An importer’s guide to free trade agreements

By Victor C. De Dios

First Published in Business World (12/16/2013)

WITH the entry into force of regional Free Trade Agreements (FTAs), importers have a window of opportunity to reduce costs by availing themselves of preferential customs duty rates. As such, it is very important for importers to understand the existing FTA benefits and the mechanics for qualifying for them.

THE BASICS OF TARIFF
In customs parlance, a tariff is a tax on either exportation or importation of goods. In the Philippines, tariffs are mainly associated with customs duties on imports as the government rarely imposes them on exports.

Upon importation, an importer must declare the dutiable value of the goods, upon which the appropriate customs duty rate is applied, to arrive at the duties payable. Based on the 2012 ASEAN Harmonized Tariff Nomenclature (AHTN), customs duty rates depend on the tariff classification of the goods and may range from 0% to as much as 50%. These customs duty rates are often referred to as the “regular rates” or the “most-favored nation (MFN) rates”.
Customs duties paid by an importer generally form part of the cost of the goods. They also form part of the landed cost, upon which the 12% VAT on importation is applied.

PREFERENTIAL CUSTOMS DUTY RATES UNDER FTAS
The regular or MFN customs duty rates may yield to the application of “preferential customs duty rates” under an FTA. Under existing FTAs, member states commit to the implementation of schedular tariff elimination or reduction plans, which in turn entitle importers in member states to avail of lower customs duty rates.
Currently, the Philippines is a party to the following FTAs:

• the ASEAN Trade in Goods Agreement (ATIGA), an improvement to the prior ASEAN Free Trade Area-Common Effective Preferential Tariff Scheme. It is an FTA among Association of Southeast Asian Nations members — Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore, Thailand, Cambodia, Laos, Myanmar and Vietnam;

• the ASEAN-China FTA;

• the ASEAN-Korea FTA;

• the ASEAN-Japan Comprehensive Economic Partnership;

• the ASEAN-Australia and New Zealand FTA; and

• the ASEAN-India FTA.

The ultimate objective of these FTAs is to promote the free flow of goods within the trade area. This is done through the gradual reduction or eventual elimination of customs duties on a majority of goods traded within a free trade area (subject to a deferred and flexible schedule of implementation for certain member states).

With the implementation of FTAs, importers and exporters alike, whether stand-alone or part of a multinational group, can further study if their trade transactions qualify for the benefits of tariff or duty minimization under a particular FTA. Philippine importers can then focus on the benefits of sourcing imports from FTA member states in order to import at lower costs, while Philippine suppliers and exporters can focus on gaining a competitive advantage by directing sales to FTA member states.

REQUIREMENTS FOR QUALIFYING FOR PREFERENTIAL CUSTOMS DUTY RATES
Using the preferential customs duty rates under a particular FTA is not automatic. There is a need to establish that the imported goods actually originate from an FTA member state. The pertinent origin criteria are found in the Rules of Origin of each FTA.

Substantively, under all FTAs, goods are considered “originating” from a member state (i) if they are wholly obtained or produced in said member state, or (ii) if, after processing in that member state, the goods are compliant with the minimum Regional Value Content requirement (which is generally 40% of the free-on-board [FOB] value of the goods). For some FTAs, goods are also considered “originating” in accordance with the more technical change in tariff classification rules or product-specific rules.

In all cases, regardless of the substantive criteria for meeting the origin requirement, securing a Certificate of Origin (CO) in accordance with the Operational Certification Procedures of each FTA is required in order for the preferential customs duties to apply.

Foreign suppliers can obtain COs from the customs authority of the exporting country to entitle Philippine importers to preferential customs duties upon importation into the Philippines. In the same manner, Philippine suppliers and exporters can obtain COs from the Bureau of Customs (BoC) to entitle their foreign buyers to preferential customs duties in the importing country.

CUSTOMS AUDIT CONSIDERATIONS
Every importer should understand that a claim for entitlement to preferential customs duties can be the subject of review by an examiner at the customs border and by the Post-Entry Audit Group (PEAG) during a post-entry audit.

At the border (prior to release of the goods from the BoC), the customs examiner is tasked to perform a routine check of an importer’s declarations in the import entry. This includes a review of the correctness of the customs duty rates, which, if found to be preferential under an FTA, should be supported by a CO. Hence, in order to maintain entitlement to preferential customs duties at the border, an importer should specifically attach the CO to the importation documents submitted to the examiner.

Notably, clearance at the border is without prejudice to an audit by the PEAG. Hence, assuming that an importer hurdles the examination at the border, the PEAG can still raise issues in a post-entry audit generally within three years from the date of importation.

Similar to an examination at the border, the PEAG can review the importer’s entitlement to preferential customs duties, as well as the availability of COs at the time of audit to maintain the entitlement.

In case of failure to present COs at the time of audit, an importer runs the risk of a possible deficiency assessment for customs duties and VAT, as well as possible administrative penalties for failure to keep records as provided for under the Tariff and Customs Code of the Philippines, as implemented by Customs Administrative Order No. 4-04.

With customs audit procedures in place, proper documentation is vital to importers’ customs risk management. It is thus imperative for importers to maintain copies of COs and other importation records until a customs audit is completed in order to minimize risks of deficiency assessment and administrative penalties.

Victor de Dios is a tax senior director at 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.