border trade management m risks, ensuring compliance

CROSS BORDER TRADE MANAGEMENT

MANAGING RISKS, ENSURING COMPLIANCE

Agaton Teodoro O. Uvero

1.00 – 4.30 pm, Thursday, October 8, 2020

Outline

Introduction

Cross Border Trading Arrangements

Managing International Trade Risks

Trade Compliance & PH Environment

Conclusion

Introduction

4

Trading across Borders

International Trade

◼ Movement of goods, services & information across International Borders

◼ Export and Import of goods & services

Complexity of export and import Rules

International security measures at the border; Additional costs

Increasing pressure to ensure compliance

5


Unpredictable costs for trading across borders

Companies require transparency, consistency and uniformity in export and import rules

Integration of ASEAN and various FTAs; greater threats and opportunities

Increasing demand to facilitate trade

Customs – “weakest link” in the supply chain

6


The Pandemic

◼ Exponential growth in online transactions for goods and services

◼ Closures of ‘brick and mortar’ stores; Bankruptcies of retail chains

◼ Survival before recovery; ‘riding’ the next 12 months

◼ Poor consumer demand; reduced global trading (transport and logistics)

◼ More losers than winners

Cross Border Trading Arrangements

Typical Trading Arrangement

Cu

sto

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ord

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Invoice Flow

Payment Flow

Goods Flow

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Philippine Buyer

Overseas Supplier

Overseas Supplier

Direct Sale to Subsidiary (1)

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ms B

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Invoice Flow

Payment Flow

Goods Flow

‘ABC Vietnam’Overseas Supplier

‘XYZ PHILS’Local Buyer

‘ABC PHILS’Buyer

Direct Sale to Subsidiary (2)

Cu

sto

ms B

ord

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Invoice Flow

Payment Flow

Goods Flow

‘ABC China’Overseas Supplier

‘XYZ PHILS’Domestic Client

‘ABC PHILS’Buyer

Indenting and Commission Sale

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sto

ms B

ord

er

Invoice Flow

Payment Flow

Goods Flow

‘ABC Thailand’Overseas Supplier

‘XYZ PHILS’Philippine Buyer

‘ABC PHILS’Indentor

Commission

Third Party Invoicing

Cu

sto

ms B

ord

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Invoice Flow

Payment Flow

Goods Flow

‘ABC China’Manufacturer

‘XYZ PHILS’Buyer

‘XYZ SGP’Supplier

Third Party Logistics / Importer-of-Record (IOR)

Cu

sto

ms B

ord

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Invoice Flow

Payment Flow

Goods Flow

13

‘ABC Thailand’Overseas Supplier

‘XYZ PHILS’Philippine Buyer

‘Logistics Provider’Warehouse/IOR

PhilippinesOverseas

RM ‘Ship To’

FP - Exported

Service Fee

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ms B

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FP - Domestic

RM

FP

RM

Service Fee

FP ‘On Consignment’

Key:RM = Raw MaterialsFP = Finished Products

ABC PHILS DISTRIBUTOR‘Commissionaire’

Thailand‘Toll Manufacturer’

Indonesia Customers

ABC PHILS, INC..‘Toll Manufacturer’

ABC SINGAPORE‘Risk Entrepreneur’

Supplier ofRaw

Materials Supplier ofRaw

Materials

Sample Trading Arrangement in the FMCG Industry

Regionalization of MNCs:Old Structure

XYZ PHILS., INC.

President & CEO

Manufacturing

Research & Development

Advertising and

Promotion

Finance and Administration

Sales and Distribution

From autonomous and self-sufficient national organization to regional organization

Centralization of manufacturing facilities at a regional level

Reduction of facilities (economies of scale, market access, incentives, labor costs, etc.)

Regional centralization of functions (e.g. research and development, advertising and marketing, finance and administration)

Toll/Contract Manufacturing

Regionalization of MNCs

CONTRACT FOR SALE OF GOODS

applicable jurisdictionTerms, conditions and

Any specific clause relatingto carriage and delivery

INCOTERMspecified in the

contract

Source: IPSM, International Trade Centre (UNCTAD/WTO)

International Sales Contract

For Any Mode or Modes:

EXW - Ex Works FCA - Free Carrier CPT - Carriage Paid To CIP - Carriage and Insurance Paid DAP - Delivered At Place DPU - Delivered At Place Unloaded (new)DDP - Delivered Duty Paid

For Water Transport (Sea or Inland Waterway):

