Business Logistics

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Business Logistics

• Customs International trade Impact on
  international movements of goods
• 25 March 2008

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Agenda

• Introduction principles
• Customs Efficient Supply Chain Management
• Case scenario on cost reduction strategies
• Trade security
• Corporate policy on Trade

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Factsheet

• 90s great focus on Central and Eastern Europe
  for production and growth in turnover
• Post 2000 Large corporations and SMEs go
  global
• global procurement
• export to emerging markets
• This presents new challenges
• Customs regulations impact goods flows and import
  taxes in emerging countries are usually very high
• The finance impact of so-called trapped duty
  has an increasing impact on the COGS (cost of
  goods sold)
• Possibilities for optimisation and cost
  reduction?

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Factsheet

• Businesses have an increasing dependency on their
  logistical partners (3PL/4PL)
• For warehousing and transportation
• For global representation to Customs
• Information sharing
• material master data customs data
• Commercial data invoicing
• Transport details
• High liabilities jointly and severally
• For pricing purposes landed cost determination
• Large importers and exporters may locally
  in-source their customs compliance but in such
  case the operating model is often a hybrid one
  (partly in-sourcing and partly out-sourcing)
• Large software providers have entered the space
  of customs management software

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Cost reduction in international trade is top
priority

• The three elements that drive how many import
  taxes are due
• Value of the goods
• Classification of the goods
• Origin of the goods
• Import taxes include
• Customs Duty
• Import VAT
• Excise Duty
• Anti-dumping Duty
• Other restrictive measures are import quota,
  import licenses (dual use goods)
• Export control procedures (dual-use goods, US
  regulations, etc.)

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Customs valuation

• Transaction value the price paid or payable
• To be added if not yet included
• Royalties and licenses, sales commissions
• Tools and supplies/assists free of charge
  supplied by the buyer/importer
• Packaging
• Transportation and insurance up to entry into the
  EU, etc.
• Can be excluded
• Buying commissions, reproduction rights in the
  EU, finance costs, etc.
• Alternative methods
• The value of identical / similar goods
• The re-sale minus value / Cost-plus value
• Reasonable means

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Classification - Origin

• The classification code of a product is the basis
  for the import taxes due as well as any other
  measures
• There is only one correct commodity code per
  product
• Examples play station, home cinema, plasma
  screens, etc.
• Origin is the nationality of a product and refers
  to where the product was
• Either wholly obtained, or
• Sufficiently processed to obtain the originating
  status
• Get legal certainty Binding Tariff Information
  (BTI) Binding Origin Information (BOI)

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Customs Duties Strategic Overview
Determine baseline duty / risk
Classification
Valuation
Customs
Special Procedures
Origin Preference
Reduces / Remove Duty
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Agenda

• Introduction principles
• Customs Efficient Supply Chain Management
• Case scenario on cost reduction strategies
• Trade security
• Corporate policy on Trade

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Customs Efficient Supply Chain Management (CESCM)

• Management priorities are defined around
• Cost Reduction Strategies
• Customs Efficient Supply Chain management
• Replacement for disappearance of export refunds?
• Risk Compliance Management
• Trade security programmes (AEO)
• SLAs with customs agents and freight forwarders
• SAP Global Trade Services or other technology?
• Supply Chain Facilitation
• Optimising Supply Chain Rationalisation for
  Customs
• Use of preferred trade programs, e.g. AEO, Trade
  Agreements etc
• Links to cost reduction, compliance and emerging
  markets
• Strategic Trade Planning
• Internal Building trade issues into strategic
  planning, eg sourcing
• External Lobbying, Advocacy, links to
  bi-lateral trade agreements

Customs and International Trade
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Customs Efficient Supply Chain Management (CESCM)

