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Trade Intelligence Americas
February 2018
PwC
Index
Trade Intelligence Americas seeks to capture the essence of selected issues that are of particular interest to businesses operating in the Americas.
Our regional network of customs and international trade professionals share insight on the latest news as well as regulatory and technical developments relevant to customs and international trade based on our experience working with business as well as our dicussions with authorities – all of which we share in Trade Intelligence Americas.
Feature article
Six degrees of valuation – Similarities and differences in the Americas 1
Country reports
Argentina 10 Argentina moves toward APAs: why and how are they important to customs valuation?
Brazil 11 Dealing with customs valuation and transfer pricing rules in Brazil
Canada 13 Bankruptcy of customs broker: what could this mean for importers?
Colombia 15 The international trade in Colombia: focus on globalization and world economy
Ecuador 17 How does the new customs control service rate affect trade and your business?
Mexico 18 Changing horizons for the Maquiladora industry as the NAFTA agreement moves on
Perú 20 Transactions with related parties and the existence of test values
United States 23 What is the fate and future of free trade agreements in the Trump era and beyond?
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Six degrees of valuation – Similarities and differences in the Americas
The August/September 2017 APAC edition of Trade Intelligence included an article entitled “Six Degrees of Valuation: Is there madness in the methods?” The article provided an instructive history and overview of customs valuation principles generally, and a summary of how these principles have developed over time in the APAC region specifically. As the article noted, those engaged in the practice of customs and trade compliance acknowledge that customs valuation is the “undisputed king of complexity and confusion.” Perhaps it is not surprising, then, that application of globally relevant valuation principles has differed from region to region, and country to country, or that different customs authorities have varied in their responses to difficult questions. Accordingly, the inaugural issue of the Trade Intelligence – Americas seemed like the perfect opportunity to take up the questions and considerations raised by our APAC colleagues, and address them from an Americas perspective.
Customs valuation is complex and can be confusing. The application of globally relevant valuation principles differs from country to country as does the responses of customs authorities to difficult questions. The inaugural issue of the Trade Intelligence – Americas addresses customs valuation principles from an ‘Americas’ perspective, and how these principles have developed over time.
Trade Intelligence/February 2018 2
History and valuation rules and commercial environment
Virtually every country in the Americas region is a member of the World Trade Organization. Accordingly, application of Article VII of the General Agreement on Tariffs and Trade, which sets forth what is typically referred to as the Customs Valuation Agreement (Valuation Agreement or Agreement), fundamentally governs the customs valuation issues raised in just about every import transaction throughout the region. In the majority of these import transactions, customs value will be determined by utilizing the transaction value method. The transaction value method is defined as the price actually paid or payable for the goods being imported when those goods were sold for export. To this price paid or payable, the Agreement dictates that certain additions, and in some cases deductions, be made in order to accurately arrive at the appropriate value of the good. Prescribed additions include:
1. commissions (other than buying commissions) 2. the cost of certain containers or packing 3. the cost of certain goods and/or services used in the production of the good to
be imported when provided by the buyer (directly or indirectly) free of charge or at a reduced cost (i.e., assists),
4. certain royalties or license fees 5. proceeds of a subsequent resale.
In the cases of the United States and Canada, specifically identified international freight and insurance may be deducted.
As is the case in any country applying the Valuation Agreement, where transaction value is not available (e.g., where the import is not pursuant to a sales transaction, the sale transaction is unacceptable for various reasons or the import sale is between related parties that cannot support the arm’s length nature of their transfer price from a customs perspective), alternative methods of valuation should be applied. These include:
1. the value of identical merchandise 2. the value of similar merchandise 3. deductive value (i.e., resale minus methodology) 4. computed value (i.e., cost plus methodology 5. a fallback method, derived from one of the earlier methods adjusted as
necessary to arrive at an appropriate value.
While these rules provide the standard starting point from which all countries determine customs valuation issues, the legal, governmental, and commercial realities within each country can lead to varying interpretations, even within the same region. The Americas region includes both established and emerging economies and countries with stand-alone customs enforcement agencies as well as others where customs enforcement falls within broader tax/revenue agencies. There are countries with highly formalistic and somewhat onerous approaches to the import framework, others which are more pragmatic and where substance will tend to govern over form, and yet other countries that sit at the global cutting edge of real-time, data-based import process management and enforcement. Moreover, the Americas is a region that has been transformed from a trade perspective by the explosion of intercompany trade by multinational with globally diverse supply chains, a plethora of bilateral and multilateral trade agreements and the emergence of Asian trade powerhouses.
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All of these factors, and more, have impacted to some degree the lens through which valuation rules are interpreted and the customs valuation enforcement environment that has developed in different countries in the region. Despite the variety of approaches, certain valuation developments and trends have emerged that establish the Americas as a unique customs valuation environment which merits attention by companies moving their goods internationally.
