INSIGHT: Benefits of New Trade Documentation Waiver in Australia

The Australian government announced changes that provide a certificate of origin waiver benefit exempting businesses accredited under its authorized economic operator (AEO) initiative, the Australian Trusted Trader (ATT) program, from providing documentary evidence of origin at the time of importation.

This measure, announced on June 28, 2019, is part of a growing suite of trade facilitation benefits afforded to such businesses, which have never been more important in the wake of escalating global trade tensions. Whilst it will reduce the administrative and financial burden on importers, there remains the need to take steps to ensure goods legally qualify for trade benefits.

Authorized Economic Operator Programs

An AEO is a party involved in the international movement of goods and approved by a national customs administration as complying with World Customs Organization (WCO) or equivalent supply chain security standards.

To qualify, traders must demonstrate that they have robust processes and controls in place in respect of all customs matters. More than 80 countries around the world have adopted AEO programs and businesses accredited under an AEO program are afforded international recognition, preferential treatment and trade facilitation benefits. AEO programs aim to facilitate legitimate trade, harmonize and standardize the application of customs controls and provide an electronic environment for streamlined and efficient customs procedures.

As the U.K. continues to navigate its journey towards Brexit and a departure from the EU, AEO certification will become even more desirable as an internationally recognized tool to keep cargo moving and assist in reducing the risk of delays at the post-Brexit border.

Both the EU and U.K. are expected to recognize each other’s AEO schemes in a post-Brexit environment. A new AEO system also took effect between China and Japan from June 1, 2019, allowing companies from both countries to trade with greater convenience in customs declarations. The timing is opportune with such multilateral deals providing China with opportunities for growth against the backdrop of its ongoing trade war with the U.S. resulting in a decline in trade volume.

Australian Trusted Trader Program

Australia’s AEO program is the ATT program, which is administered by the Australian Border Force (ABF), and aimed at streamlining border operations and processes for businesses approved as “trusted traders” (TT). Key benefits include duty deferral resulting in cost savings, faster border clearance due to fewer customs controls and recognition as a secure business partner globally by countries and regulatory authorities with whom Australia has a mutual recognition agreement (where countries agree to recognize one another’s conformity assessments). Eligible businesses include importers, exporters and service providers.

In the wake of the current global trade system which is in a state of flux due to geopolitical tensions, changes in national trade policies and growing protectionist sentiments, access to AEO program benefits has never been more important for businesses to facilitate smooth international trade dealings.

Rules of Origin

The rules of origin (RoO) are an agreed set of rules between countries that share a preferential trade agreement (PTA), such as a free trade agreement (FTA), and determine the criteria for which goods are eligible for free or preferential import tariffs.

In order for importers to qualify for preferential treatment under a PTA for their goods, they will need to demonstrate that they comply with the RoO under the relevant PTA. This is done by completing documentation to demonstrate to the relevant customs administration in the destination country that the products will qualify for preferential tariff treatment under the PTA.

Typically, RoO criteria require a product to be entirely produced in one of the participating countries, or have a minimum percentage of the value produced there. Their importance is derived from the fact that duties and restrictions often depend upon the source of imports. While the requirement of substantial transformation is universally recognized, the criterion differs between countries and ranges from change of tariff classification or ad valorem percentage to manufacturing or processing operation.

Satisfying Rules of Origin

Assessing RoO can be very complex, particularly for manufactured goods where key components are imported from a range of different countries. Australian importers of manufactured goods need to prove each component qualifies for the requisite PTA. For example, Australian manufacturers of trucks may import multiple goods that form the components of such vehicles, e.g. windshields, bumpers, mirrors, wheels, fuel tanks etc. which may all come from different countries with the origin and value of these components potentially changing over time.

For manufactured goods, origin can be satisfied if suppliers can provide proof of the origin of inputs, the cost of inputs and evidence of what manufacturing process is undertaken in the source country. While the ABF suggests that contractual documentation will be relevant to origin, a contract merely proves that a party to the dealings provided an assurance rather than evidencing an outcome. To be a TT, an importer must demonstrate a desire to comply with customs laws, which includes ensuring that systems are in place to verify a manufacturer’s origin claims, and often this is satisfied through provision of origin documents.

Origin Documents

Origin documents are usually required for imports and obtaining them can result in both an administrative and financial burden for suppliers. The certificate of origin (CoO) is a document to certify the place of growth, production or manufacture of goods. A certified declaration of origin (DoO) verifies that the goods were manufactured outside Australia and is required when origin certification is requested by the destination country. Obtaining origin documentation can be complex where multiple consignments are sent from a distribution center to multiple Australian ports. Adhering to documentation requirements also has the effect of impeding supply chain processes.

Changes

As of June 28, 2019, TT importers will no longer be required to obtain or present origin certification documents, such as a CoO or DoO, in order to claim preferential rates of duty under certain PTAs.

