The truth about customs.Important information for CPAs involved in international trade. Big companies used to be the only entities to conduct business internationally. No longer. Fierce competition at home, the prospects of new opportunities overseas and a surge of trade liberalization lib·er·al·ize v. lib·er·al·ized, lib·er·al·iz·ing, lib·er·al·iz·es v.tr. To make liberal or more liberal: "Our standards of private conduct have been greatly liberalized . . . initiatives, such as the Customs Modernization modernization Transformation of a society from a rural and agrarian condition to a secular, urban, and industrial one. It is closely linked with industrialization. As societies modernize, the individual becomes increasingly important, gradually replacing the family, and Informed Compliance Act, the North American Free Trade Agreement North American Free Trade Agreement (NAFTA), accord establishing a free-trade zone in North America; it was signed in 1992 by Canada, Mexico, and the United States and took effect on Jan. 1, 1994. (NAFTA NAFTA in full North American Free Trade Agreement Trade pact signed by Canada, the U.S., and Mexico in 1992, which took effect in 1994. Inspired by the success of the European Community in reducing trade barriers among its members, NAFTA created the world's ) and the General Agreement on Tariffs and Trade General Agreement on Tariffs and Trade (GATT), former specialized agency of the United Nations. It was established in 1948 as an interim measure pending the creation of the International Trade Organization. (GATT See General Agreement on Tariffs and Trade. GATT See General Agreement on Tariffs and Trade (GATT). ), are forcing small and midsize companies to look across borders to market and sell their products and services. However, the increased import and export opportunities have exposed more companies to customs penalties. In fact, smarter companies already are considering customs duties Tariffs or taxes payable on merchandise imported or exported from one country to another. Customs laws seek to equalize the charges imposed by other countries, furnish income for the federal government, and preserve the financial stability of domestic industries. "manageable taxes" that they must plan for. Consequently, CPAs who work with import or export companies must be better informed about customs and international trade practices. This article provides CPAs who manage, audit or review international companies with information on how customs procedures affect the bottom line, how to identify potentially costly customs problems and how to minimize and manage US. Customs Service intervention. WHY NEW OPPORTUNITIES? The modernization act is a wide-ranging U.S. law that dramatically changed the relationship between the U.S. Customs Service and international traders. It has streamlined and automated US. customs procedures for processing import transactions, shifting the focus of compliance efforts from prerelease pre·re·lease n. Something released before an official or scheduled date. adj. Of or relating to an interval preceding an official or scheduled release: merchandise and document examinations to postentry audits and reviews. For example, a typical shipment may not be highly scrutinized upon entry to the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . However, after entry, customs could audit the importer's books and records to ensure die information provided to them was accurate and complete--an enforcement strategy similar to that of the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. . The act requires traders to exercise "reasonable care" in the entry, tariff classification, product valuation and marketing of imports. To satisfy this standard of care, the US. Customs Service expects all importers to adopt management systems that ensure import and export compliance is a priority. That includes strict recordkeeping procedures, internal reviews and consultations with outside experts to detect and remedy violations. Along with drastically changing the importer's compliance obligations, the modernization act provides stiff penalties for companies failing to meet its new standards. For example, civil customs penalties may be as high as the domestic value of any imported merchandise. In addition, the modernization act provides for specific recordkeeping penalties of up to $10,000 per violation when an importer fails to exercise reasonable care in maintaining records such as purchase orders, invoices or receiving reports. These penalties may be assessed even if there are no errors on the underlying documents and may be doled out Adj. 1. doled out - given out in portions apportioned, dealt out, meted out, parceled out distributed - spread out or scattered about or divided up in addition to the general penalties. Finally, to verify that importers are taking their new obligations seriously, U.S. customs auditors are scrutinizing more companies. In fact, customs has announced that it intends to