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Why International Trade Compliance is so Important?
Faster import clearance, duty savings, predictable costs, reduced regulatory oversight and a competitive advantage are all reasons to ensure that your business is compliant with international trade regulations. If you are an importer or exporter, you need a clear understanding of the rules that govern trade in your area. Here are a few of the legislative requirements and regulations you need to understand:
1. The Harmonized System of Tariff Classification.
. What is it?
Developed and maintained by the World Customs Organization, this multipurpose classification system is comprised of names or terms for goods used as the basis for customs tariffs and for the compilation of trade statistics. It is reviewed and updated periodically to clarify, add, or delete any confusing wording, as well as to incorporate new products entering the marketplace.
. Why is it important?
Not knowing the proper classification of imported goods may result in an error, leading to a chain reaction of errors on rate of duty, import and export controls, restricted goods, etc., resulting in hefty fines or delays at the border.
2. Transfer Pricing
. What is it?
Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services and funds) transferred within an organization. For example, goods from a parent company may be sold to a foreign subsidiary, typical market mechanisms that would normally establish prices between third parties don’t exist. Therefore, the transfer price will affect the allocation of profit among the parts of the company. The value of your product impacts the duty and taxes calculated. Value is defined as all costs that go into getting your goods to its final destination, including price paid, associated costs and transportation. If a transfer price agreement is in place it could also impact the calculation of duties or refunds.
. Why is it important?
Customs valuation and transfer pricing have a lot in common but have competing interests. Customs and Tax authorities worry that multinational entities set transfer prices on cross border transactions to reduce taxation, making customs value a major tax compliance issue. Lack of attention to customs valuation methodologies exposes companies to audits, investigations and /or penalties. If duty calculated is less than it should be, penalties can result. In other cases, you may be paying more duty than you need to.
There are different rules developed for transfer pricing depending on the authority both attempting to reach arm’s length values. However, due to differing methodologies and standards, the transfer pricing value may not be suitable for customs value and vice versa. The one thing that is certain is that multinational companies need to comply with both Tax and Customs valuation rules.
3. Trade Agreements and the Specific Rules of Origin
. What is it?
A free trade agreement is a treaty between two or more countries where commerce in goods and services can be conducted across common borders, without tariffs or hindrances. However, capital or labour may not move freely. Member countries usually impose a uniform tariff on trade with non-member countries. Free trade agreements offer duty relief for many imported goods and eligibility often relies on the specific rules of origin to determine whether goods meet the required transformation to benefit from duty free status.
. Why is it important?
Trade agreements can offer significant cost savings in the form of reduced duty or even duty-free. It is important to note that importers must understand the legislative requirements and ensure the appropriate audit trails are in place when qualify goods for the benefits of the any agreement. Each agreement has a set of “Specific Rules of Origin”: that must be adhered to while maintaining the proof of origin for those eligible goods.
To take advantage of the benefits of these agreements and avoid costly penalties, importers and exporters must ensure compliance with the applicable rules and regulations of the agreement.
4. Customs Compliance, Verification and Audit
. What are they?
Compliance refers to conformity in satisfying official requirements of various customs services. Verification is providing evidence that confirms the accuracy of your submissions to customs, and Audit refers to a formal examination of records and documents.
. Why are they important?
Compliance, Verification and Audit help to establish your importer profile, thereby facilitating the movement of your goods across borders. All three processes provide for security, along with the proper collection of duties, taxes, and correct application of preferential duty tariffs so governments can protect selected industries. For the importer, these processes prevent supply chain bottlenecks, costly production downtime, or errors which may result in expensive penalties.
5. Export Controls and Documentation
. What is it?
There are many controls in place for exporting. Specific commodities such as softwood lumber, firearms and peanut butter are controlled and require a special permit. There could be the situation where the destination country may require an export permit.
. Why is it important?
You must understand whether the product and the destination of that product are controlled, regulated or prohibited and whether a permit is required to proceed with the export.
In Canada, for example, exporters are subject to the same rules and regulations as importers in regard to penalties. If you are operating as a Non-Resident Importer, you would also be subject to penalties for any situation involving fraud, negligence and gross negligence. Your company should take the appropriate steps to ensure compliance with Canada’s export laws and implement an internal export compliance program, have documented record keeping policies, have an internal audit procedure, and work closely with both your Customs Broker and Freight Forwarder.
Finally, never assume the steps you took six months ago for an export are the same steps you should take today – regularly review regulations!
Failure to understand and comply with these 5 (five) trade basic requirements, even without intent, can lead to fines, audits, seizures, inspections, investigations, and possibly imprisonment. These regulations have been established for setting rates of duty and to fulfill the requirements of international trade agreements.
