Wednesday, September 15, 2010

Free trade agreements are not always as free as they seem

On January 1, the preferential duty rates on most qualifying imports from Asean under the Asean Free Trade Agreement (Afta) and China under the Asean China FTA became zero per cent. This provides a significant commercial advantage to importers of qualifying products, but what is a qualifying product?

The common answer is any product that meets the rule of origin, which is usually that a minimum percentage (typically 40 per cent) of the FOB selling price is local content, or that there is a change of tariff heading.

However, this is the not the only criteria, and importers are being caught out by the additional rules that can apply.

One of the long-standing issues with the Asean-China FTA is that any imports that are sold via a third country are denied the preferential tariff benefits in Thailand.

The FTA wording is currently silent on whether third-country sales are allowed, whereas other FTAs specifically allow third-country sales. Therefore it is possible to claim preferential origin into Thailand. However, some other Asean countries have allowed preferential claims because it is not specifically prohibited under the agreement.

This has been extensively discussed, and the planned resolution was to amend the agreement to specifically allow third-country invoicing. This was scheduled to be passed in September. However, there has been a delay to the agreement, and further discussions will be required.

This calls into question a target date of January 1, 2011, and will be a concern to a lot of companies sourcing from China via regional or global headquarters. It is likely that the issue will be resolved soon, but any further delay creates additional duty costs.

Even when third-party invoicing rules are established, as is the case with Afta, there can still be practical implementation issues. Thai Customs have been challenging companies that have more than three countries in the supply chain, on the grounds that only three countries are allowed.

Whilst other Asean members accept four-country-plus invoicing, there are penalties being levied on Thai importers based on their supply chain, regardless of the fact that the goods meet the basic origin criteria.

Again, discussions are ongoing to resolve this problem, but in the meantime Thai Customs are challenging importers and seeking back duties and penalties. It is likely that many companies with longer supply chains have not yet been challenged, as it is not always apparent at the time of importation, and that there may be issues raised during an audit. Hopefully by that time there will be a uniform policy in Asean to accept such situations

To add to the complications, the current AFTA rules are transitioning to the Asean Trade in Goods Agreement (Atiga). This is part of the Asean 2015 plan, and should simplify Asean trade issues in the long term.

However, some of the rules of origin will change. For example, certain products will revert to only a regional value content rule that requires a minimum Asean content, whereas most products will still allow the change in tariff heading (generally considered to be more simple to meet) or the regional value rules. Importers and exporters should check the new rules to confirm which rules apply to their products.

An issue that will affect all importers using a Form D is that the old AFTA form will be replaced by the Atiga form. The two are virtually identical, and there is no firm date yet for when the AFTA forms will no longer be accepted. Previous experience of changes - for example, when the issuing authorities change the official stamp of endorsement or change the size of the form - shows that forms can be rejected at the port of entry, but that challenges are not consistent and some shipments can clear without problems. In some cases, this is storing up trouble to be discovered in a subsequent audit by Thai Customs.

There are many benefits to using FTAs, the most obvious being the duty savings, but also green-lane clearance and potentially counting the imported goods as qualifying content in the FTA calculation of any exported goods.

However, it is not always as simple as it seems, and importers should be aware that getting the certificate of origin does not always mean they can claim the preferential rate.

By Paul Sumner is a partner of Worldtrade Management Services at PricewaterhouseCoopers Thailand. He can be reached at Nation, Bangkok

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