Customs compliance has gained a seat at the table as an essential part of companies’ business strategies.
While in the past customs management has been perhaps seen as a burden, these days, there is a surge of recognition in the value that strategic customs planning can bring, if properly handled. Discussed now in board rooms across companies, customs is becoming a vital part of business strategy. But what is exactly customs compliance? And how can it be done properly, or even in a way that is a commercial advantage?
What is customs compliance?
According to the Merriam Webster dictionary the word customs typically define “duties, tolls, or imposts imposed by the sovereign law of a country on imports or exports”. Trade and customs compliance involves adhering strictly to such rules and regulations established by the countries from which people are importing and exporting goods from and to. These rules are numerous and ever-changing. Since the 2008 financial crisis, more than 7000 new trade barriers and regulations have been introduced. Moreover, as specified by the European Union, “in recent years, there has been an increasing emphasis on the importance of customs controls for non-financial purposes such as product compliance and safety, security health and environmental protection”. This is showing a bigger focus on ESG being strengthened within trade regulations, including rules on forced labour, deforestation, carbon taxes, etc. Consequently, a lot has changed in this space with companies having to keep on top of the latest decisions, in addition to their everyday challenges to grow and keep their business healthy.
There are many ways in which businesses manage their customs compliance. Companies will often outsource their transactional customs business (preparing and submitting customs declarations, etc) to customs brokers. But they nevertheless also need in-house capability to keep on top of key questions, such as “How much duties do I need to pay?”, “Are these goods prohibited or not prohibited?”, “Do I need to get a permit or a licence?”, “How much customs duties am I actually paying?” “What free trade agreements could I qualify for?”, "Am I submitting the correct data?" etc. For some, these are managed in-house within their supply chain departments, while for others the support and expertise of a knowledge expert to optimise their customs is something they routinely seek.
How can customs compliance be managed within global trade?
In-house compliance management resources are often focused on managing the day-to-day, not necessarily having the bandwidth to deep dive and scout the opportunities to strengthen their compliance, simplify their processes, or gain advantages from a trade agreement in a particular country, etc. Even the most sophisticated, well-structured compliance departments teams, who are real experts in their core products and geographies, might experience knowledge gaps within their compliance management. This can result in the need to benefit from customs consultants, to support on a specific piece of work. “Many companies have the bandwidth to handle their day-to-day business but are not able to deep-dive into assessing the potential underlying risks and liabilities or seeking out opportunities to make a real impact on the bottom line through customs duty optimisation. This is where expert advisors can add real value, helping to avoid risk, and deliver savings.” says William Petty, Global Product Development Manager within Global Trade & Customs Consulting at Maersk. “It’s important for businesses to avoid a situation where they only realise, they need to bring in expertise after they have suffered a penalty.
The cost benefits of customs
Customs can be an opportunity, and the first step is knowledge. When a business is aware of the options available to benefit from proper customs management, its strategy can be forever changed. Here is how:
- Free trade agreements analysis: The International Trade Administration describes a free trade agreement (FTA) as “an agreement between two or more countries where the countries agree on certain obligations that affect trade in goods and services” and that define the goods that can be imported at zero percent duty, or a reduced duty rate. This can drive millions of dollars of savings that go straight to a company’s bottom line. Free trade agreements are being negotiated all the time, and there is no single global regulation for all. So, it is a complex web to navigate. To qualify, businesses need to make sure they comply with certain criteria, such as rules of origin, and they need to make sure they can document all of this. The cost benefit of qualifying for a trade agreement is not always a given, so having a proper free trade agreement analysis done can therefore be a great advantage.
- Duty recovery: This is another way for business to optimise their customs duty payments. There are several ways for businesses to recover duties that have been already paid, depending on the national legislation. For example, if a company imported goods and paid duties on it, but then reject those goods, or in the case of US and some other countries simply do not use those goods, the company can re-export or destroy them and recover the duties. It is also possible to recover duties that have been overpaid. These opportunities can be advantageous and are available in most economies under certain criteria. How much can be recovered depends on what kind of goods the company is importing, how much volumes, how valuable it is, what are the duty rates, etc. but, regardless, having ample knowledge on such option is a commercial benefit.
- Duty suspension: This allows businesses to delay/ suspend the payment of duties. This can deliver real benefits to businesses in terms of cashflow. There are a number of scenarios in which businesses can suspend duty payments. For example if they are only importing the goods temporarily for a specific purpose and will then re-export them again, or if they want to put their goods into a “bonded” warehouse or free zone and only pay duties when the goods are actually sold into the market, or if a business imports goods to be processed or repaired), such businesses can qualify for an inward processing regime. All these options are not automatic, they require businesses to qualify, and to maintain good compliance. But it is always worth assessing the potential benefits to see how these options could boost your cashflow and optimise your duty payments.
How can customs compliance boost business?
Aside from the cost savings opportunities mentioned above (free trade agreements, duty suspension or recoveries) used by businesses to boost and manage cash flow, there are other benefits that make customs compliance a commercial advantage:
- Risk control: Correct customs compliance can help a business stay ahead of risks and minimise their exposure to penalties and liabilities. Customs violations can lead to substantial penalties, fines, and even the seizure of goods, and can even damage a business’ reputation if the issue is one of public interest, such as compliance with Environmental, Social & Governance regulations.
- Logistic efficiency: Being smart with custom compliance can help with supply chain efficiency. Compliant businesses experience fewer unpredictable delays at borders and can even access special “fast track” procedures by qualifying for what are called “trusted trader schemes”. Speedy and predictable border clearance not only saves time and cost, but also by letting a brand keep their delivery promises to customers, it helps them maintain great stakeholder and end-consumer’s relationships.
- Expansion and growth: When expanding into new geographies, businesses need to make sure they are compliant with all the regulations and have the right permits and licences. But companies can use strategic customs planning further upstream to understand the potential regulatory burdens and optimisation opportunities in different countries, which they can use to help drive the decision on where to go, and where to grow.
Summarising, strategic customs planning can help a company keep on the right side of compliance, as well as benefit from the sort of optimization and strategic commercial advantage that is available.
To manage such complexity, an experienced provider with a global presence can support a business to turn customs compliance challenges into great opportunities.
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