Recognition by customs authorities of new business realities
The emergence of highly integrated global supply chains with transactions, and often multiple transactions, between related parties has been one of most significant commercial developments of the second half of the 20th century. This development upturned the premise that the sale prices between taxpayers engaged in international transactions were dictated by market forces alone. In response to these commercial realities, government taxing authorities adopted rules governing related party pricing practices with the objective of requiring arm’s length results in related party transactions. From the direct tax perspective, many of these rules are based on the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Customs authorities also implemented rules to ensure that transactions between related parties were at arms-length, however the specific requirements of the customs oriented rules which are founded on the Valuation Agreement vary from the OECD-based rules. The typical result: companies applying OECD-based rules to achieve arm’s length results in their intercompany transactions were often ‘whipsawed’ upon application of the customs-based rules on the same transactions.
Trade Intelligence/February 2018 4
Recent years have seen a process of ‘bridging the gap’ between transfer pricing and customs rules and enforcement regimes in the Americas region. This has been achieved as importers make additional input into transfer pricing processes to ensure that they more closely approximate customs requirements, and customs authorities hone an approach under which transfer pricing methodologies can be considered holistically in satisfying customs requirements and those approaches are more clearly articulated. This effort is a work in progress, however, and customs authorities in different countries in the Americas region occupy vastly different points in that continuum.
An example of the alignment that has been achieved between tax and customs treatment of related party transactions is the ability, in some countries in the Americas, of importers whose prices are subject to retroactive transfer pricing adjustments to continue to use transaction value. This is not universal in the Americas. In some countries, customs authorities have determined that transaction value is not fixed and final at the time of import when retroactive transfer pricing adjustments are made. Under this latter rationale, related party transactions in which prices are subject to retroactive adjustment would be precluded from applying the preferred method of customs appraisement. Importers would be required to base customs value on alternative method. In still other jurisdictions while importers are required to report upward post-importation transfer price adjustments (and pay any additional duties accordingly), downward transfer pricing adjustments are historically disregarded and do not give rise to eligibility for refund of duty payments.
Customs authorities in the US reconsidered this stance in HQ W548314, stating that an importer’s transfer pricing policy could be considered an objective formula by which pricing was considered fixed at the time of import if the following criteria were met:
1. a written ‘Intercompany Transfer Pricing Determination Policy’ is in place prior to importation and the policy is prepared taking IRS code section 482 into account
2. the US taxpayer uses its transfer pricing policy in filing its income tax return, and any adjustments resulting from the transfer pricing policy are reported or used by the taxpayer in filing its income tax return
3. the company’s transfer pricing policy specifies how the transfer price and any adjustments are determined with respect to all products covered by the transfer pricing policy for which the value is to be adjusted
4. the company maintains and provides accounting details from its books and/or financial statements to support the claimed adjustments in the United States
5. no other condition exists that may affect the acceptance of the transfer price.
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It is worth noting that the US has developed a Reconciliation program under which importers can flag import value that are uncertain at the time of importation, and subsequently close out the import by reporting the correct value. This program, essential for properly managing retroactive transfer pricing adjustments, is an outlier globally.
Canada is another jurisdiction that has implemented rules that require the disclosure of retroactive upward adjustments along with the payment of unpaid duties, but also allows the reporting of retroactive downward adjustments, with the opportunity to request the refund of duty overages. This downward reporting and refund opportunity is subject to strict reporting rules and timing requirements (such as requiring the clear identification of the entries impacted, allocation of the adjustment properly across them and mandated reporting of the adjustment within 90 days of having “reason to believe” the adjustment impacted the customs value of imported merchandise). Customs authorities in other jurisdictions in the Americas have demonstrated varying levels of willingness to recognize transfer pricing concepts such as retroactive TP adjustments within the context of customs valuation. That said, it is a heartening observation for multinational importers to note that, overall, the direction of many customs authorities indicates an increasing comfort with what is a normal commercial reality for many importers, namely, the need to use transfer pricing adjustments, even retroactively, to meet pricing targets.
Trade Intelligence/February 2018 6
Another commercial reality that has seen increasing sensitivity from customs authorities in the Americas is the proper treatment of costs that may be paid by buyers (i.e., importers) but that may not necessarily need to be included in customs value if certain requirements are met. An example of this in the US includes fees that are paid for the right to exclusively distribute products in a given jurisdiction. While these fees may have been paid as part of a purchase contract for goods to be imported, customs authorities have been amenable to breaking down the value of the distribution right that is conveyed in exchange for the payment, and allowing that portion to be excluded from transaction value when certain factors are met. For example, in HQ H42894, customs authorities in the US permitted an importer of automobiles to adopt the approach that an exclusive distribution right fee was not part of the price paid or payable for the imported automobiles. US Customs examined the agreement, and noted factors such as the fact that the fee was paid for the right to distribute merchandise and services, that the fee was paid in order to use certain intellectual property, and finally that the payment for the distribution rights was separate from payments made for the purchase of the automobiles. To be sure, the agreements underlying the transaction were drafted in a way that made it possible for authorities to identify these factors. However, positive and progressive analysis was exercised by US Customs in that, once provided with such an agreement, authorities were amenable to a novel and nuanced approach in identifying various streams of payment, rather than lumping the exclusive distribution right fee into customs value simply because it was paid by the importer and ostensibly related to imported automobiles.