This provision applies to Australia’s FTAs with Chile, Korea, Malaysia, Singapore and Thailand and the Economic Partnership Agreement with Japan. The origin waiver benefit exempts TTs from providing documentary evidence of origin, reducing the administrative burden of obtaining this evidence, and reducing the costs associated with certification. Origin documentation requirements under the Korea, Japan and Singapore FTAs can already be satisfied by way of exporter declarations of origin, which are not particularly onerous to obtain and do not involve a third party needing to issue documents.

Compliance with Rules of Origin Remain

It is important to note that the origin documentation waiver benefit does not remove the requirement that TTs maintain evidence that the goods comply with the relevant rules of origin. TT importers will still be required to keep evidence (generally for a period of at least five years from the day of importation) that imported goods comply with the relevant rules of origin and present this if asked.

Examples of evidence include commercial documentation, contracts and statements in relation to the manufacture of the goods that contain information sufficient to prove the origin of the goods for the purpose of a PTA, and statements in relation to manufacturing process, materials and compliance with cost requirements from manufacturers.

Evidence also needs to be sufficient to prove that the goods meet the relevant Division of the Customs Act 1901 (Australia’s customs legislation) and Australian Customs Regulations pertaining to RoO (for the relevant PTA) in the absence of a CoO or DoO. If available under the provisions of the relevant PTA, TT importers may be able to meet a request for evidence of origin by providing “retrospective” origin documentation, e.g. a “retrospective” CoO or DoO.

Limits of the Origin Waiver Benefit

The origin waiver benefit does not apply to goods imported prior to June 28, 2019, refund applications or exporters, who will have to examine whether there are any equivalent benefits under any mutual recognition agreements. The benefit also does not apply to all PTAs, notably the Australia–China FTA and ASEAN–Australia–New Zealand FTA. These are both heavily used and the requirement to produce CoO remains. For some goods there must be a minimum level of Chinese or Australian content; for other goods, the focus is on what happens to the goods in China or Australia (e.g. production processes).

Conversely, the benefit also does not apply, but with less detriment, to the new Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) that took effect from December 30, 2018 that Australia is a signatory to along with ten other countries. This is because the CPTPP has preferential RoO criteria used to ensure that only goods that meet the CPTPP origin criteria receive CPTPP preferential rates of customs duty set out in the importing Party’s Tariff Elimination Schedule. This prevents non-member countries from gaining preferential benefits from the CPTPP.

Risky Business

The origin certificate waiver benefit does not relinquish the need to satisfy RoO under PTAs, but rather reduces administrative paperwork by removing layers of control in the process of obtaining documentation and makes the use of PTAs more attractive to businesses (difficulty in satisfying RoO is the primary reason for under-utilization of PTAs). The risks faced by importers engaged in transactions remains however, therefore they must continue to be vigilant. The usual red flags will not apply i.e. where an issuing authority will not provide a CoO with the correct manufacturer or goods details, such as a HS code (or alternatively will not issue a CoO at all) therefore importers must keep an eye out for other signs of compliance risk. These include where an exporter is having difficulty assessing if goods satisfy RoO (concealed by the waiver).

If goods do not satisfy the relevant RoO, it will mean that there was a false statement made regarding the application of a PTA that resulted in an underpayment of duty. This can result in obligations to pay underpaid duty, fines, removal of TT status and prosecution. Using a PTA without a CoO or DoO is inherently risky by removing the most robust evidence an importer or customs broker has to prove imported goods satisfy the terms of a PTA used to minimize or eliminate duty. TTs therefore should take appropriate action to mitigate their risk.

Action Required

TTs that wish to obtain the origin waiver benefit should ensure that they obtain sufficient information to prove origin in the event of an audit (which can take place up to four years from the date of import). Consideration should be given to provisions in contracts (or contractual amendments) that provide the right to perform necessary due diligence and/or compel a supplier to provide requisite documents relating to origin validation.

TTs should also work closely with their suppliers and customs brokers to understand what is required to assess origin and put in place appropriate processes so they can continue to benefit from trade facilitation and reduced supply chain costs but with minimal added risk.

It is important to note that TTs who have paid duty on goods that are later revealed to be originating goods under an eligible PTA, may apply for a refund of overpaid duties. An application for a refund must include documentary evidence of origin, such as the commercial documentation, manufacture statements or a CoO or DoO.

Finally, importers that are not currently TTs should consider applying for accreditation. In a world of escalating global trade tensions and growing protectionist sentiments, trade liberalization benefits have never been more valuable for those that qualify. The origin waiver benefit is the latest in an increasingly growing suite of trade facilitation benefits afford to such businesses including priority processing, consolidated cargo clearance and duty deferral.

Bill Cole is International Trade Partner and Meera Pillai is Tax Senior Manager at BDO Australia.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.