifications. Understandably, traders seek to apply the designation with the lower duty. In the event of disputes, the trader will commonly have the right to appeal the customs ruling to a specialized customs board or legal tribunal. These challenges or “protests” of customs valuation by the customs authorities are commonly handled by specialized counsel or customs attorneys.

The HS nomenclature was revised for the 2012 edition, the fifth amendment since the WCO Council approved the first version in 1983. The 2012 revision includes a number of amendments related to environmental and social issues, particularly concerning classifying and coding goods on food security under the early warning data system of the Food and Agriculture Organization of the United Nations (FAO). HS 2012 also featured new classifications for controlled chemicals and ozone-depleting substances in order to respond to global environmental protection efforts.

Since duty can be a decisive element in a trading relationship, importers are also able to request advance “binding rulings” from customs administrations so that the cost of importation will be known in the planning process. BTI’s require very detailed information about the commodity and its use. While anyone can request a binding ruling, beginners are best advised to seek specialized customs counsel.

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16.3 Customs brokers and agents

Traders rely on customs brokers (also known as “customs house brokers” or “CHBs”) to clear goods through customs and provide any other necessary customs-related services, such as assisting with the classification of goods. Brokers act as agents of the exporter or importer in dealings with customs authorities. Therefore, traders should very carefully and precisely instruct their brokers as to the nature of the goods and the fees they expect - and are willing - to pay as well as any advance information about rulings or any other matter that may affect the entry process. Traders should explicitly require that the broker contact them for assistance in the event of difficulties arising during clearance, because the trader will frequently be better placed to answer questions or to resolve disputes concerning the technical quality or price details of the merchandise. Customs brokers must be licensed in some countries - such as the U.S., Canada, Mexico, Russia and Australia - but not in others (most countries in the E.U. do not require licensing of customs brokers or agents).

16.4 Export clearance: licences and quotas

For export, a formal export licence may or may not be required. Even when one is not

required, most countries will require exporters to formally notify customs by submission of

at least one standard document or electronic declaration containing specified information

including what is being sold and who the buyer is.

Export licences are most commonly required in the case of sales of politically or strategically

sensitive goods, such as exports of arms or weaponry, precursor chemicals, high-technology

goods or goods in short supply. In some rare cases, goods may be subject to an export quota,

meaning that exporter must obtain government authorization in order to ship abroad (the

government will not grant authorizations once the quota is exceeded). Import quotas are

also common to protect local markets.

16.5 Import customs clearance: duties and taxes

a. Customs valuation and classification

Upon the importation of goods, duties and taxes are payable. Since the level of duty directly impacts the importer’s bottom line, effective “duty management” has become a strategic imperative.

The amount of duty varies widely depending on the value of the goods, tariff schedules of the importing country, customs classification of the goods and, in some cases, the origin of the goods. Customs officers will strictly verify the declared value of the goods, because duty is often calculated as an ad valorem percentage (meaning the duty is calculated as a percentage of the invoice value of the goods). Customs valuation is covered by an international treaty, the WTO Customs Valuation Code, “WTO Agreement on Implementation of Article VII of the GATT 1994”, which sets forth the basic rule that the customs value of the goods is the value agreed between unrelated buyers and sellers. If the parties are related or if there are other payments aside from those on the invoice, then the so called “transaction value” on the invoice may not be acceptable.

Note that the invoice value will vary according to the amount of transport services included in the price under the chosen Incoterm. For the same goods, a CIF value will always be [Page222:] higher than an FOB value, because the CIF value includes sea freight and insurance. In most countries, duties are calculated on a CIF basis, but some use an FOB basis (for example, Australia and Canada). The customs requirement may not always accord with the term actually used by the parties. This may generate confusion when customs officers refuse to accept values based on invoice prices calculated under Incoterms other than FOB or CIF. The easiest solution is simply to convert the invoice value to the appropriate FOB or CIF customs value for the purposes of the customs declaration.

