What is customs compliance?
Custom compliance need to be performed when goods arriving into EU from a third country.
There are a lot of different aspects of customs clearance and customs compliance:
* AEO - Authorised Economic Operator,
* BTI,
* Rules of Origin,
* Customs classification,
* CDS - Customs Decisions system,
* Customs Audits,
* Economic Procedures,
* Comprehensive Guarantee,
* Import and Export Brokerage.
Import and Export Customs Brokerage
For imports all goods arriving to EU from third-country customs clearance will be required. Most businesses use a customs broker who specialise in customs clearance or set up their own customs clearance in-house function.
Customs broker will require customs information to facilitate clearance.
They will receive the Commercial invoice of the items being imported from the courier, including the country of origin and price. The logistic provider will also provide the arrival details which are entered into the customs system. This information is entered into the Customs Clearance Declaration and validated against what the logistic carrier have already provided for customs.
They will need know the Tariff Classification which will tell them the rate of duty charge or any restrictions associated with the tariff classification. The broker also need to know how you are going to pay for customs duties and VAT. In other words, have you got a credit account with customs or do you want the broker to pay on your behalf and than recharge this back to yourself.
The information required to perform clearance will be:
* Export and Import Address details
* Invoice number
* Description of goods
* Quantity of Goods
* Value of Goods
* Number of Packages
* Weight of the shipment
* Indication who is paying for transport
* Country of origin
* Tariff classification
* Supplier declaration of origin if applicable
* Freight number and arrival time
* Goods location while clearance is being processed
* Customs authorisations if applicable
The broker will enter the information into the customs system.
They can receive a red channel which require physical examination by customs, or orange channel, which require document examination by customs, or a green one which will require a full examination. The broker than will pass the clearance sleep to the delivery carrier who will deliver the goods to its destination.
In house customs clearance function
Setting your in house customs clearance facility gives you full control of customs activities, improves your customs compliance, enhances your knowledge, enhance changes to see new opportunities as well as improve existing processes. Customs also see this as an extremely positive way.
Setting up your own customs clearance facilities is very uncommon as most businesses will hire a custom broker to deal with customs activities.
However it is not difficult to set up and there are several software system which are connected to customs systems. Once the software provider is chosen you need to apply for certificate from customs. Once you have obtained a digital certificate, you will allow the software provider to have a sub-certificate.
Once this is in place you should receive the software training on how to clear the goods. Learning to complete customs clearance takes time. However it becomes clear and straight forward once you learn what to include. With time you will learn how to clear more complicated clearance for example: economic procedures or end use.
Exports
For exports, the same process applies as for import customs clearance. The information required for export customs clearance is almost the same, except with the fact that this is the exporter who provides the information to the customs clearance broker. Export is more for export control of restrictive goods, security and statistical purposes. There is no VAT or customs duty paying is applicable. Exports also generally have 8-digit tariff code as opposed to 10-digit code for imports.
Authorised Economic Operator (AEO)
AEO is a certified standard authorisation issued by customs through the EU to certify that the economic operator has a certain high standards in the following areas:
* safety and control,
* controls around systems to manage commercial documents,
* customs rules and compliance,
* financial solvency,
* standards of competence or professional qualifications.
It is primarily a trade facilitation that recognises that operators are reliable and use best practice in the supply chain.
Customs authorities and potential business partners will have a high degree of confidence in the AEO certified organisations.
There are few number of benefits for AEO certified organisations and as EU customs compliance and facilities develop these benefits are expected to widen.
1) Worldwide recognition as a secure business partner in the international trade
2) Joined customs cooperation resulting with faster movements of goods
3) Customs performing a high risk analysis for shipments for customs clearance globally and the AEO will have much lower risk profile
4) Priority treatment if customers are performing a physical check controls on shipments
5) Access to simplified customs procedures for example warehouse bonds
6) Reduction of full waiver or custom bonds comprehensive guarantee authorisation
7) Use of simplified procedures
To apply for AEO certification you must be an economic operator established in the EU and be part of the international supply chain involved in customs activities.
There are 3 types of AEO certification:
1) AEOS - AEO Security and Safety
2) AEOC - Compliance
3) AEOF - Full AEO (combination of two above)
Depending on the type of business either of the 3 certifications may be obtained. It is a great learning process for any organisation.
The types of economic operators who can apply for the AEO certifications include (but not exclusive): exporters, manufacturers, warehouse bond operators, freight forwarders, transport and logistic companies and customs agents.