audit over 1,000 companies by the year 2000. If an official customs audit discloses a lack of reasonable care, such as when the company's internal controls do not provide sufficient oversight, the company can be subject to the civil and criminal penalties. just as significant, if not more so, the Customs Service will target that company for intense examination of future shipments, resulting in major monetary costs and delays in delivering imported goods to customers. If all that wasn't enough, Congress recently named Raymond Kelly, the former police commissioner of New York City New York City: see New York, city. New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , to be the Custom Service's new commissioner. WHO SHOULD BE IN THE KNOW? Any CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. associated with a business that is involved in importing or exporting should be aware of all potential customs issues: Controllers, tax directors and CFOs must plan and structure international transactions to avoid penalties and minimize customs duties just as they plan for income taxes. They also have to establish internal controls and recordkeeping procedures to comply with customs regulations. For example, they should oversee the preparation of a customs compliance manual to lay the foundation for the company's compliance efforts. The manual should explicitly detail the proper controls, systems and procedures for the company's import operations. The compliance manual also should include information on employee responsibilities and the customs implications of their actions. Internal auditors Internal auditor An employee of a company who analyzes the company's accounting records to that the company is following and complying with all regulations. at least once a year, but preferably twice, must test the efficiency and the related recordkeeping and internal controls of company trade operations. They also have to ensure the company is taking advantage of the Customs Service's provisions for reducing tax exposure. Independent auditors Independent Auditor An external auditor with a certified public accounting designation that qualifies him or her to provide an auditor's report. Notes: These auditors aren't affiliated with the company being audited. , during the annual audit or review, must identify possible customs issues and violations that result in material contingent liabilities Contingent Liability 1. The possibility of an obligation to pay certain sums dependent on future events. 2. Defined obligations by a company that must be met, but the probability of payment is minimal. Notes: 1. . Management and customs consultants who analyze company international operations Internal Operations (I.O., IO or I/O) is a fictional American Intelligence Agency in Wildstorm comics. It was originally called International Operations. I.O. first appeared in WildC.A.T.S. volume 1 #1 (August, 1992) and was created by Brandon Choi and Jim Lee. must recommend increased efficiencies, ensure compliance and take advantage of tax-saving opportunities. REASONABLE CARE There is some good news, though: CPAs can help companies or clients reduce penalties significantly by ensuring they exercise reasonable care in their international operations. Specifically, CPAs can * Help a company establish internal controls so the information given to customs is accurate and complete. * Implement recordkeeping procedures to ensure the company maintains documents for the required amount of time (generally five years from the date of entry). * Draft and implement a compliance manual detailing the company's relevant controls, systems and procedures. Such a manual also helps employees understand how their actions can affect the company's compliance with customs requirements. * Review periodically whether the company's operating procedures, recordkeeping and internal controls are managed efficiently. * Prepare a strong policy statement declaring the priority of customs compliance for management and all personnel. MANAGING GOVERNMENT INTERVENTION A customs audit can last anywhere from 6 to 18 months, requiring 1,200 to 2,000 person hours of work. In addition to being intrusive in·tru·sive adj. 1. Intruding or tending to intrude. 2. Geology Of or relating to igneous rock that is forced while molten into cracks or between other layers of rock. 3. Linguistics Epenthetic. , such an audit can cost a company hundreds of thousands of dollars in time and professional fees. However, under the modernization act's spirit of shared responsibility, the Customs Service, working with the international trade community, has introduced two new compliance initiatives to help relieve the importer's audit burden. Self-Governance and Controlled Self-Assessment are two audit-based programs that allow CPAs to manage government intervention by limiting customs' intrusion into a company's operations. The Self-Governance Program. Companies incorporate this program into their corporate structures. It was