FAS - Free Alongside Ship FOB - Free On Board CFR - Cost and Freight CIF - Cost, Insurance and Freight

INCOTERMS 2020(International Commercial Terms)

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Importance and Benefits

For traders,

◼ knowing what is inclusive of the price◼ which costs will be subject to duties and taxes◼ who will claim against the insurance in case of loss or damage◼ minimizing disputes

For forwarders, identifying possible opportunity for freight and other logistics services

For customs, assessing the correct duties and taxes (cost plus insurance and freight)

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The Logic of Incoterms

Transport by sea and inland waterway ONLY

Transport by ANY mode

Departure termEXW (Ex Works)

Shipment term, main carriage unpaid

FAS (Free Alongside Ship)FOB (Free On Board)

FCA (Free Carrier)

Shipment term, main carriage paid

CFR (Cost and Freight)CIF (Cost, Insurance and Freight)

CPT (Carriage Paid To)CIP (Carriage and Insurance Paid to)

Delivery term DAP (Delivered At Place)DPU (Delivered At Place Unloaded)DDP (Delivered Duty Paid)

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Four Pillars of Incoterms

DELIVERY (WHERE and WHEN the seller fulfills obligation to deliver/transfer of ownership?)

DOCUMENTS (WHO provides WHAT documents, whether manual or electronic)

RISKS (WHO bears the risk of loss or damage at any point of transit) / Transfer of Risk)

COSTS (WHO pays for WHAT)

Sales contract

Shipping conditions Buyer

INCOTERM: CIF

Seller

Deliver the goods

Indemnify in event of loss or damage

Contract of carriage

Cargo insurance

policy

Insurance company

Transport operator(s)Source: IPSM, International Trade Centre (UNCTAD/WTO)

Transport & Insurance: CIF

CONTRACT FOR CARRIAGE 2

EXPORT PORT to IMPORT PORTCONTRACT FOR CARRIAGE 3

IMPORT PORT to BUYER

CONTRACT FOR CARRIAGE 1

SUPPLIER to EXPORT PORT

PAID BY SUPPLIER PAID BY BUYER

WaybillBill of lading

Possible Charter PartyWaybill

Sales contract

Shipping terms

INCOTERM: CIF

Contract of Carriage: CIF


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BuyerSeller

EXW FCA

CPT

CIP

FOBFAS DAP

DDP

Waterborne transport only

CFR

CIF

Import clearance costs on account of the buyer (except for DDP)

Export clearance costs on account of the seller (except for EXW)

Transport insurance costs on account of the seller

Unloading costs on account of the seller only if in its contract of carriage except DPU

Cus-toms

Cus-toms

Cus-toms

Cus-toms

*

*

*


Transfer of CostsINCOTERMS 2020

DPU

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BuyerSeller

EXW FCA

CPT

CIP

FOB

CFR

CIF

FAS DPUDAP

DDP

Waterborne transport only

Cus-

toms

Cus-toms

Cus-toms

Cus-

toms


Delivery and Transfer of RiskINCOTERMS 2020

Each of the Incoterms has an impact on:

Risks & Costs

INCOTERMS 2020


The most onerous (burdensome) to the seller is DDP.

The most onerous for the buyer is EXW.

If no Incoterms is used, you will need to specify in detail how the various issues related to delivery, costs & transfer of risks will be dealt with.

Managing InternationalTrade Risks

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Evaluating Trade Risks / Disruptions

Trade Market / Country Risks

◼ OECD Country Credit Risk based on

Financial payment experience

Financial, economic and political situation

◼ Corruption and Bribery (Transparency International – Corruption Perceptions Index)

◼ Cost of Doing Business particularly cross border trade (World Bank –Doing Business: Measuring Business Regulations)

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Evaluating Trade Risks

Trade Market / Country Risks

◼ Transparency and Fairness (World Economic Forum – Global Competitiveness Report)

Macroeconomic Environment

Regulations and bureaucracy (red tape)

Business sophistication

Market size and competitiveness

Infrastructure (ports, roads, ICT, etc.)