Custom value can be impacted in ways other than the method of appraisal used or application of additions to value. The US is one of the few remaining jurisdictions in which customs authorities allow use of what is commonly called first sale for export valuation methodology. First sale for export is the result of an interpretation of the Valuation Agreement, which states that transaction value consists of the ‘price actually paid or payable for the goods when sold for export to the country of importation.’ US authorities interpret this language to mean that import value can be derived from the value in an earlier transaction than the one accompanying the import, as long as the product was clearly destined for the United States. Additionally, using a sale to a middle-man as the importer’s basis for transaction value requires that the sale was a bona fide sale conducted at arms-length. However, where these factors can be supported, the importer derives the benefit of lowering its declared value – in essence, the taxable base on which duties, fees, and other import taxes are assessed.
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Additional considerations around dutiability – And customs agency transparency
Another area of customs valuation in which customs authorities across the Americas can differ broadly in interpretation is where fees like the one above is paid by an importer, or on the importer’s behalf. Whereas in some jurisdictions, analysis of the fee will conclude upon a determination of whether or not it is part of the price paid or payable, in others the analysis would continue and require consideration of whether the payment is dutiable as a royalty or, in yet other instances, as a proceed of a subsequent sale. Under the Valuation Agreement, royalties or license fees are dutiable when they are related to the goods being imported and required to be paid, directly or indirectly, as a condition of the sale. In the US, the presumption that royalty payments made by the importer are part of transaction value , and possibly subject to duty, unless the importer can establish otherwise, was officially articulated in the court decision Generra Sportswear Co. v. United States, 905 F.2d 377 (1990). Despite this presumption, importers have been successful in establishing that certain royalty payments need not be considered an addition to value, as a long line of US rulings establishes. This makes the US distinct from other jurisdictions in the Americas, which take a much stricter interpretation and more often than not conclude that most royalties, including those paid for use of trademarks and other post importation activities, must be included in customs value. For example, in Argentina, customs authorities have in certain cases determined that royalties paid for post-importation manufacturing know-how were includable in the customs value for imported raw materials that will be used as part of that manufacturing process.
Trade Intelligence/February 2018 8
The US is also distinct from other jurisdictions in that when a fee is determined to not be included in the price paid or payable, and to not constitute a dutiable royalty, customs authorities are more likely to perform further analysis to determine whether the fee should be dutiable as a proceed of subsequent sale. In the US, customs authorities will find that proceeds of a subsequent resale are dutiable when they pertain to resale of the imported merchandise, and they accrue directly or indirectly to the benefit of the seller. In the exclusive distribution rights ruling mentioned above, US authorities determined that the fee was not tied to the resale of the imported automobiles, and was derived from a separate transaction, rendering the fee non-dutiable as a proceed of subsequent resale.
However, in other circumstances (see, e.g., HQ 545504), US Customs authorities found a similar fee paid for the right to distribute dutiable where it was calculated and accrued upon sale of the imported merchandise. Before making this determination, Customs clarified that the fee was not a royalty from its perspective, notwithstanding that it was identified as one in the agreement between the parties. This also shows some of the complexity importers will have to navigate in determining the customs impact of various fees – in many instances, customs authorities will look behind the formal descriptions of transactional components to understand the substance of the component from a customs perspective. Since this determination in how to characterize a fee (e.g., a royalty versus a proceed of subsequent resale) triggers entirely different analytical frameworks, importers must remain nimble in assessing the various payment streams connected to their goods.
Although there are complexities inherent in customs valuation in the Americas, and there are aspects regarding customs valuation in this region that are distinct from elsewhere in the world, importers benefit from the fact that a number of customs authorities seek to adopt a highly transparent enforcement and compliance environment taking steps designed to keep importers informed. For example, in the US, customs authorities publish rulings requested by importers in a searchable database related to a number customs topics, including customs valuation. US customs authorities have also issued a series of “Informed Compliance” publications covering various topics, including various valuation topics such as related party transaction, buying and selling commissions, and deductions for freight and other costs. Additionally, US authorities have published a Valuation Encyclopedia, which addresses a full complement of customs valuation topics from a US perspective, and is updated periodically by customs authorities. The US is not alone in this regard – Canadian customs authorities have published a series of “D Memoranda” addressing valuation topics such as methods of determining value, related party imports, and treatment of assists.
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Conclusion
It is more important than ever for companies operating under global supply chains to understand the impact of their goods crossing customs borders, often multiple times, en route to their final destination. While the common understanding of internationally harmonized customs valuation rules is at its base correct, we hope that this article helps companies develop a deeper appreciation for how quickly these rules become local in any given jurisdiction. In addition to the local rules, customs authorities are racing alongside everybody else to keep up with the pace of change in the market place, and working with a local resource who has an understanding of these trends – which perhaps have not yet become evident in a ruling or a regulatory update – can make a big difference in properly managing compliance, or realizing an opportunity to save duties that otherwise would have been paid.