You should be prepared for a long application process that will take from 6 months to a year from start to finish depending on the current level of the compliance your organisation is in. It is important not to apply for AEO if you feel that you are not adequately prepared.
Rejections of applications can cause issues for subsequent applications depending on the conditions of the original application.
The application process starts from AEO self assessment questionnaire that allows the economic operator to perform full check on their business without a formal application. The self assessment can be used as a checklist during the formal application process. It can readily identify gaps that exist. You can also request a custom walk around to review the processes and potential shortages that may exist.
The application process mat take several visits from customs over couple of months. Once the economic operator is certified customs will perform surveillance audits every 18 months. Possible smaller audits within a shorter period of time may fall in.
Customs Classification Database
Any organisation who deals with international trade deals with customs formalities must create and maintain a customs classification database. This is absolutely crucial to maintain a high standard of customs compliance and ensure that the duties and taxes are being applied correctly. A customs classification database will ensure customs clearance to be performed correctly.
The Customs Classification Database should include the below information as minimum:
- List of Company Part Numbers,
- Descriptions of these Part Numbers,
- Customs Tariff Classifications,
- Any customs authorisations that the organisation may hold,
- Any licences or restrictions applicable,
- Procedures codes applicable for example warehouse bond,
- Customs tariff number,
- Name of the supplier of the material for import shipments
Whoever is completing the Customs Declarations will need these information to correctly process the information. To identify customs tariff classifications for part numbers the organisations can use the service of the customs consultant or perform this task internally.
The classification is put together in a very logical manner.
The imports classification is made from 10-digits, where each digit provides a specific data, where the export tariff code consist of 10-digits.
Customs Harmonised System was designed to use on a global basis and the first 6-digits generally fulfilled all national requirements. The remaining 4 digits has been designed for a country specific purposes.
Not all classifications are straight forward therefore it is important what the product is, what it is made of, what the nature of the product is and what the use of the product is.
Binding Tariff Information (BTI)
BTI decisions are customs tariff classifications decisions made by customs in all EU member states and binding throughout the EU.
Some of the benefits of the BTI are:
- little certainty regarding tariff classification - this is particularly important when the BTI applies for duty-free tariff classification
- uniform application on the rules around the BTI throughout the EU
- BTI holders will be advised by customs of any information in the classification that impact your BTI,
- advanced knowledge to BTI holders by customs when the expiry date is near
Some of the rules around the BTI applications are:
1) you must be an importer or exporter
2) each application can only be made for one type of product
3) information on the BTI will be stored on the EU database
4) validity dates apply for each BTI
5) appeals can't be made on BTI decisions
The BTI application process is as follows:
1) applications are done via trade report system
2) you will need a customs digital certificate to access this system
3) you must hold EORI number
4) you must supply the full information about your product for customs to classify your product
5) in some cases there may be a need to supply some complex information on the product breakdown, if it is difficult for the customs to determine exactly what the product is and what it is used for, they will ask for as much information as possible
6) if the application is refused the reason will be given and the applicant cannot appeal the decision
7) if the application was approved the BTI number must be included on all customs declarations
8) it normally is 3 years when you can reapply
Economic Procedures
Economic procedures are put in place by the EU to facilitate trade and the investment into the EU, through variety of authorisations. Each economic procedure works differently and each economic operator can benefit from them differently depending on the type of business they operate.
There are 3 main economic procedures:
1) Inward Processing Suspension Authorisation
2) End Use Authorisation
3) Warehouse Bond Authorisation
Inward Processing Suspension (IPS) - the application needs to be made by operators through customs decisions system and can significantly reduce duty rate to the traders. On the IPS customs duty is suspended on arrival into the EU. IPS authorisation need to be passed to the freight forwarded and travel with the Commercial Invoice. Customs duty is than paid on much reduced level when the item is added in the EU into the finished product. The trader has an option for calculating duty based on the value of the finished product sold into the EU at the tariff classification of the finished product or alternatively calculate the value of the material that has been used inside of the finished product at the tariff classification of the original import. The trader can use the lower duty figure of both scenarios. Generally traders have 6 months to cleared goods, this is called discharged period.
End User Authorisation is an economic procedure for certain products that allow traders to import those products into EU for reduced or zero customs import duty. The relief will depend on the tariff classification which will indicate what level of relief EU customs have allowed. Traders must apply for the End Use Authorisation through the customs decision system. Part of that process is 3 years forecast which they are planning to place on the end use. This must be done per tariff code and volume. Customs will than put on the authorisation the tariff code and volume based on the information the trader has provided. Traders must monitor this limits and adjust them if for any reason there is a risk that the limits will be exceeded. Traders must make these adjustments in advance before the limits have been exceeded. Once the authorisation has been approved and received the trader must provide the authorisation to the customs broker. During the customs clearance the customs broker will insert the preference code 115 into the customs declaration and also the end user authorisation number, this will allow the customs system to recognise that this declaration fall under the end user authorisation. Customs duty than is fully or partially relieved. On the end user authorisation application the purpose of the product is requested to be included, for example for use at production.