• Opportunity
• Customs duty represents a significant opportunity
  to reduce costs globally
• However, the current economic environment while
  providing a basis for reconsidering the
  commercial structure, also requires a very robust
  approach which must be commercially and
  technically sustainable
• This requires a globally co-ordinated strategic
  focus on business structure verus duty costs
• Central strategic planning to establish the
  optimum duty effective commercial structure for
  each territory
• Local implementation of globally developed
  structural building blocks

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Customs Efficient Supply Chain Management (CESCM)

• Goal is to achieve a globally consistent business
  model which minimises duty costs around the World
• This requires central planning of appropriate
  changes to the model in order to
• achieve optimum duty effective commercial
  structure for each territory ...
• without adversely impacting commercial
  objectives, and ...
• maintaining consistency with the companys Global
  transfer pricing strategy
• Key to the approach is the
• central planning of key initiatives
• central buy-in of key departments which are
  effected, e.g., quality, legal
• central preparation of robust legal, accounting,
  tax and customs technical support for all
  strategies to be rolled out
• local implementation of the appropriate
  combination of the initiatives in question on a
  market by market basis

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Customs Efficient Supply Chain Management (CESCM)

• Customs Efficient Supply Chain Management
• Recognises that commercial structure must be
  driven by operational and market realities
• Puts in place the optimal customs duty solution
  to leverage highly significant duty savings from
  the optimum commercial structure
• Facilitates repatriation of overseas funds in a
  tax efficient manner
• Interacts with all other areas of taxation
  (transfer pricing, corporate income tax,
  withholding tax, VAT and sales tax) to minimise
  its impact on the overall tax strategy being
  applied by the company

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Existing CESCM environment

• Some level of duty efficient structuring has been
  carried out by many companies in the industry
• However
• On a territory by territory basis
• On an ad-hoc basis
• Such an approach has the following disadvantages
  
• It is not centrally planned and implemented with
  the support of Head Office and of all key
  departments, e.g., tax, legal, warranty, transfer
  pricing, finance
• If not consistent globally, it is more difficult
  to defend and far more vulnerable to attack by
  local customs authorities
• It is not leveraged to full effect, if not rolled
  out globally
• The current economic climate requires a much more
  robust and carefully planned approach.

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Customs Efficient Supply Chain Management

• The key structural building blocks include the
  following
• Impact on valuation (link with TP)
• Distribution Rights
• Territorial Franchise Fees
• Royalty agreeements and license fees
• Local Advertising and promotion funding
• Global marketing cross charges
• Global research cross charges (prospective)
• Bifurcation of Finance costs
• Trapped duty duty on raw pack

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Customs Optimization Strategies for Developed and
Emerging markets
Emerging markets
Developed markets
Global sourcing and export sales
Global sourcing and export sales
Visible duty
Use of preferential trade
?
agreements for duty free
?
Eliminate duty on raw and pack
access
Trapped duty
Valuation
Classification of
?
Recover duty trapped in
?
finished products
to
local purchases or
Advanced duty planning
minimise duty
preference imports
Use advanced planning techniques to create
procurement cost advantages, e.g. equivalence
?
?
Managing risk in volatile Environment, e.g.
compliance, FCPA, penalties etc
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Agenda

• Introduction principles
• Customs Efficient Supply Chain Management
• Case scenario on cost reduction strategies
• Trade security
• Corporate policy on Trade

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Trapped Duty - the hidden cost
Issue local purchasing of Packaging/Flavours
and ingredients for which raw material originates
from non-EU, e.g. aluminium foil used for wrappers
Pays Duty on Imports of Aluminium (7,5)
Trapped Duty in purchase Price
Exports 40 outside EU No recovery of original
duty
Packaging SupplierManufacturesAluminium Foil
EU Producer

• Solution
• Use Producer usage or export documents to
  avoid/recover duty paid by the supplier
• Supplier imports exempt quantity based on
  Producers documents for re-export

• Application Materials
• Packaging Plastics, Metals, Foils etc
• Ingredients All ingredients and materials
• Application Sectors
• Food, beverages, confectionery products