Trade Intelligence/February 2018 10
Country reports
Argentina
Eduardo Gil Roca
+5411 4850 6728
Claus Noceti
+5411 4850 4626
Laura Dragun
+5411 4850 6722
Argentina moves toward APAs: why and how are they important to customs valuation?
Argentina has reformed its tax system through Law 27,430 in force since January
2018.The new law introduces the possibility for Argentine taxpayers to celebrate agreements with the local tax authority for the ‘Joint Determination of International Operations´ Prices’ (DCPOI), among other modifications.
The DCPOI agreements are nothing less than Advance Pricing Agreements (APAs) which allow taxpayers to set out the appropriate criteria and methods, for tax purposes, to determine transfer prices of the transactions between related parties over a fiscal period.
These instruments could provide certainty to local taxpayers regarding transfer pricing (for revenue purposes) of goods import and export operations. Consequently, they could be used as complementary information to support the prices used for the determination of the customs value of such transactions.
However, a sole DCPOI agreement cannot support related party customs value in view of:
1. the historically conflicting interests of the Argentine revenue and customs authorities in determining the fair’ value to be set for cross-border transactions between related parties
2. the stricter controls that customs authorities have been carrying out on these operations.
Thus, it is important that each local company develops a clear understanding of the inter-company transactions, the criteria employed to assess the customs value of goods import and export operations, and how this criteria complements the establishment of a DCPOI agreement.
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Brazil
Marcelo Musial
+55 11 3674 3718
André Apostolopoulos
+55 11 3674 20000
andre.apostolopoulos@ pwc.com
Aline Gatti Dardim
+55 11 3674 26911
Raquel Petrolini
+55 3674 2707
Dealing with customs valuation and transfer pricing rules in Brazil
The volume of imports into the Brazilian territory has significantly increased throughout the years. This fact is associated to policies to encourage the national industry that have resulted in the establishment, in Brazil, of a significant amount of companies whose headquarters are domiciled abroad.
Consequently, there was also an increase in so-called intercompany transactions, that is, transactions between related parties. In these cases, the direct relationship between buyer and seller allows the parties to agree on the price that best meets their internal interests and the resulting possibility of adopting prices different from the market parameters has prompted the creation of laws to regulate these kinds of transactions, on the form of transfer pricing or customs valuation rules.
Transfer pricing rules, from the point of view of income tax, are intended to prevent the behavior of taxpayers, when importing or exporting, from shifting the profits for the subsidiary or the headquarters, by either reducing or increasing them. Therefore, when related parties practice transfer prices within an acceptable limit, there is no need for adjustments to income tax. To establish those limits, the legislation sets forth methods of calculation that will be observed by companies on import and export transactions. However, when the prices practiced by companies exceed those legal limits, adjustments have to be made for income tax purposes.
On the other hand, the purpose of customs valuation rules is to avoid that companies practice prices lower than market price with the intent of reducing the customs duties and indirect taxes that levy upon imports. Brazil follows custom valuation rules from the General Agreement on Tariffs and Trade (GATT) from 1994, article VII of which establishes the main rules on customs valuation that will be observed by importers when determining the import duty calculation basis. In short, there are six customs valuation methods, which will be observed in all import transactions in subsequent order, that is, if the first method is not applicable, the second method will be applied, and so on, and so forth. The first method is applied as a general rule and the others are applied only in exceptional cases. For intercompany transactions, the first method is only applicable when the price has not been influenced by the relationship between the related parties. If the prices are affected in any way due to this situation, the subsequent methods will be applied.
Trade Intelligence/February 2018 12
It is worthy to mention that customs value and transfer price assessments are made by different departments of the Brazilian Federal Revenue, and at different times. Customs value is generally verified during customs clearance and transfer price during the assessment of income tax returns.
The question that arises is whether it would be possible to use the transfer pricing methods for customs valuation purposes and vice versa, once they consider the same reference. From the above explanations and based on the current legislation, we understand the answer would be ‘no’. Even though some countries use the same rules for both matters, in Brazil, customs valuation and transfer pricing for income tax purposes are ruled by different legislations. Therefore, due to the legal definitions of specific methods to calculate each one (the transfer pricing and customs valuation) and the lack of legal provision, customs valuation and transfer pricing methods are not interchangeable.
It is important to highlight that when dealing with transfer pricing, taxpayers are allowed to adopt the method that better suits the transaction from a tax perspective. This flexibility is not applied regarding customs valuation; t as previously mentioned, the respective methods will be duly followed in order. On some occasions, importers/exporters find themselves in a difficult position when the results from the application of those methods are different. In these cases, it is important to bear in mind the intent of each of those rules: keeping intercompany prices within a threshold between both customs valuation and transfer price rules, and, therefore, mitigating risks of assessment by tax authorities.
Even though the purpose of the two mechanisms is to avoid tax base erosion due to the interference in goods´ price forming for import and export transactions, the taxes affected by those methods are different and so are their methods of calculations and applicable legislation.
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Canada
Jaime Seidner
+1 416 687 8492
Bankruptcy of customs broker: what could this mean for importers?