Generally traders have 6 months to use of the materials. This is called the discharge period. Exports out of the EU are not dutiable. Any materials not put into end use by the 6 months period are subject to customs duties. A discharge report must be completed within 3 months of the end of the discharge period. It can be done with one of the customs officer. This report is extremely important. Records of the stock in use and stock in use are presented (opening stock and closing stock), materials put to end use and materials put to use other than end use. A list of export declarations consisting export material shipped out outside EU and report showing usage of all end use material and duty calculations of all end use materials not put to end use is also required. Customs will check the information carefully including levels of authorisation limit monitoring, import declarations and duty calculations of the material not put to end use., as well as stock reports of unused parts and how these are being recorded. Poor book-keeping may result in suspension of the end user authorisation.
Customs Warehouse Bond Authorisation allows traders to store non-EU goods without the payment of customs duty or VAT. Paying of these costs are made only at the time of releasing goods from the warehouse bond. The materials in the bond are in effect frozen in time. This is particularly beneficial when the traders operating in the end user authorisation. This is because instead of materials being cleared in the end use and processing the material is cleared into the warehouse bond first on the procedure called 7100. Traders can discharge or remove materials in any quantity and at any time from the warehouse bond. The discharge period will only depend on the quantity taken out of the bond and not the full amount taken into the bond.
Using warehouse bond facility along with the end use authorisation not only suspends the discharge period but also ensures that you only processing what you need and when you need it. This means you don't have to be concerned with the discharge period and unused material.
Traders must apply for warehouse bond authorisation through the customs decisions system. The facility map and security map must be included in the application. As part of the application process traders will be required to provide a forecast of materials they plan to place on end use. The forecast must be made per tariff code. Customs will than put the quantity per tariff code on the Warehouse Bond Authorisation, based on the information the trader has provided. During the validity period of the authorisation traders must monitor these limits and adjust them if for any reason there is a risk that these limit will be exceeded. And again, traders must make the change in advance the limits are exceeded. Customs can ask the duty to be pid based on the value of limits that were exceeded. In some situations and at the discretion of a customs officer it may not be a requirement to put quantity limits.
There are 3 types of Warehouse Bonds:
1) Type 1 - where responsibility lies with the holder of the authorisation and the holder of the procedure of the location of the warehouse bond
2) Type 2 - the responsibility lies with the holder of the authorisation
3) Private Warehouse - is when the bond holder also deposits the goods into the bond, the trader does not have to own the goods but must be a subsidy in this case and there are no third parties allowed.
Once the authorisation has been approved and received the trader must provide the authorisation to the customs broker. During customs clearance the customs broker will insert the relevant procedure number to the customs declaration and the warehouse bond number. This will allow the customs system to recognise that this declaration falls under the Warehouse Bond.
The discharge report is critically important and it includes:
1) accumulative report showing opening stock and closing stock, materials removed and discharged in the Warehouse bond
2) report showing of discharge or removal of all parts and costs and payments
3) Customs Warehouse discharge declaration confirming the discharge of materials from the warehouse bond per tariff code and any applicable customs payments
4) a Customs Warehouse Bond authorisation quantity an monitoring report if applicable
5) import customs declaration containing the Warehouse Bond Materials
Customs will than apply authorisation normally focusing heavily on the discharge report. There are checks of limits and monitoring, customs declarations, quantity discharged from the stock match the stock system, duty calculations for discharge materials and whether warehouse stock reports for materials are being correctly recorded.
Non-compliance may need to the suspension of the warehouse bond authorisation.
Comprehensive Guarantee Authorisation
Generally you need to pay customs duties immediately upon arrival of the goods into the EU but they are exceptions to this. The exceptions are:
1) Defer payment of the duty on the 15th day of the day following import,
2) Goods entering into a Customs Warehouse Bond,
3) Entering into the inner processing suspension where duty is suspended on arrival and paid at a reduced cost at a later date at the end of the discharge period
4) Entering the goods into End Use, where goods entering at the reduced or removed duty
To available these procedures you will need an authorisation. You can also hold a comprehensive guarantee authorisation to secure against any duty payment default.