Braver is a world class foreign trade and international affairs company based in Sao Paulo, Brazil. If you are looking for a strong partner to assist you on your overseas business management, contact our businesspeople and get to know more.
1. The Harmonized System of Tariff Classification.
. What is it?
Developed and maintained by the World Customs Organization, this multipurpose classification system is comprised of names or terms for goods used as the basis for customs tariffs and for the compilation of trade statistics. It is reviewed and updated periodically to clarify, add, or delete any confusing wording, as well as to incorporate new products entering the marketplace.
. Why is it important?
Not knowing the proper classification of imported goods may result in an error, leading to a chain reaction of errors on rate of duty, import and export controls, restricted goods, etc., resulting in hefty fines or delays at the border.
2. Transfer Pricing
. What is it?
Transfer pricing refers to the pricing of contributions (assets, tangible and intangible, services and funds) transferred within an organization. For example, goods from a parent company may be sold to a foreign subsidiary, typical market mechanisms that would normally establish prices between third parties don’t exist. Therefore, the transfer price will affect the allocation of profit among the parts of the company. The value of your product impacts the duty and taxes calculated. Value is defined as all costs that go into getting your goods to its final destination, including price paid, associated costs and transportation. If a transfer price agreement is in place it could also impact the calculation of duties or refunds.
. Why is it important?
Customs valuation and transfer pricing have a lot in common but have competing interests. Customs and Tax authorities worry that multinational entities set transfer prices on cross border transactions to reduce taxation, making customs value a major tax compliance issue. Lack of attention to customs valuation methodologies exposes companies to audits, investigations and /or penalties. If duty calculated is less than it should be, penalties can result. In other cases, you may be paying more duty than you need to.
There are different rules developed for transfer pricing depending on the authority both attempting to reach arm’s length values. However, due to differing methodologies and standards, the transfer pricing value may not be suitable for customs value and vice versa. The one thing that is certain is that multinational companies need to comply with both Tax and Customs valuation rules.
3. Trade Agreements and the Specific Rules of Origin
. What is it?
A free trade agreement is a treaty between two or more countries where commerce in goods and services can be conducted across common borders, without tariffs or hindrances. However, capital or labour may not move freely. Member countries usually impose a uniform tariff on trade with non-member countries. Free trade agreements offer duty relief for many imported goods and eligibility often relies on the specific rules of origin to determine whether goods meet the required transformation to benefit from duty free status.
. Why is it important?
Trade agreements can offer significant cost savings in the form of reduced duty or even duty-free. It is important to note that importers must understand the legislative requirements and ensure the appropriate audit trails are in place when qualify goods for the benefits of the any agreement. Each agreement has a set of “Specific Rules of Origin”: that must be adhered to while maintaining the proof of origin for those eligible goods.
To take advantage of the benefits of these agreements and avoid costly penalties, importers and exporters must ensure compliance with the applicable rules and regulations of the agreement.
4. Customs Compliance, Verification and Audit
. What are they?
Compliance refers to conformity in satisfying official requirements of various customs services. Verification is providing evidence that confirms the accuracy of your submissions to customs, and Audit refers to a formal examination of records and documents.
. Why are they important?
Compliance, Verification and Audit help to establish your importer profile, thereby facilitating the movement of your goods across borders. All three processes provide for security, along with the proper collection of duties, taxes, and correct application of preferential duty tariffs so governments can protect selected industries. For the importer, these processes prevent supply chain bottlenecks, costly production downtime, or errors which may result in expensive penalties.
5. Export Controls and Documentation
. What is it?
There are many controls in place for exporting. Specific commodities such as softwood lumber, firearms and peanut butter are controlled and require a special permit. There could be the situation where the destination country may require an export permit.
. Why is it important?
You must understand whether the product and the destination of that product are controlled, regulated or prohibited and whether a permit is required to proceed with the export.
In Canada, for example, exporters are subject to the same rules and regulations as importers in regard to penalties. If you are operating as a Non-Resident Importer, you would also be subject to penalties for any situation involving fraud, negligence and gross negligence. Your company should take the appropriate steps to ensure compliance with Canada’s export laws and implement an internal export compliance program, have documented record keeping policies, have an internal audit procedure, and work closely with both your Customs Broker and Freight Forwarder.
Finally, never assume the steps you took six months ago for an export are the same steps you should take today – regularly review regulations!
Failure to understand and comply with these 5 (five) trade basic requirements, even without intent, can lead to fines, audits, seizures, inspections, investigations, and possibly imprisonment. These regulations have been established for setting rates of duty and to fulfill the requirements of international trade agreements.
Braver is a world class foreign trade and international affairs company based in Sao Paulo, Brazil. If you are looking for a strong partner to assist you on your overseas business management, contact our businesspeople and get to know more.