A recent Canada Border Services Agency (CBSA) bulletin deals with importers who pay duties and taxes to a customs broker that goes bankrupt before remitting these amounts to the CBSA. The bulletin confirms that the importers may be subject to double payment of these remittances. However, there are options to avoid or mitigate this consequence.
CBSA bulletin
The CBSA bulletin concerns importers that may be affected by the sudden closure of Icecorp Logistics Inc. and its Icecorp Customs Brokers division (referred to together as Icecorp).
The CBSA bulletin specifically states that, “[o]utstanding account balances for transactions filed by Icecorp Logistics must be paid by the importer.”
Therefore, any business that relied on Icecorp’s brokerage services and paid duties and taxes to Icecorp may be subject to double payment of the duties and taxes that had been paid to Icecorp.
Implications
The implications can be significant, especially if your business already paid to Icecorp customs duties and taxes owed on imported goods.
But what’s more important, the implications are not limited to importers that dealt with Icecorp – they extend to importers dealing with any customs broker that goes bankrupt when the importer settles with the customs broker and not the CBSA directly.
Trade Intelligence/February 2018 14
Next steps
Importers can take steps to prevent or mitigate the double payment of duties and taxes when a customs broker goes bankrupt.
For example, as part of their import duty and import tax payment options, importers should consider paying directly to the CBSA the duties and taxes owed.
Also, importers should:
make sure that the CBSA has your up-to-date business addresses and contact details; this will ensure that all communications sent by the CBSA will be received without delay by the appropriate person
determine if they received written communications from the CBSA regarding any outstanding balances
look at their accounts with current service providers
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Colombia
Ingrid Magnolia Díaz Rincón
+57 (1) 6340555 ext: 10238
Lina María Ocampo Tenorio
+57 (1) 6340555 ext: 10229
Rafael Eugenio Vesga Pérez
+57 (1) 6340555 ext: 10511
The international trade in Colombia: focus on globalization and the world economy
Colombia has not been indifferent to the demands of economic globalization and facilitation of foreign trade and has been concerned with updating its legislation in such a way that its customs and foreign trade processes adapt more each day to that dynamic.
The key to Colombian economic growth lies in encouraging new investors, both foreign and local, with rules that favor them in tax, customs, and logistics areas, seeking to make their business competitive on local and international levels.
Due to Colombia’s strategic position in South America, the country becomes the most attractive destination for large investors who want to promote their business in Colombia as well as t in the rest of South America; for this reason, the government has been concerned to design laws that allow and facilitate commercial work. Major regulatory changes have materialized in recent years on issues such as:
Authorized Economic Operator: through this mechanism, the Colombian government established the requirements and conditions for companies incorporated in Colombia to prove that they have all the controls and mechanisms to ensure that their logistics chain is secure, facilitating the global trade commerce, allowing that the confidence of their processes not only be taken into account in Colombia but in all countries where the operator has international trade activities and with which they have subscribed or intends to sign mutual recognition agreements.
Trade Intelligence/February 2018 16
With the formal implementation of this mechanism, and adequate customs legislation, Colombia joins the list of countries that have this type of certification aiming to facilitate foreign trade.
New regulation in free trade zones: free trade zones are specific areas defined by the national government where the companies have tax and customs benefits. Since the end of 2016, the national government has been implementing changes to the regulations applicable to these areas in order to accelerate procedures and facilitate access to the regime.
The previous modifications are given by the investment generation policies and economic and social development.
The Colombian government is in the process of regulating the New Customs Statute, which, with its new regulations, seeks the customs processes optimization, the inspection of goods, the different applicable customs regimes, and other aspects that influence the foreign trade operation in Colombia; the previous in order to internationalize those processes according to the worldwide standards.
Colombia's policies and actions are designed to promote globalization and economic growth and create opportunities and possibilities for everyone by treating foreigners as national citizens.
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Ecuador
José Proaño
+593 (2) 382 9350
1 Judgment C-1254/01
How does the new customs control service rate affect trade and your business?
The new Customs Control Service Fee has generated a series of controversies on both national and international levels. Given the effect on the Ecuadorian market and its international trade relations, it’s worthwhile understanding the background and delving into some of the legal aspects and general implications.
The rate was established by means of Resolutions No. SENAE-SENAE-2017-0001-RE- (M) and SENAE-SENAE-2017-0004-RE (M) issued by the General Director of the Ecuadorian Customs Service, on November 1, 2017 and December 28, 2017, respectively. The main objective is to cover customs control services in the preceding, concurrent, and subsequent phases, carried out on the national territory. The measure entered into force on November 13, 2017 and January 15, 2018, respectively.
The taxpayers of this rate are the natural or juridical persons whom introduce into the country merchandise through any customs import procedures. A tariff of US$0.10 was established which is applied on the taxable base obtained by a coefficient resulting from dividing the declared net weight per item (gram) for the control unit (grams).
The first objection to the levy is due to its nature since the Customs Authority does not deliver any additional services to the importer; furthermore, we consider that the rate quantification may exceed the amounts necessary to cover the activities of the personnel assigned to customs control. This rate does not seem to have any characteristics of a service rate and can be considered a new tax.