Geography
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Case scenario
Chinese manufacturer
Denim from Portugal
40 EUR
100 EUR
Import duty 12 EUR
Distribution hub in Belgium
60
40
Supplies to EU Customers
Supplies to non-EU Customers
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Case scenario
Export under OPR
Chinese manufacturer
Denim from Portugal
Re-import under OPR - Import duty (10040) 12
7,2 EUR
40 EUR
100 EUR
Distribution hub in Belgium
60
40
Supplies to EU Customers
Supplies to non-EU Customers
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Case scenario
Export under OPR
Chinese manufacturer
Denim from Portugal
40 EUR
100 EUR
Distribution hub in Belgium Customs warehouse
Re-import under OPR upon removal from customs
warehouse. Import duty (10040) 12 60
4,32 EUR
60
40
Supplies to EU Customers
Supplies to non-EU Customers
Reduction in duty is top line saving
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Case scenario
Export under OPR
Chinese manufacturer
Denim from Portugal
40 EUR
90 EUR
Hong Kong buying Agent
100 EUR
Distribution hub in Belgium Customs warehouse
Re-import under OPR upon removal from customs
warehouse. Import duty (9040) 12 60
3,6 EUR
60
40
Reduction in duty is top line saving
Supplies to EU Customers
Supplies to non-EU Customers
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Case scenario
Manufacturer in Sri Lanka
Denim from Portugal
40 EUR
100 EUR
Import duty 0 EUR
Distribution hub in Belgium
60
40
Supplies to EU Customers
Supplies to non-EU Customers
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Case scenario Emerging markets
EU production
Customers in Russia

• Issues to consider?
• Value of the goods price paid or payable (US
  FCPA regulations vs. Belgian regulations)
• Import taxes how to optimize using legal
  provisions ?
• Things to consider
• Classification of goods
• Local distribution (assembly) activity
• Customs inspections on Russian border cargo
  inspection

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Case scenario Global economy
Developed Markets
CEEMEA
Latin America
Asia

Developed Markets
CEEMEA
Latin America
Asia
Cocoa powder, butter, paste 7.7 - 9.6 Flavours
4.5 -
Cocoa Paste 5 Pasta 15 Milk Powder 15
Cocoa misc 10-14 Pasta 16 Milk Powder 16-27
Coffee Beans 100 Sugar 60 Milk Powder 60
Raw Materials
Finished Goods
Soup 15 Kitkat 15 Boiled Sweets 21
Soup 16-18 Kitkat 18 Water 20
Soup 30 Kitkat 30 Water 20
Soup 11.5 Kit kats 9 Coffee (instant) 9
Packaging
PET 14
PET 15 - 30
PET 2.5
PET Preforms 6.5
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Agenda

• Introduction principles
• Customs Efficient Supply Chain Management
• Case scenario on cost reduction strategies
• Trade security
• Corporate policy on Trade

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What does the future hold ?

• The focus of the Customs Authorities is moving
  away from the collection of duty to the safety
  and security in the international trade
• The Customs Authorities are also introducing a
  fully paperless customs environment with
  dedicated control mechanisms. The European
  Commission has introduced a multi-annual
  strategic plan (MASP)
• As a consequence, Customs and Trade has become a
  strategic objective for the business

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EU MASP
2009 2014 Automated Import System (incl.
centralized clearance) / Automated Export system
(EU)
Mid 2005 WCO SAFE Framework / Customs Security
Program (EU)
2006 2009 Common Risk Management Framework
(EU)
Jan 08 AEO (EU)
2001
2014
Mid 09 Pre-arrrival and pre-notification (EU)
2001/02 C-TPAT (US)
Mid 2003 NCTS - First step to a paperless
environment (EU)
2006 2009 Import/Export Control system (EU)
2007 - 2011 Single Authorisation for simplified
procedures (SASP, formerly known as SEA) (EU)
2005 2014 Single window (EU)
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Authorised Economic Operator - what is it?