designed to encourage companies to develop and maintain efficient and effective internal controls over their import-related transactions. CPAs should use this program when implementing internal audit type mechanisms. These new procedures will allow the company to ensure it is compliant and customs to verify such compliance with minimal intrusion. In addition, participation in this program likely will deter a customs audit. The Controlled Self-Assessment. This is available only to companies that are the targets of official customs' audits. Under this initiative, customs allows the company's internal audit department, or a third-party CPA, to conduct the fact-finding portion of its review. Because customs is not the fact-finder, any deficiencies can be disclosed, thereby limiting any penalty liability. In fact, customs' involvement in reviewing the importer's operations is significantly limited. Both of the new audit initiatives allow CPAs to take a significant role in ensuring a company's compliance and managing the customs audit process. Participation in either of these programs brings the following benefits: * The government does not pry into the company's operations. Customs cannot conduct wasteful "fishing expeditions Also known as a "fishing trip." Using the courts to find out information beyond the fair scope of the lawsuit. The loose, vague, unfocused questioning of a witness or the overly broad use of the discovery process. ," entrap unsuspecting employees or turn an ambiguous issue into a negative finding. * The duration of the on-site review is cut to approximately four months from the usual 9 to 12 months. This not only allows the company to focus on its normal operations Generally and collectively, the broad functions that a combatant commander undertakes when assigned responsibility for a given geographic or functional area. Except as otherwise qualified in certain unified command plan paragraphs that relate to particular commands, "normal operations" of but it also limits the amount of time and resources spent on audit matters. * The company can work proactively on a comfortable schedule rather than react to problems. Without an on-site government presence, companies need not worry about rushing to satisfy an information request or making the wrong impression. * The whole tone of the audit is changed. Rather than being geared toward finding violations and assessing penalties, the goal becomes locating and resolving problems and establishing procedures to limit future problems. * The company will undergo reduced cargo /transactional examinations. This is possible when acceptable compliance is determined. MORE CPA SERVICES The appraised value An appraised value (USA) or mortgage valuation (Australia) pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related to the issuance of mortgage loans by a of merchandise imported into the United States is known as the transaction value of the goods; that is, the price actually paid or payable for the merchandise when sold for exportation to the United States (the invoice price Invoice price The price that the buyer of a futures contract must pay the seller when a Treasury bond is delivered. ). Certain costs must be added to this value for duty assessment, including * The buyers packing costs. * The buyer's selling commissions. * The value of any "assist"--almost anything the buyer of the imported merchandise provides, directly or indirectly, free or at a reduced cost for use in producing or selling the merchandise for export to the United States. * Royalties or license fees the buyer has to pay, directly or indirectly, as a condition of the sale. * Proceeds of the import's subsequent resale, disposal or use that accrue To increase; to augment; to come to by way of increase; to be added as an increase, profit, or damage. Acquired; falling due; made or executed; matured; occurred; received; vested; was created; was incurred. , directly or indirectly, to the seller. Many companies have valuation difficulties because their employees don't know Don't know (DK, DKed) "Don't know the trade." A Street expression used whenever one party lacks knowledge of a trade or receives conflicting instructions from the other party. all the costs that customs considers taxable or don't realize that their daily activities have significant customs implications. Even if those implications are apparent, communication between corporate departments often is lacking. For example, a purchasing manager A Purchasing Manager is an employee within a company, business or other organization who is responsible at some level for buying or approving the acquisition of goods and services needed by the company. for a US. apparel company purchases fabric from a factory in Italy and provides the fabric, free of charge, to a suit manufacturer in Hong Kong Hong Kong (hŏng kŏng), Mandarin Xianggang, special administrative region of China, formerly a British crown colony (2005 est. pop. 6,899,000), land area 422 