In this context, several legal actions have been filed in Ecuador to avoid the application of this tax by business sectors that so far have been rejected by judges. In the future, we foresee that unconstitutionality actions will be filed in the coming months. The application of this rate has also become a barrier for imports and, essentially, it has raised concerns about relations with the World Trade Organization, the Andean Community, and the European Community due to the interference with treaties and commercial agreements. In fact, the Authorities of member countries have raised several concerns without results to date on undertaking any measures to avoid interference.
In Colombia, a similar rate was issued in 2001 and declared unconstitutional by the Constitutional Court[1], since it was not determined which customs services were provided by DIAN (Colombia's National Customs Agency) to users, nor the methodology for costs and benefits. The resolution regarding this rate and its effects on trade agreements and treaties has not yet reached its highest discussion and the legal and consular reactions of the members directly involved are expected in the coming months.
Trade Intelligence/February 2018 18
Mexico
Yamel Cado
+52 (55) 5263 2330
Óscar Manuel Garza
+52 (81) 8152 2055
oscar.manuel.garza@ pwc.com
Iván Jaso
+52 (55) 5263 8535
Norma Gascon
+52 (55) 5263 6147
Changing horizons for the Maquiladora industry as the NAFTA agreement moves on
The renegotiation process for the North American Free Trade Agreement (NAFTA) has created uncertainty for many industries and companies – not only from the United States, Canada and Mexico, but around the world. Some business are facing such challenges that they are reviewing their supply chain model, developing new strategies to be resilient, and focusing on what appears to be the new reality: change.
In the particular case of Mexico, some import and export programs created by the Federal government, which encourage the manufacturing in the country by allowing the deferral of customs duties payment upon the temporary importation of goods under the condition to conduct a manufacturing process in Mexico of goods destined to be exported, may represent an opportunity for many industries trying to reduce costs. Such is the case of the Mexican IMMEX Program. Another opportunity for national direct or indirect producers of finished goods destined to domestic or foreign market is the Promotional Sectorial Program, which enables the importation of raw materials for the manufacturing of finished goods pertaining to certain industries, at preferential duty rates regardless of their country of origin.
The renegotiations process for the NAFTA among the United States, Mexico, and Canada has created uncertainty for many industries and for what the three parties considered to be the rules of the game the last 25 years. Under this scenario, some businesses are re-examining their current state and re-considering their future state and how to adjust accordingly. .
From a customs perspective, the Mexican Maquiladora (toll manufacturing) scheme represents an alternative for the investment and grow of many companies. The IMMEX Program promotes the manufacturing entities to export finished goods by allowing temporary importation of raw materials, machinery, and equipment that will be used in a manufacturing process for later exportation of finished products. The main benefit of the temporary importation of raw materials is that the import duties payment is deferred and, in many cases, not subject to payment as long as the finished goods are ultimately exported.
Trade Intelligence/February 2018 19
Additional to the import duty benefits that the IMMEX Program offers, there is also the option to obtain Value Added Tax (VAT) and Excise Tax (ET) benefits by applying for a VAT and ET Certification. The VAT and ET Certification allows an IMMEX entity to apply a 100% VAT and ET credit upon the temporary importation of goods.
The IMMEX Program and VAT/ET Certification are not only attractive under tax and customs perspectives, but also under a business model perspective to create more jobs and promote specialized work that creates competitive strategies to operate within Mexico. The implementation of specific manufacturing processes within the country may represent an opportunity for both investors and the workforce in the long run.
The IMMEX Program and VAT/ET Certification both represent alternatives to be evaluated for the foreign investment as well as the implementation of specific and important customs and electronic controls to comply with the different customs regulations applicable to each specific industry.
On the other hand, the PROSEC Program promotes the development of national industries by allowing them to apply preferential duty treatment upon the permanent importation or the change of regime from temporary to permanent basis of raw materials (regardless of their country of origin) under the condition that they are destined to the manufacturing of finished goods of specific industries. Such preferential duty treatment enables the price of finished goods manufactured by national producers to be competitive within the domestic market and abroad. Such Program promotes the investment and development of numerous industries.
The uncertainty of the NAFTA agreement has increased the need to evaluate the customs and tax alternatives applicable in Mexico from tax, legal, transfer pricing, and customs perspectives.
The review of steps to be followed and actions to be taken to be able to apply for the customs and tax benefits in Mexico avoiding risk for the foreign and Mexican entities could be even more important than the NAFTA agreement itself.
Trade Intelligence/February 2018 20
Perú
Joseph Andrade
+(511) 2116500 ext: 8028
1 According to the WTO Customs Valuation Agreement, the following are considered test values:
– The transaction value in sales to unrelated buyers of identical or similar goods for export to the same country of importation.
– The customs value of identical or similar goods as determined under fourth valuation method (deductive value). This method is based on the unit price at which the imported goods or identical or similar imported goods are so sold in the greatest aggregate quantity, at or about the time of the importation of the goods being valued, to persons who are not related to the persons from whom they buy such goods, subject to some deductions.