• The World Customs Organisation as well as the
  European Customs Authorities are responsible to
  closely guard our borders to combat the terrorist
  threat, imports of counterfeits and pirate goods,
  illegal drug imports, fraudulent imports, etc
• Equally so, the Authorities do not wish to
  adversely affect trustworthy and compliant
  businesses. The AEO accreditation is proof of
  such status and also gives access to extra
  customs simplifications
• It is still early days though everywhere in the
  world equivalent programmes are being kicked off
  and Authorities are discussing green lane
  operating models which will facilitate a fast
  track customs clearance and thus reduced lead
  times

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AEO programmes pop up everywhere
Initiatives resulting in approved supply chain
green lanes
AEO (EU)
Pre-arr/Pre-dep (EU)
CSP (EU)
FAST (USA-CAN)
CSI (USA)
AEO (JAP)
C-TPAT (USA)
24hours rule (USA)
STP (SGP)
102 (USA)
FAST (USA-MEX)
AEO (KE)
(Selection of initiatives)
Blue Line (BRA)
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Who should apply for AEO and where ?

• Any party involved in international supply chain
  is eligible to AEO
• In practice
• EU establishment required (exception regional EU
  offices of airline/shipping line)
• You should apply where you are established, where
  you manage your logistical/customs compliance
  (keep your records)

source EU taxud 2006/1450
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Why does a business go for AEO?
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AEO benefits operationally

• Improved management of risks, examples are
• SLAs with freight forwarders and customs
• Split-up of contracts by service types such as
  compliance, customs clearance
• Avoidance of increased inspections (risk
  assessment framework).
• Inspections cause time delay 1 to 3 hrs delay
  for trucks
• Extra admin cost
• Opportunity costs for internal resources
• Impact on lead time certainty increased
  inventory requirement (buffer stocks)
• AEO should lead to a reduction of logistics
  overhead feasible through review contracts and
  increased efficiencies

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AEO criteria crossing the line
People know how
Processes compliance
TechnologyAudit trail
Trader Information - Customs Processes
Appropriate customs compliance record
Governance, Risk and Compliance
Authorised Economic Operator (AEO)
Accounting Logistical accounting and controls
Financial solvency
A safe and secure physical supply chain
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Agenda

• Introduction principles
• Customs Efficient Supply Chain Management
• Case scenario on cost reduction strategies
• Trade security
• Corporate policy on Trade

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Building a corporate strategy

• Corporate Priorities and Focus is increasingly
  touching Customs and Trade
• Having a reliable supply chain makes or kills a
  business
• Financial Risks, Internal Controls and other
  regulatory requirements (SOX, JSOX, AEO, C-TPAT,
  ISO, TAPA, etc.)
• Product and Supply Chain Integrity (Counterfeit,
  Terrorism, Commercial Threats)
• Bribery and Anti-Corruption Risks and Controls
• Highest Revenue Growth increasingly from emerging
  markets where customs and border processes still
  heavily impact physical supply chains
• Making global procurement activity and export
  sales cost efficient is an absolute priority and
  customs regulations often offer potential for
  cost reduction

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Building a corporate strategy

• What is the current and future role of the
  logistical company?
• Render logistical services
• Integrate with their clients operational model
• Help the clients to streamline their processes,
  reduce cost and lead times
• Challenges
• Most logistical companies are one brand though
  locally managed with distinct processes and
  strategies
• Global companies require a flexible but
  streamlined approach

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Contact details

• Franky De Pril
• Partner, Global Strategic Trade Team
• Brussels, Belgium
• 32 497 05 10 96
• e-mail franky.de.pril_at_be.ey.com
• Chris Horckmans
• Director, Customs International Trade
• Brussels, Belgium
• 32 479 98 43 69
• e-mail christina.horckmans_at_be.ey.com

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Thank you