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Availability of Government support

Access to Industry/Business chamber resource

Transparency of Trade Regulations and Documentation

◼ Export and import regulations

◼ Customs documentation and process

◼ Free Trade Agreements (FTAs) benefits

◼ Trade war and sanctions

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Vendor Risks / Accreditation

◼ Suppliers and Buyers

◼ Banks

◼ Freight Forwards

◼ Customs Brokers

◼ Other logistics providers

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Risk Management / Risk Mitigation

Managing Risks involves the following

◼ Identification of all risks

◼ Assessing the probability / likelihood of each risk

◼ Evaluating the commercial impact

◼ Ranking the risks in terms of probability and impact

◼ Mitigating the probability of the risk happening

◼ Preparing for the ‘what if”

Sample Trade Risk Positioning Model

Source: International Trade Centre

Trade supply opportunity/risk rating

Expenditure / Commercial Impact

80% of items = 20% of value 20% of items = 80% of value

M

H

N

L

Bottleneck

Routine

Critical

Leverage

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Sample Risk Template

Trade Compliance& PH Environment

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General Trade Compliance Issues

Export Control / Exporting to Restricted Importers in US and EU

Valuation and Classification of Goods (including Certificate of Origin); FTA and other preferential treatment qualifications

Licensing / Permit Requirements (in both Exporting and Importing countries)

Special attention to dual or multiple use goods (technological, biological, chemical, nuclear use)

Documentary and other regulatory requirements

37

PH Trade Environment

International Laws in the last 20 years

◼ WTO Valuation Agreement

◼ WTO International Trade Remedies (dumping and safeguards)

◼ ASEAN Harmonized Tariff Nomenclature

◼ WCO Revised Kyoto Convention

◼ WTO Trade Facilitation Agreement

◼ Post Clearance Audit and Voluntary Disclosure

Multilateral and Bilateral FTAs

Customs Modernization and Tariff Act – RA 10863

38

Customs Laws, Rules and Regulations

CMTA and Special Laws

Customs Administrative Orders (CAOs), Customs Memorandum Circulars (CMOs) and Customs Memorandum Circulars (CMCs)

Government Regulations (DTI-BPS, DTI-BIS, DOH-BFAD, NTC, BSP, PNP, etc.)

International conventions and treaties (e.g. CITES, BASEL Convention, AHTN, HS Convention, WTO Agreements, etc.)

“Actual Practices”

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Classification of Imports

General Rule (Section 116, CMTA)

◼ all merchandise are allowed except those that are specifically prohibited or regulated for reasons such as:

Public health and safety National Security International Commitments & Development

Classification (Section 116-119 CMTA)

◼ free importation◼ regulated commodities◼ prohibited commodities◼ restricted commodities

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Regulated Imports

essential chemicals – Dangerous Drugs Board rice and corn – NFA food and medicines – BFAD copiers – BSP, NBI firearms and explosives – PNP used motor vehicles – BIS commodities from socialist countries – PITC hazardous wastes – EMB consumer products – BPS

no import or commodity clearance / permit may result in fine, penalty, forfeiture and/or seizure (Section 101, TCCP and CAO 4-94); repealed by CMTA

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Types of Entries

Consumption (goods subject to duties and taxes)

Warehousing (goods for export production)

Transit (goods bound for free zones)

Transshipment

Entry Processing

Prepares and lodges enttry declaration (SAD)

Submits E-manifest

Importers /Brokers

Shipping Lines / Forwarders

BOC run SelectivityProgram

Selected?

Importers /Brokers

Makes payment to accredited bank

Cargo RELEASE

Yes

No

RED/Orange Process

YELLOW Process

Yes

Docoument Check (Value, Tariff heading, Permits?)

BOCFormal Entry Division

Physcial Examaniationor X-ray

Makes final assessment based on physical or

document check;Re-route to GREEN

GREEN Process

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Duty Treatment: General Rule

all importations are dutiable even if previously exported from the Philippines unless provided otherwise by law

◼ MFN duty rates (Sec 104 TCCP, Sec 1611 CMTA)

◼ Dumping (RA 8752, Sec 711 CMTA) and Safeguard duties (RA 8800, Sec 712 CMTA)

◼ Marking Duty (Sec 710 CMTA)

◼ Special ATIGA (ASEAN) rates and other FTAs

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Duty Treatment: Exception to the General Rule

exceptions:

◼ dutiable but zero-rated (Sect 104 TCCP, Sec 1611 CMTA)◼ exempt transactions (e.g. conditionally free, Sec 800 CMTA, duty-free

importations)◼ exempt entities (e.g. telecom franchise)◼ special preferences (e.g. MFN rates vs. FTA rates)◼ special laws (e.g. AFMA)◼ Customs Bonded Warehouse (Chapter 2, Title VIII CMTA)◼ BOI /PEZA/Free Trade Zones (FTZs)