– The customs value of identical or similar goods as determined under fifth valuation method (computed value), that consist of the sum of value of materials and fabrication or other processing employed in producing the imported goods, the amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to the country of importation and other concepts as transportation cost, value of insurance policy.
2 Question in the Customs Declaration is “does the declared customs value closely relates to the value of goods mentioned in article 1.2b) of the Customs Valuation Agreement (test values)”? and is preceded by the questions regarding the existence of relationship and if such relationship has affected the declared value. Note that the only possible answer to these questions is yes or no.
Transactions with related parties and the existence of test values
Peruvian Customs Administration has stated in a recent memo that importers are not required to have information regarding test values in order to support the customs value of their import operations (in an event of a related party transaction).
The use of test values[1] is an alternative that may be used by the importer in order to demonstrate that the relationship between the seller and importer has not influenced the declared price according to the World Trade Organization Valuation Agreement.
As obtaining information regarding test values is a challenging task, importers requested a clarification to the Customs Administration regarding its obligation to declare (in the Customs Declaration) the existence of test values[2].
In this regard, Customs Administration stated that the use of test values are a prerogative of the importer, and that the importer is not required to have test values to support the customs value declared.
Note that usually customs declaration is filled by the customs broker declaring that the value closely relates to test values in order to avoid further questioning and / or review of the declared customs value.
Trade Intelligence/February 2018 21
Implications
Only if the importer cannot support the fact that the relationship with the seller has not influenced the price, Peruvian Customs Administration would be able to discard the transaction value and apply the other valuation methods provided by the agreement.
Based on the fact that the importer has already declared that there are no test values, the support of the declared value will require an analysis of the circumstances of the sale.
Also, it will be noted that an incorrect declaration may cause the imposition of an administrative fine (US$ 110 per customs declaration).
Recommendations
For future operations, importers are required to double check the information regarding the existence of test values before filling the Customs Declaration.
Regarding prior operations, a review of the information declared in the Customs Declaration is highly recommended.
In order to support the customs value declared, we suggest conducting a customs valuation study (circumstances surrounding the sale, and to confirm the existence of real test values) in order to determine if the relationship between the company and its seller has (or has not) influenced the price.
Trade Intelligence/February 2018 22
United States
Anthony Tennariello
+1 (646) 471 4087
anthony.tennariello@ pwc.com
Maytee Pereira
+1 (646) 471 0810
What is the fate and future of free trade agreements in the Trump era and beyond?
The potential for American trade reform has been a font of anxiety and uncertainty for professionals in various industries since the Trump Administration began in the United States. The administration’s proposed policies, seemingly intended to curtail the rapid globalization and trade liberalization of the past few decades, have been a persistent storyline for those in the trade space. Reduction of trade deficits with major partners was one of the hallmarks of President Trump’s 2016 campaign, and seems to form the basis of much of the administration’s policy. Against this backdrop of an apparent reinvigorated protectionism, the future of new and existing American free trade agreements (FTAs) has been thrown into question. While the future landscape of American foreign trade agreements remains unclear, some signs have begun to take shape for observers of trade policy.
A shift in focus and favor to bilateral from multilateral agreements
Perhaps the most apparent change under the Trump Administration’s trade policy is a shift in focus from multilateral trade pacts toward a stated preference for bilateral agreements. One of the first actions of the administration’s Office of the US Trade Representative (USTR) was to withdraw from the Trans-Pacific Partnership Agreement (TPP), a 12-member negotiation which would have been the largest trading bloc in the world by the members’ combined Gross Domestic Product. The remaining 11 member-states decided in May 2017 to revise the agreement and continue negotiations without the United States. More recently, the United Kingdom has expressed interest in pursuing TPP participation once Brexit is concluded. Meanwhile, over the past year, the USTR has released statements regarding bilateral trade talks with TPP member-states Japan, Vietnam, and Malaysia. However, despite the administration’s stated preference for bilateral agreements, there has been little progress beyond high-level discussions with any of the TTP member-states thus far.
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Negotiations between the United States and the European Union for a proposed trade pact known as the Transatlantic Trade and Investment Partnership (TTIP), have also stalled since the advent of the Trump Administration. However, the Trump Administration has given mixed signals on its willingness to continue discussions. Commerce Secretary Wilber Ross indicated to a German audience in June that the US remains receptive for talks to resume over TTIP.
Renegotiating NAFTA and plausible outcomes
Another area of importance to companies involved in North American production is the administration’s aggressive stance on the North American Free Trade Agreement (NAFTA) which includes the United States, Canada, and Mexico. In July 2017, US Trade Representative Robert Lighthizer released the Summary of Objectives for the NAFTA Renegotiation. The first item on the list of objectives for US negotiators is to “Improve the US trade balance and reduce the trade deficit with the NAFTA countries.” How this is goal could be accomplished is unclear. The impasse caused by this fact may be evidenced by Lighthizer’s most recent statement on the conclusion of the fifth round of NAFTA renegotiations held in December in which he stated:
While we have made progress on some of our efforts to modernize NAFTA, I remain concerned about the lack of headway. Thus far, we have seen no evidence that Canada or Mexico are willing to seriously engage on provisions that will lead to a rebalanced agreement. Absent rebalancing, we will not reach a satisfactory result.
