Compliance Strategy GoesBeyond Following the Rules

By Peter Liston

The difference between basic trade compliance and a comprehensive compliance strategy can be measured in millions of dollars. Basic competency in completing import/export paperwork is just the baseline for entering the international marketplace. Success depends on understanding the markets, legal requirements, and tax implications. Only then can you develop market-specific strategies that help your company succeed.

Import/Export Paperwork Is Just the Beginning

Basic trade compliance consists mainly of paperwork — lots of paperwork that must be completed correctly, on time, every time. It's no simple thing: Each country or trade zone has its own documentation requirements, product codes, and regulations. Product classification is mostly standardized because countries use the Harmonized System (HS) developed by the World Trade Organization to classify traded products. The word "mostly" is important.

For instance, India uses the basic HS system but adds its own coding requirements. Products bound for the Indian market must carry Indian Trade Classification HS codes (ITC-HS). India has many trade protections for domestic industry, and tariffs differ according to the product's end use. For example, gold wire for industrial manufacturing has a specific ITC-HS code, while the same gold wire for jewelry manufacturing has a different one. The wrong code can increase the tariff by 10 percent or more.

Here's another example of coding/paperwork problems. Let’s say one of our clients has six server towers stuck in customs in Brazil due to import paperwork errors. Now, the large OEM may have to destroy the towers because they can't be used in Brazil and can't be brought back into the US. These paperwork errors leave them in customs limbo.

Develop Country-Specific Trade Strategies

Even countries with strong domestic trade protections recognize the need for imports, so they develop policies that encourage trade, albeit with some barriers.

China is a good example. Unlike other countries, China uses a "market price" instead of "cost of goods sold" to determine import product value. That valuation combined with (1) a low currency value, and (2) a duty and tax rate of close to 50 percent on some products creates a high wall around the market. There are options: Bonded warehouses help companies lower costs and manage cash flow for goods exported to China. Products stored in these warehouses don't incur taxes and fees until they're moved for manufacturing or resale.

When developing your trade strategy, consider the taxes, fees, transportation costs and expenses involved in importing parts for manufacturing. Sometimes, in-country sourcing can be a better alternative than importing foreign products. Many companies find that it saves costs and reduces the risk to supply chain disruptions. But be careful: Title transfer, purchase origin, importer and exporter of record, and classification of product (service-related or new purchase) all materially matter and can affect total cost.

There's no one-size-fits-all strategy that works for every country, so develop country-specific strategies that minimize cost and maximize value.

Leverage Trade Zones and Agreements

Free trade agreements (FTA) are a boon for international commerce. With a FTA in place, importers/exporters can move goods more quickly through customs with less paperwork and save on taxes and fees. For instance, goods (and people) move freely across borders in the European Union with a minimum of delay.

Some countries attract investment with special trade zones within their borders. China was the first country to create special economic zones (SEZ) to encourage trade, and India has special manufacturing zones where imported material to be used for in-country manufacturing receives favorable tax treatment. Now, countries as diverse as the United Arab Emirates, Philippines and South Korea offer areas where exporters and others receive tax and regulatory incentives.

While special trade zones and agreements can lower costs and make compliance more efficient, pay careful attention to domestic political developments. Unexpected events like the United Kingdom's surprising Brexit vote can throw markets into financial and regulatory turmoil.

Basic trade compliance keeps your company out of the regulatory hot seat and your employees out of jail, but it's just the starting point. A robust compliance strategy helps your company move material more efficiently, with less supply chain risk, and at a lower cost.  This requires expert knowledge and long-range planning that considers all variables. All this takes time, but your success depends on it.

Peter Liston, senior director of global trade compliance for Flash Global, has more than 30 years of expertise in trade compliance, with a special emphasis in the area of international import /export gained through various roles with the U.S. government and the private sector.