The Trans-Pacific Partnership Agreement And New Trade Agreements Will Change The World Of Trade Customs, Trade & Risk Management Services Ltd. USA Customs, Trade & Risk Management Services (Vietnam) Co. Ltd. Nestor Scherbey, LCB 1
Background Nestor Scherbey Licensed U.S. Customs Broker since 1979 with National Permit and District Permits Foreign Trade Zone Manager, Volkswagen of America Director, Global Trade Operations, Amway Customs Committee Representative AmCham Thailand Advised U.S. Customs on revisions of U.S. Customs Regulations governing Foreign Trade Zones and Customs Valuation Advised Office of U.S. Trade Representative on North American Free Trade Agreement Origin Rules (NAFTA) Advised USTR on TPP Certification of Origin procedures Developed Advisory Opinion documents for World Customs Organization (WCO) TCCV Experience with more than 100 customs audits, challenges and penalty cases in 51 countries 2
3
The TPP Will It Change Strategies For Companies In Vietnam? Parties: Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, Vietnam. Korea and Thailand have expressed intentions to join. Together, these represent 39% of the global economy (combined GDP of USD 28.1 trillion). Global income growth estimated at USD 223 billion per year by 2025. Additional world exports estimated at USD 305 billion per year by 2025. Vietnam as a source country and manufacturing center for exports is a main beneficiary. 4
U.S. FTA s Significantly Differ From ASEAN and other Asian Agreements ASEAN and other Asian FTA s, Bilateral and Multilateral trade agreements operate through official issuance of Certificates of Origin by state agencies under relatively simpler rules. Capacity Utilization from 10% to 29%. Vietnam s is 22%. U.S. style FTA s such as NAFTA, KORUS, CAFTA-DR and others have much more complex and very technical Rules of Origin that require strategic planning supported by specialist customs expertise. They yield much higher capacity utilization. TPP will be similar to KORUS, NAFTA and CAFTA. The new Rules of Origin incorporate all of the rules of the Harmonized System, as well as, those of Customs Valuation. Higher standards will be required of government officers and companies. 5
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements Unfortunately, the already technically difficult rules of HS Classification and Customs Valuation are combined in new ways for all 97 Chapters of the HS in these agreements. The Rules of Origin of these FTA s add very technical new additional specific rules and numerous exceptions found in special Annexes. Often, the exceptions to the already very complicated additional rules have exceptions to the exceptions! 6
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements An example of a Rule of Origin from CAFTA-DR concerning changes in HS classification of nonoriginating materials due to processing within an eligible country for textile and apparel goods, in order for the good to qualify. 63.01 63.02 A change to heading 63.01 through 63.02 from any other chapter, except from heading 51.11 through 51.13, 52.04 through 52.12, 53.10 through 53.11, chapter 54, heading 55.08 through 55.16, 58.01 through 58.02, or 60.01 through 60.06, provided that the good is cut or knit to shape, or both, and sewn or otherwise assembled in the territory of one or more of the Parties. 7
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements An example of a Rule of Origin from KORUS concerning changes in HS classification and/or Regional Value Content due to processing within an eligible country for non-originating materials that is necessary for the relevant good to qualify. 91.02 91.07 A change to heading 91.02 through 91.07 from any other chapter; or A change to heading 91.02 through 91.07 from heading 91.08 through 91.14, whether or not there is a change from any other chapter, provided that there is a regional value content of not less than: (a) 30 percent under the build-up method, or (b) 40 percent under the build-down method. 8
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements Free trade is not really free. New record-keeping requirements (typically 5 years) will implemented, along with new customs penalty authority. A U.S. KORUS example: False certifications of origin under the United States Korea Free Trade Agreement: (1) In General Subject to paragraph (2), it is unlawful for any person to certify falsely, by fraud, gross negligence, or negligence, in a KFTA certification of origin (as defined in section 1508 of this title) that a good exported from the United States qualifies as an originating good under the rules of origin provided for in section 202 of the United States Korea Free Trade Agreement Implementation Act... 9
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements In the U.S., importers are subject to civil customs penalties risks that range from 20% of the value of the goods wrongly certified up to 100% of the value of the imported goods. In cases involving fraud, there is also the risk of criminal prosecution involving both fines and imprisonment for up to 5 years (8 years if domestic or international terrorism is involved). Producers and exporters who issue false certifications of origin are subject to the same customs penalty risks as importers. In addition, record-keeping violations involve civil penalties ranging from USD 10,000 to USD 100,000 per violation. Willful or other failure to provide a required document within a reasonable time is a violation. 10
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements The WTO Trade Facilitation Agreement will require Vietnam to change its legal framework to implement discipline with customs penalties. However, the new FTA s will also require introduction of new customs penalties to enforce the requirements of the agreements involving certifications of origin, recordkeeping, enforcement of intellectual property rights and other provisions of the agreements. The new FTA s will also establish new procedures for international customs cooperation and verifications under the agreements to deter fraud and enforce origin certification procedures. 11