Apart from outright withdrawal from the landmark trilateral agreement, some observers believe that a tightening of the rules of origin would be a likely result of a successful renegotiation since the USTR’s list of American objectives contained a section proposing the following:
- Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.
- Ensure the rules of origin incentivize the sourcing of goods and materials from the United States and North America.
Trade Intelligence/February 2018 24
In his opening remarks at the first round of renegotiations in August, USTR Lighthizer stressed that “Rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial US content.” An explicit requirement for originating content from a specific party to a trade agreement would be a radical departure from previous FTAs, and it is difficult to see how the other NAFTA nations would accept such a provision. On the other hand, strengthened rules of origin could very well be seen in the form of regional value content (RVC) requirements being raised for certain product categories, or a decrease of the de minimis threshold from 7%.
US heightens scrutiny of the US-Korea free trade agreement
In addition to NAFTA, the USTR is also engaged in discussions with South Korea to reassess and amend the US-Korea free trade agreement (KORUS) in order to “achieve fair and reciprocal trade between our two nations.” Echoing the current renegotiation of NAFTA, reducing US trade deficit with South Korea is again the US Administration’s stated focus in reassessing KORUS. It is unclear what changes to the agreement may result from a potential renegotiation, though like NAFTA, increasingly strict rules of origin are a plausible outcome. These discussions are presently at an early stage and those in the trade space would do well to monitor developments, as they may shape the administration’s policy position toward America’s eleven other bilateral trade agreements currently in force. For instance, USTR officials recently engaged in discussions with Australia over the US-Australia free trade agreement, and statements released by the administration did not include criticisms featured in recent press releases pertaining to NAFTA or KORUS. The United States currently has a trade surplus with Australia of $13 billion.
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Are the US and UK moving towards a bilateral agreement?
Following the success of the ballot initiative for the United Kingdom to withdraw from the European Union in 2016, both the US and UK governments have stated their desire for a US-UK free trade agreement in the future. As a member of the European Union, the UK cannot negotiate bilateral trade treaties on its own until full withdrawal, scheduled for 2019 in accordance with Article 50 of the Treaty of the European Union governing withdrawal. The notion of a ‘special relationship’ between the two countries is a long standing feature of US-UK diplomacy; the two countries share a total goods and services trade of $121 billion and the most prolific bilateral foreign direct investment partnership on earth valued at over $1.1 trillion. Over the past year, USTR Lighthizer and the UK International Trade Secretary Dr. Liam Fox have met twice as part of the US-UK Trade and Investment Group. In a joint statement, after the first meeting, Dr. Fox said, “As our largest single trading partner, we have a strong foundation to build on as we start preparation on joint work to explore a future ambitious trade agreement once the UK has left the EU.” USTR Lighthizer stated, “As UK negotiations with the European Union begin, I look forward to working with Dr. Fox and the United States Congress to lay the groundwork for our future trade relationship, including exploring the possibility of a new US-UK trade agreement.” Perhaps most importantly regarding the administration’s demonstrated priorities, the US carries a $15 billion surplus in its goods and services trade with the UK.
Trade Intelligence/February 2018 26
Contact details
Argentina Eduardo Gil Roca +5411 4850 6728 [email protected]
Claus Noceti +5411 4850 4626 [email protected]
Laura Dragun +5411 4850 6722 [email protected]
Brazil Marcelo Musial +55 11 3674 3718 [email protected]
André Apostolopoulos +55 11 3674 2000 [email protected]
Aline Gatti Dardim +55 11 3674 2691 [email protected]
Raquel Petrolini +55 11 3674 2707 [email protected]
Canada Jaime Seidner +1 416 687 8492 [email protected]
Colombia Ingrid Magnolia Díaz Rincón +57 (1) 6340555 ext: 10238 [email protected]
Lina María Ocampo Tenorio +57 (1) 6340555 ext: 10229 [email protected]
Rafael Eugenio Vesga Pérez +57 (1) 6340555 ext: 10511 [email protected]
Ecuador José Proaño +593 (2) 382 9350 [email protected]
Mexico Yamel Cado +52 (55) 5263 2330 [email protected]
Óscar Manuel Garza +52 (81) 8152 2055 [email protected]
Iván Jaso +52 (55) 5263 8535 [email protected]
Norma Gascon +52 (55) 5263 6147 [email protected]
Perú Joseph Andrade +511 211 6500 ext: 8028 [email protected]
United States Anthony Tennariello +1 646 471 4087 [email protected]
Maytee Pereira +1 646 471 0810 [email protected]
The information contained in this article is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers WMS Pte Ltd (“PwC”). PwC has no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual PwC client service team or your other advisers. The materials contained in this article were assembled in February/March 2017 and were based on the law enforceable and information available at that time. © 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