sq mi (1,092 sq km), adjacent to Guangdong prov. . Customs considers the Italian fabric and the related transportation costs to Hong Kong dutiable du·ti·a·ble adj. Subject to import tax. dutiable Adjective (of goods) requiring payment of duty Adj. 1. additions to the invoice price. If the purchasing manager doesn't notify the company's import department that the fabric was sent to the Hong Kong manufacturer, the cost information given to US. customs when the finished suit is imported will be undervalued Undervalued A stock or other security that is trading below its true value. Notes: The difficulty is knowing what the "true" value actually is. Analysts will usually recommend an undervalued stock with a strong buy rating. and the duty underpaid un·der·paid v. Past tense and past participle of underpay. underpaid Adjective not paid as much as the job deserves underpaid adj → . This is a dangerous scenario for the company because customs scrutinizes assists carefully and undoubtedly will discover this material omission. The company then will be required to pay the loss of revenue to customs (assume, for this example, $100,000) plus penalties, which can be a maximum of eight times the revenue loss ($800,000) or the domestic resale value of the merchandise ($5 million). In addition to these monetary costs, the company's future shipments probably will be subject to extensive customs examinations at the port of entry, resulting in severe delays. Also, the negative publicity may damage the company's goodwill and brand name when the public learns of the penalty action. A company's CPA could have prevented this situation by * Detecting this violation through a review of the company's import operations. The CPA then could have helped the company prepare and submit a prior disclosure which would notify customs of the omission, thus eliminating the penalty liability. * Establishing procedures and controls to notify appropriate parties when actions affected the taxable value of imported merchandise. * Arranging an in-house customs training session for all employees with roles in the import process, including purchasing, research and development (R,&D), transportation and traffic, legal, financial, tax, information management and manufacturing. MORE TO BEAR As with everything in life, bigger opportunities bring bigger risks. Although companies may realize significant benefits by expanding their cross-border operations, they must be aware of their complex responsibilities and obligations and the many possible penalties for customs violations. Because of this, tax directors, CFOs and other CPAs are being entrusted to make corporate decisions regarding customs and international trade matters. To effectively make the "right call," these professionals must understand the consequences of their decisions and be informed. The regulatory environment has changed rapidly. Under the modernization act, the U.S. government has shifted the burden to the international trader to provide accurate tariff classification, merchandise valuation, country of origin and pricing and financial information to customs. Moreover, importers are now required to exercise reasonable care in their transactions. Informed CPAs now are in a special position to assist their companies and clients to exercise the requisite care for customs purposes and maximize the benefits of going global. This is an opportunity that all CPAs must embrace. RELATED ARTICLE: Customs Warning Signs Checklist The following nine questions are customs red flags to note when working with or for international traders: 1. Are any additional payments made above the invoiced amount to an overseas supplier? Examples are [] Price adjustments. [] Additional work expenses. [] Design costs. [] Split payments. [] Warranty costs. [] R&D expenses. 2. Are any assists provided to the foreign supplier, free or at a reduced price? Examples are [] Materials. [] Components. [] Accessories such as labels, buttons or tags. [] Tools, dies or molds. 3. Are there transactions between related parties? Do they involve IRS transfer price adjustments? 4. Are currency fluctuation Fluctuation A price or interest rate change. payments made? 5. Are domestic or overseas royalties or license fee payments made? 6. Are there any yearend journal entries that affect purchase accounts? 7. Are there any overseas R&D costs? 8. Is there any defective merchandise? 