U.S. Style FTA s Significantly Differ From ASEAN and Asian Agreements It means that customs services from the U.S., Canada, Japan, Australia and other TPP partners will provide technical assistance to GDVC and request verifications of origin certification by Vietnamese producers and exporters for exports to these countries. It also means that verification teams of audit officers from these countries will come to Vietnam to carry out on-site verifications at the offices and factories of Vietnamese producers and exporters and, will be assisted by MOIT and GDVC officers with such verifications (audits). Vietnam Customs will also similarly have the right to verify compliance in TPP countries. They have been shy about this until now but, change is 12
The New Trade Agreements And Trade Facilitation Are Transforming Vietnam Customs And Other Agencies The new Customs Law passed in 2014 took effect on January 1, 2015. A new National Decree Guiding the Implementation of the Customs Law took effect on March 15, 2015. New Customs Circular 38/2015/TT-BTC took effect on April 1, 2015, as did several others. It annuls and replaces 13 previous Circulars and represents a major overhaul of Vietnam s customs regulations to prepare for implementation of the new agreements. The new regulations also implement the modernization of Vietnam Customs from a traditional port-centered transactional service, to one implementing customs risk management and Post-Clearance Inspections (Audits) beyond the level of local Sub-Units. 13
Increasing Customs Valuation Risk Customs authorities are not required to automatically accept prices declared upon invoices as appropriate customs values. New Customs Circular 39/2015/TT-BTC that took effect on April 1, 2015 provides much more detailed guidance on this for the first time in Vietnam. In a Post-Clearance Inspection or audit, Customs will scrutinize the circumstances of trade and ownership relations between the buyer and seller, demand and review all contracts, purchase orders, proof of payment, accounting records, intercompany correspondence and other information and documents before finally accepting such prices as customs values. Because an exporter or importer have been invoicing prices and conducting international trade transactions for one or more years in certain ways does not mean that such transactions are final or that a customs valuation challenge cannot occur. 14
The Ongoing Changes Involve New Time Limits And Fines Decree No. 127/2013/ND-CP On Penalties for Administrative Violations and Enforcement of Administrative Decisions Pertaining to Customs Controls of October 15, 2013 took effect on December 15, 2013. This Decree provides that the time limit for imposing penalties for customs tax evasion or fraud that is not subject to criminal prosecutions is 5 years from the date the violation is committed and, the taxpayer is also liable for duty and tax arrears for a period of 10 years from the date of violation. With the technical assistance for customs modernization Vietnam is receiving from the WTO, World Bank, U.S. and other sources for implementation of the new trade agreements, enforcement under the new provisions will inevitably increase. 15
New Time Limits And Fines This means that the importer or exporter is subject to additional customs tax impositions for a 10 year period and, to an additional fine or penalty that can range from 10%-20% of the amount underpaid up to an amount equal to the total amount of customs tax evaded for a period of 5 years from the date of violation(s), increased further if aggravating factors are found. 16
New Time Limits And Fines The Decree provides for an elaborate schedule of fines for a host of violations including: late fulfillment of customs procedures; failing to provide correct information with customs declarations about the descriptions, quantities, HS classifications, weights and origins of goods; for untimely re-exports or re-imports; for declaring false increases of the intended quantities of processed products or intended quantities of products made of imported materials or supplies of the export processing company. 17
What should companies do to prepare long term strategies for trade agreement optimization and compliance? Analyze current and future products in view of destination export markets for trade agreement optimization. Accurately apply the Rules of Origin for trade agreement purposes to determine whether current materials, components and manufacturing processes result in eligibility for trade agreement purposes in target markets. If you begin with inaccurate HS classification or value calculations of Regional Value content, everything else will be wrong. 18
What should companies do to prepare long term strategies for trade agreement optimization and compliance? Perform cost-benefit analyses by product and be prepared to change materials or components sourcing and to alter manufacturing processes to be able to take advantage of trade agreements preferential treatment. Establish a global trade management database and recordkeeping documentation audits will be by foreign customs authorities and / or the local customs service with technical assistance from foreign customs services. 19
What should companies do to prepare long term strategies for trade agreement optimization and compliance? Bring your seat backs to the full upright position and fasten seat belts there is a period of transformational turbulence ahead with very significant changes in trade rules, regulations and processes too numerous to list. Carefully review existing import and export operations, international contracts, payment and other practices, documentation and compliance processes to prepare for the new trade agreements and new rules. It is better to be proactive now and have a checkup, rather than waiting until you are in the hospital. 20
Thank You! For assistance, please contact: Nestor Scherbey Customs, Trade & Risk Management Services (Vietnam) Co., Ltd. Tầng 16 Saigon Tower 29 đường Lê Duẩn Quận I, TP Hồ Chí Minh, Việt Nam Tel: +84 (0)8 3520 7790 Fax: +84 (0)8 3520 7604 E-mail: nestor@ctrms.com www.ctrms.com USA: Tel: +1 803 389-8353 Fax: +1 803 339-1928 21