The Eight Customs Supply Chain Activities

In the past, there was a view that the Customs supply chain only starts when the goods arrive at a Customs border post or port of entry. However, times have changed and today Customs Administrations have become interested in a global transaction from the time when the seller and buyer, for example, conclude a sales contract to trade and transport goods cross border. It therefore stands to reason that it is important to have a good understanding of the key elements that make-up the Customs supply chain to ensure compliance is upheld throughout the process. As per the diagram below, the Customs supply chain involves two principal parties, that is a seller and a buyer, each in a different country, agreeing to trade with goods. The diagram below illustrates that the sales contract will, amongst other things, cover eight key Customs activities which will be discussed in more detail:

As per the above diagram, it is suggested that there are, amongst other activities, eight key Customs activities that define and make-up the Customs supply chain:

? Activity 1 – Sales Contract: The seller and buyer need to formally agree on the trade and transport terms, and it is advisable that the details be captured within a contract of sale. The contract of sale, amongst other things, will also confirm the payment arrangements, that is whether it will be a documentary credit, documentary collection or open account arrangement.

? Activity 2 – Trade Terms: Trade terms or otherwise known as Incoterms are no substitute for a contract of sale but is useful in assisting the seller and buyer to define their risk and cost obligations – especially if there are cultural and language barriers to overcome while agreeing on each party’s risk and cost obligations. It needs to be noted that Incoterms are always seen from a seller’s point of view.

? Activity 3 – Origin: The Customs supply chain may require that the seller confirm whether the goods are originated from the country of export and this request may require that the seller confirms that the origin-status complies with a specific trade agreement’s protocol. This confirmation carries a major risk for the seller/exporter since non-compliance in the country of import will result in the buyer passing on the opportunity costs, penalties and interest incurred should the certificate of origin be inaccurate. The seller will have little choice but to accept these unforeseen costs since the buyer relied, in good faith, on the origin certificate issued by the seller and to avoid spoiling the relationship – the seller will have to step in and accept accountability for the origin liability.

? Activity 4 – Valuation: Both the seller (exporter) and the buyer (importer) will be required to confirm the Customs value of the goods and as defined within each country’s Customs legislation. The majority of countries in the world follow the World Trade Organisation’s (WTO) rules for imported goods as defined in the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (GATT). The Value-Added Tax (VAT) to be paid at the time of import may require a VAT value that is calculated taking the Customs value into consideration. In other words, if the Customs value is over or under declared, then the VAT value will be incorrect, and the VAT paid will then also be incorrect. The Customs value of exported goods may be defined in the seller’s Customs legislation.

? Activity 5 – Tariff: Similarly, the exported and imported goods need to be classified in accordance with the Harmonized Commodity Description and Coding System also referred to as the "Harmonized System" or simply "HS". The HS tariff is a multipurpose international product nomenclature developed by the World Customs Organization (WCO). The first six digits of the HS tariff is international and as a result the seller and the buyer should both be using the same six-digit tariff code when exporting and importing the same goods. A mismatch of the six-digit tariff codes may result in the Customs Administration doing an investigating to confirm the correct tariff subheading classification together with the correct Customs rate of duty.

? Activity 6 – Customs Broker Agreement and Instructions: Sellers and buyers may rely on a Customs Broker to assist them to do the export and/or import clearance and since the Customs Broker is acting as “agent” it is important that the seller and/or the buyer act as principal party, which means that they need to make the final decisions regarding the Customs clearance process and information related to this process and provide clearing instructions, preferably per shipment, to confirm that the Customs Broker is acting as agent and on the seller or buyer’s instructions.

? Activity 7 – Main Carriage Transport Arrangement: Depending on the contract of sale and the agreed Incoterm, either the seller or the buyer will be responsible for the transport arrangement to export the goods from the export country for delivery in the import country. The transport document is a contract between the carrier and the shipper and as a result the transport document should be prepared in line with the contract of sale and the Incoterm. Watch out for house waybills, house sea waybills or house bills of lading. These “house” transport documents are not issued by the actual carrier but possibly by the freight forwarder and since house transport documents are issued by the freight forwarder – the carrier will not engage directly with the seller or the buyer but with the freight forwarder since the master air waybill, master sea waybill, or master bill of lading will be a transport contract between the freight forwarder and the actual carrier. The seller, for example, must make sure that the master transport document lists the seller as the shipper since the transport contract is between the carrier and the shipper.

? Activity 8 – Indirect or Direct Export: The Customs supply chain involves both Customs and VAT. As a result, it is important to confirm upfront whether the export will be viewed as an indirect export or a direct export. If the seller sells the goods and the sale arrangement falls within the indirect export definition, then VAT at the standard rate will apply. If the seller sells the goods and the sale arrangement falls within the direct export definition, then VAT at the zero-rate will apply. It is advisable for the seller to contract directly with the local carrier to ensure it is in control of the export as well as making sure the goods are exported and will not end-up in the seller’s local market whereby the buyer is now competing with the seller.

It is possible that there are more activities than the eight mentioned above. However, once a seller and buyer begins the process to identify the key activities that will define the Customs supply chain and, which party is responsible for a particular activity, then both parties stand a better chance to control and manage the Customs supply chain covering a specific sales contract in order to ensure it complies with a relevant country’s Customs legislation and that the landed cost of the imported goods do not result in some unpleasant surprises such as additional costs after the goods have been sold to end-users.

Ronnie van Rooyen (LLM Maritime Law and MPhil Maritime Studies).