45

Tax and Duty Calculation

Transaction Value – Sec 700 CMTA, CAO 4-2004

Classification & Duty Rate – Sec 103 – 104 TCCP, Sec 1611 CMTA

Quantity / Quality

Others

◼ country of origin (e.g. FTAs)◼ partial or total exemption◼ other tariff preference (e.g. AFMA)

NOTE: INCOTERM used has direct impact on duty calculation

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Sample Computation

Computation of Duty

Cost/Value + Insurance + Freight = Dutiable Value

Dutiable Value x Duty Rate = Duties Payable

Computation of VAT

Dutiable Value + Duties Payable + Bank Charges + Customs BrokerageFee + Storage (or Arrastre/Wharfage) + Import Processing Fee = Landed Cost

Landed Cost x 12% VAT = VAT payable

Computation of Excise Tax (depends on the ATRIG)

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Post Clearance Audit: Obligations

for the importer

◼ accurate & complete declaration◼ exercise of ”reasonable care” ◼ record keeping of import & related business records◼ principal liability for underpayment

for the customs broker

◼ record keeping of import records

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Post Clearance Audit: Scope

Audit examination, inspection, verification and/or investigation conducted on:

◼ document flow

◼ financial flow

◼ goods inventory flow

◼ Other business processes

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Post Clearance Audit: Compliance Issues

customs valuation

tariff classification and duty rate

quantity / quality

country of origin (preferential rates)

others (exemptions, trade remedy measures, etc.)

◼ Movement of goods from CBWs or Free Zones to PEZA locators

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General Issues

◼ failure to exercise “reasonable care”

➢ lack of corporate competence to review or manage customs operations

➢ absence of corporate officials responsible for customs compliance

◼ “beneficial owner” issue (ultimate consignee)

Customs Compliance Issues

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Record Keeping

◼ no ready “trade profile”

◼ records not “audit ready”; not accessible

◼ no audit support (accounting and finance) to declared value

◼ constitute waiver of the right to contest the audit results

Customs Compliance Issues

52

BOC BIR

Duty, Excise and VAT Income Tax, Excise and VAT

Transaction Value Cost of Goods(undervalued) (cost overstated)

Business and Financial Records Financial Statement (FS) and BIR returns(including import records)

Customs Audit vs BIR Audit

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Customs Audit vs BIR Audit

BOC BIR

1) Audit Letter Audit Notification Letter (ANL) Letter of Authority (L/A)

2) Years Covered 3 Years from final payment 3 years from filing of tax return(transactional) (annual or fiscal year)

3) Prescription Issuance of ANL is an exemption Assessment must be issued w/into the period of limitation 3 years

4) Records Requested Import Documents, Business Financial Recordsand Financial Records

5) Audit Issue Value, Classification, etc. Income Tax, Excise, VAT

6) Penalty imposed 125% or 600% of Revenue Loss 25%-50% Surchargeplus 20% interest plus 12% interest

7) Compulsory Remedy Hold Shipment/ Subpoena Subpoena

CONCLUSION

Conclusion

Digital commerce (and logistics) is growing exponentially

Need to survive and adapt

Necessity for assessing market risks in these pandemic times

Functions may be outsourced; but not accountability

Ensure compliance; stiff penalties for non-compliance

Need to be ‘perfect’ when dealing with PH customs

Thank you

[email protected]

57

For orders -

email: [email protected] [email protected]

call: 551-1775 / 551-3871

About the Speaker

Agaton Teodoro O. Uvero is an international trade lawyer, and a supply chain consultant. He is the EditorialBoard Chairman of Asia Customs & Trade and Chairman of NowheretogobutUP Foundation, Inc.

He began his career at PricewaterhouseCoopers Consulting, and later worked on technical assistanceprograms funded by the Asian Development Bank, United States Agency for International Development, andJapan International Cooperation Agency. He served the Philippine government from 2013 to 2016: as DeputyCommissioner, Bureau of Customs, Department of Finance, and as Chairman, APEC Sub-Committee onCustoms Procedures (2015). He recently authored the book “Understanding International Trade, Tariff andCustoms”.

Mr. Uvero has lectured at the Ateneo Graduate School of Business-Center for Continuing Education onInternational Supply Chain Management. He currently lectures on International Trade and Customs at the UPLaw Center and Ateneo School of Law (MCLE program).

Mr. Uvero has provided advisory services and training for many of the Top 1000 Philippine corporations,professional and industry associations, and business chambers. He is a regular speaker in local andinternational conferences. Mr. Uvero has degrees in Philosophy and Law from the University of the Philippinesand is an alumnus of East West Center (Hawaii).