9. Are there any shortages or overages? RELATED ARTICLE: EXECUTIVE SUMMARY * BECAUSE MORE TAX DIRECTORS AND CPAs are handling the customs and international traffic work for global companies, they must be better informed of customs and international trade practices. This includes controllers, tax directors, CFOs, internal and independent auditors and management and customs consultants. * CPAs CAN HELP COMPANIES OR CLIENTS significantly reduce penalty exposure by helping them exercise reasonable care in their international operations. * MANY COMPANIES EXPERIENCE difficulties because their employees don't know all of the costs the US. Customs Service considers taxable. * CPAs CAN PREVENT DOOMSDAY scenarios--such as a company that is required to pay penalties as high as eight times the loss of revenue--by helping the company establish strong internal controls, implement the correct record keeping procedures, draft a customs compliance manual, conduct periodic reviews and prepare a strong policy statement. * CUSTOMS HAS INTRODUCED TWO NEW compliance initiatives intended to help relieve the importer's audit burden. * ALTHOUGH CPAs HAVE A GREEN LIGHT to help companies and clients exercise the requisite care for customs purposes, they need not shoulder the responsibility alone. Customs advisers stand ready when CPAs recognize help is needed. RELATED ARTICLE: U.S. Customs Target Industries for 1998 Industries subject to heightened scrutiny Agriculture Automotive Communications (including telecommunications and advanced displays) Critical components (including bearings and fasteners fasteners In construction, connectors between structural members. Bolted connections are used when it is necessary to fasten two elements tightly together, especially to resist shear and bending, as in column and beam connections. ) Footwear Production equipment Steel Textiles Industries on Watch Lid Industries subject to increased compliance evaluation Chemical Petroleum Mass merchandising RELATED ARTICLE: Customs Resources WEB SITES Import/Export Rulings & Regulations www.customs.treas.gov International Trade Commission www.ustr.gov Import Administration www.ita.doc.gov GOVERNMENT CONTACTS U.S. Customs Headquarters, Classification and Valuation Branch Washington, D.C. 202-927-2388 U.S. Customs Headquarters, Regulatory Audit Division Washington, D.C. 202-927-1100 Department of Commerce, Export Administration Washington, D.C. 202-482-4811 REFERENCE PUBLICATIONS Harmonized har·mo·nize v. har·mo·nized, har·mo·niz·ing, har·mo·niz·es v.tr. 1. To bring or come into agreement or harmony. See Synonyms at agree. 2. Music To provide harmony for (a melody). Tariff Schedule of the United States, Department of Commerce, U.S. International Trade Commission, Washington, D.C., January, 1994. To order an electronic copy call the National Technical Information Service at 800-553-6847. Order number: PB94-500980INC inc - /ink/ increment, i.e. increase by one. Especially used by assembly programmers, as many assembly languages have an "inc" mnemonic. Antonym: dec. . Price: $31. Customs Regulations, Title 19, National Archives National Archives, official depository for records of the U.S. federal government, established in 1934 by an act of Congress. Although displeasure concerning the method of keeping national records was voiced in Congress as early as 1810, the United States continued and Records Administration, Office of the Federal Register The Office of the Federal Register is an agency of the United States Government within the National Archives and Records Administration. The Office publishes the Federal Register, Code of Federal Regulations, and United States Statutes at Large, among others. , Washington, D.C., April, 1997. To order a copy calf the National Technical Information Service at 800-553-6847. Order number: PB97-179006INP INP abbr. International News Photo . Price: $49. Customs Valuation Encyclopedia encyclopedia, compendium of knowledge, either general (attempting to cover all fields) or specialized (aiming to be comprehensive in a particular field). Encyclopedias and Other Reference Books , U.S. Customs Service, Off ice of Regulations and Rulings, Washington, D.C., 1995. To order a copy call the National Technical Information Service at 800-553-6847. Order number: PB97-150627INP. Price: $49. Importer Audit Compliance Assessment Team (C4T C4T Colosseum Combinatorial Chemistry Centre for Technology (Rome, Italy) Kit Documents), U.S. Customs Service, Office of Strategic Trade Regulatory Audit Division, Washington, D.C., May, 1997. A copy can be downloaded at www.customs.ustreas.gov/imp-exp/rulings/comply/catkit.htm. ASSOCIATIONS American Association American Association refers to one of the following professional baseball leagues:
National Association of Foreign-Trade Zones Washington, D.C. 202-331-1950 www.imex.com/naftz.html National Customs Brokers Customs Broker An individual or firm licensed by customs authorities to enter and clear imported goods through customs. The broker represents the importer in dealings with the customs authorities. and Forwarders Association of America Washington, D.C. 202-466-0222 www.ncbfaa.org or fabnet.org DOUGLAS P. ZUVICH, CPA, is a manager and director of customs compliance for KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm) KPMG Kaiser Permanente Medical Group KPMG Keiner Prüft Mehr Genau (German) KPMG Kommen Prüfen Meckern Gehen Peat Marwick, New York City. He is a licensed broker and a former auditor with the US. Customs Service. |
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