AEC 2015 Prospects: Qualifying for FTA Tariffs

(Second in a five-part series)

By Emmanuel C. Alcantara

First Published in Business World (04/21/2014 – p.S1/4)

ANY SAVVY executive knows that a deal isn’t done until the money is in the bank. The same may be said for the Association of Southeast Asian Nations (ASEAN) Trade in Goods Agreement (ATIGA), where negotiated tariff cuts are only meaningful when traders are able to use them.

Many more tariff cuts await enterprising companies in 2015 for goods including rice, sugar, and automotives, as discussed in the pilot of this five-part series on the ASEAN Economic Community (AEC). The next question, however, is how can traders qualify for such preferential tariffs?

So far, there has been mixed feedback on whether companies really take advantage of free trade agreements (FTAs) in the region. According to a 2009 study by Masahiro Kawai and Ganeshan Wignaraja of the Asian Development Bank, only 20% of companies surveyed in the Philippines said they were using FTAs, a rate bested by the 25% utilization in Thailand. Meanwhile, a figure from the ASEAN Secretariat quoted by the Department of Trade and Industry places the Philippines’ utilization at a less dire 41.15% in 2010.

One of the reasons firms reportedly hesitate to use FTAs is the cost associated with obtaining a Certificate of Origin, which proves that a certain good is made up of inputs from participating FTA members. Only then can it qualify for zero or lower tariffs. It is the exporter’s responsibility to secure this certificate so that the importer at the good’s destination can enjoy the preferential tariffs.

Obtaining the Certificate of Origin can be condensed into three steps. First, a trader must determine which FTA to use and what tariff rate is assigned to the product in question. For goods traded among Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam, traders should apply the provisions of the ATIGA. Firms would also do well to take a look at ASEAN FTAs with Australia, China, India, Japan, Korea, and New Zealand if their business involves these countries. The right tariff code and tariff rate are stated on the importing country’s Schedule of Tariff Commitments, which is usually posted as an annex to the agreements on the ASEAN Web site.

The second step is to prove that the product to be exported is produced mainly in the ASEAN. Two criteria are used to indicate this: either (1) the item derives not less than 40% of its inputs from the region — a figure called the Regional Value Content (RVC), or (2) the non-ASEAN imported input was substantially transformed such that the tariff classification changes at the four-digit level.

If the exporter wants to qualify for preferential tariffs by demonstrating an RCV of not less than 40%, this can be computed directly by dividing the sum of the ASEAN material cost, direct labor, direct overhead, other costs, and profit over the good’s Freight on Board (FOB) price. Exporters are also allowed to meet the RVC rule through an indirect method of calculation wherein the value of non-originating materials is subtracted from the FOB price and the difference is divided by the FOB price. Supporting documents on these are needed for the application for and release of a Certificate of Origin.

Alternatively, an exporter may qualify for preferential tariffs by demonstrating a change in the tariff heading of the finished good. For instance, leather lining imported from Spain falls under Harmonized System Code (HSC) 6406.10.100. Assume that the leather lining is manufactured in the Philippines into shoes for export to the ASEAN. Since leather shoes are classified under HSC 6403.20.000, the first four numbers are different from that of the leather lining, and thus represent a substantial transformation. Because of this, the product is now eligible for preferential tariffs under ATIGA.

Once the Certificate of Origin is obtained, the third step is to send it to the importer who will then present the document to his or her country’s customs authority. Only then can the good enter its destination at the lower or zero tariffs provided by ATIGA or the other ASEAN FTAs.

Understandably, traders may find the process cumbersome, especially if they deal with fast-moving or perishable goods that cannot afford to be delayed by paperwork. Traders may also run into difficulties if they work with fledgling suppliers who may not be familiar with the systems needed to track the origin of inputs. This can be the case especially when a company applies for a certificate for the very first time for a certain product as there may be verification processes and ocular inspections to hurdle. While it can be faster to obtain a certificate for recurring shipments, it is important to note that Customs reserves the right of inspection whenever it deems it necessary. Recognizing this, some ASEAN members are trying out a self-certification program to make it even easier to avail of the preferential tariffs.

The Philippines, in particular, is part of the second pilot project on self-certification which aims to altogether do away with the process and instead allow qualified exporters to merely declare that their goods indeed comply with the rules of origin. Under Bureau of Customs (BoC) Administrative Order 06-2013 dated Dec. 12, 2013, exporters who wish to be certified must, among others, have been exporting to any ASEAN member state for at least a year, have officers who have sufficient knowledge and competence in the application of rules of origin and have undergone training on this pilot project conducted by BoC, and is a legitimate manufacturer or producer.

It should be emphasized, however, that the second pilot project counts Indonesia and Laos as the other participants, and in the meantime, self-certifications in the Philippines will only be honored in these participating countries. A separate pilot project implemented among Brunei, Malaysia, Thailand, and Singapore will end on Dec. 31, 2015. Hopefully, this will be replaced by a region-wide self-certification process.

This innovation — along with many others in the pipeline, such as the ASEAN Single Window for faster Customs clearance, harmonization of members’ product standards, and engagement with the private sector on non-tariff barriers — should further improve the ease and transparency of FTA usage in the region. A business-friendly regime for trade in goods, after all, is an essential complement to a thriving trade in services — which will be the topic for next week’s installment of this AEC series. Businesses have much to look forward to on the road ahead.

Emmanuel C. Alcantara is the head of the tax division of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.