If the trader holds several authorisations, for example, the End Use Authorisation and the Innerprocessing suspension authorisation at the same time, one Comprehensive Guarantee Authorisation will cover all these authorisations.
There are different options to provide the guarantee amount which is one time payment:
1) cash deposit for the guarantee amount
2) undertaking by financial institutions, for example bank, who will charge you an annual fee based on the guarantee amount
3) insurance company accredited by customs institution
Rules of origin
Products coming into or leaving EU must have Country of Origin clearly marked on the products and the documents. This is very important for customs and business partners to clearly identify where the goods originate from. The location where the goods are shipped from does not necessarily mean thats where the goods originate from. There are rules on how to classify the Country of origin of a product.
1) Has the product been "wholly obtained" and produced in a specific country
2) There a customs provision that allows for minimum amount of foreign material or labour to be used in the manufacturing process without changing the origin status of the product. In a lot of cases that is 7%.
3) There is a substantial transformation of the material imported into its finished product state than the origin can be claimed from where the substantial transformation took place
4) There is difficult to determine the country of origin and the method taken to determine the origin would be the value of materials used can be claimed in some cases to claim origin
Having correct country of origin helps customs determine if the country of origin is from a country where restrictions or certain rules apply, as well as any extra duties that will apply depend on the origin country of a product.
It is also very important to know the country of origin when importing products to ensure correct customs duties are applied to the imported products.
Origin country may be part of a trade agreement and have a preferential origin which may allow for a reduced or zero duty rate to apply.
Documents used to prove the country of origin of a product for preferential trade agreement include for example:
- EUR1 form also known as moving document
- ATR forms
- Supplier declarations which are made by the exporter
- Certificates of origin from a Chamber of commerce if approved
Non-preferencial origin determination is also very important because it is used to determine whether there are any restrictions applicable for the product entering the country.
EIDR Full Customs Clearance Waiver
This authorisation was introduced by EU and it allows traders to import products without initial customs clearance. In other words, pass through customs and straight for delivery. The customs clearance is done after the delivery within specified timeframe.
This type of authorisation if approved, indicated customs having a great degree of confidence from the product compliance control perspective.
Customs are extremely careful what trades are considered for this authorisation. Strong history of customs compliance is also essential. A control plan needs to be drawn up between the customer, freight forwarder, logistics carrier and customs.
Customs Decision System
Any applications for customs authorisations used to be sent to local customs offices with application forms downloaded from local customs system. With the enhancements in software systems EU have implemented the Customs Decision System.
The system and the process is exactly the same within each country in the EU. To access the CDS the trader must hold a customs digital certificate which can be applied in the local customs system. Once the digital customs certificate has ben issued the trader can log on to the CDS system. This can only be applied by an EU country.
A range of authorisations can be applied and selected from, which will include, but not limited to:
- Inward Processing Suspension
- End Use Authorisation
- Comprehensive guarantee authorisation
- Customs Warehouse bond
- Simplified Declarations
Each authorisation will have its own application structure containing specific information for each authorisation. Training also can be requested from customs in each country.
Authorisations once approved, can be printed and also amended at anytime. Any rejected application will contain the justification of the decisions.
Customs Audits
Customs audits can be a daunting task, but it is important to remember that customs officials are there to help traders and not to penalise them.
If customs see that the trader is consistently making an effort with their compliance they will always be accommodating.
From the other side if customs see that the trader doesn't take their customs compliance seriously and not taking on board any recommendations made by the customs, they can take much higher stands which can cause serious issues for the traders and their sale.
If trader holds any customs authorisations, they can expect customs audits at least every year.
If traders comply with the conditions in any of the authorisations and follow customs rules the traders have nothing to fear. It is therefore important to take the customs compliance seriously.
If a trader has a poor customs compliance record it is more likely that the audits are more frequent and more intense. This is when customs have no confidence in the traders process.
A typical audit process would be:
- a written notification from customs of a pending audit, what the audit will cover and the suggested date,
- a follow up letter with more detail on what the audit will cover during the audit and the timeframe of the audit itself (at this point it is suggested to prepare as much as possible through the audit agenda),
- there is an option to request a meeting with customs in advance to discuss the issues rather than go ahead with the audit, when the customs may find frequent issues,
- the audit agenda will depend on the authorisation or issues that traders have,
- on the day of an audit, there will generally be an opening meeting that will involve the sites operations manager with the persons responsible for trading decisions on behalf of the trader,
- the audit will be completed and closing meeting where findings will be discussed followed by an audit report.
- any recommendations or issues to resolve will follow with another audit
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