In some cases, customs officers may doubt the accuracy of the invoice value. Perhaps the transaction contains some element indicative of fraud (as in an attempt to circumvent foreign exchange control by paying inflated prices to a co-conspiring exporter or under declared value in order to avoid legal duty), or because the exporter is “dumping” goods into the import market at prices below the production cost in order to capture market share. In these cases, the invoice value may have to be adjusted upward to arrive at a value acceptable to customs officials. If traders have any reason to anticipate problems in this area, they should consult with customs in advance.

b. Country of origin

Generalized System of Preferences – The amount of the duty assessed will often depend on the country of origin. There are many “free trade agreements” between countries and trading blocs that are based on country of origin. And under the United Nations’ Generalized System of Preferences (GSP), many developed countries have granted preferential or free entry to imports from developing countries.

This leads to the important question of the origin of export goods. Generally, this is determined and documented by a certificate of origin, which is procured from, and stamped by, a chamber of commerce or other official export agency. Origin is a relatively simple matter in the case of agricultural products and naturally occurred products shipped in unprocessed form.

The question becomes more complex in the case of manufactured products, the components of which may not come from countries accorded preferential status. The two criteria for deciding whether a particular product meets the origin requirement for preferential status are a process criterion and a percentage criterion. Under the process criterion, the finished product will generally be accepted for preferential rates if it falls into a different product category than the components. Under the percentage criterion, a minimum percentage (usually from 35% to 50% depending on the importing country) of the content of the final product must come from the country accorded preferential status. It is important not to claim preference or to issue certifications of origin without documented evidence that can prove origin.

c. Bonded warehouses

A bonded warehouse is authorized to store imported goods without payment of duties for a given period of time. The proprietor of the warehouse must provide a bond to the customs authorities to cover any potential liability for duties. These warehouses are useful, because they can allow the importer to inspect the goods, or have its customers inspect them, before paying the duty. In the event the goods are unsatisfactory, the importer can either reject them, or if it has already purchased them, seek to have them sold or re-exported to a third party. Another advantage is that for goods assessed as having high duties (e.g., tobacco and [Page223:] alcohol products), payment of the duty can be delayed, thereby enabling the importer to save the interest value on the amount of the duty throughout the period of storage.

d. Free Trade Zones

Free Trade Zones, sometimes called Special Economic Zones, are also used to receive and hold products without payment of duty. Goods entered into a free trade zone are not considered imported into the country. They can be manipulated, further manufactured, relabelled or repackaged or just stored until needed or reexported.

16.6 Temporary imports and ATA Carnets

Temporary importation provisions are an important tool for companies that want to show their products in foreign markets or for professionals bringing tools of trade into a foreign country for a limited period of time.

Temporary importation may be greatly facilitated by the use of an ATA Carnet. The ATA Carnet is an international customs document today operating in 71 countries. Carnets are known as “passports for goods” because they allow for the temporary duty and tax-free import and export of goods for up to one year. The ATA Carnet system is collaboratively governed by the World Customs Organization (WCO) and the International Chamber of Commerce (ICC) through its World Chambers Federation (WCF) to encourage world trade and reduce trade barriers created by different national customs regulations. The initials “ATA” are a combination of the French and English words “Admission Temporaire/Temporary Admission”.

Companies are required to present the Carnet to customs authorities when leaving their home country and upon entry into and exit from every visited foreign country. On return, the company must again show the Carnet document to customs for duty-free entry back into the home country.

ATA Carnets cover most goods traded internationally, including commercial samples, professional equipment and merchandise displayed at trade shows and exhibitions. They do not cover consumable or disposable items.

For countries that do not accept Carnets, companies can usually apply for a Temporary Importation Bond (TIB), a document that may be obtained from a customs broker upon entry. TIB deposits are made in the currency of the importing country. Fees for posting TIBs vary from country to country and depend on the type of product being imported. It frequently takes several months before cash deposits are refunded.

Information about where to obtain ATA carnets can be found at www.atacarnets.org.