Australian Customs

Australian Trusted Trader – Free trade agreement benefits

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Australian importers have new reasons to become accredited Trusted Traders with the Australian Border Force (ABF) announcing that Trusted Traders can enjoy the benefits of certain free trade agreements (FTA) without requiring a certificate of origin or declaration of origin. This will ease the administrative burden of using FTAs for Trusted Traders. However, the Trusted Traders must still take steps to ensure the goods qualify for the FTA.

What is the Trusted Trader programme?

The Australian Border Force acknowledges that it cannot inspect all trade and that it needs to encourage greater levels of self-compliance. To this end, the Trusted Trader programme was established giving certain trade facilitation benefits to importers and exporters that demonstrate high levels of customs compliance and supply chain security. In addition to the newly announced waiver of origin documents for certain FTAs, other benefits include customs duty deferral, consolidated cargo clearance, priority treatment of goods at the border and mutual recognition under similar programmes offered by other countries.

To become an accredited Trusted Trader, an online application needs to be completed providing details of your business, your customs compliance and supply chain security record and systems. This application will be assessed by the ABF and will include and an on-site review. If offered accreditation, the Trusted Trader enters into a formal agreement with the ABF.

Origin documentation waiver benefit

Under the newly announced benefit, Trusted Traders that are importers will be able to claim the benefit of the Japan, Korea, Thailand, Singapore, Malaysia and Chile FTAs without needing to produce a certificate of origin or declaration of origin.

These documents are usually required for each import and obtaining them can be an administrative burden on the supplier and in some cases represent a small cost. Sometimes obtaining certificates of origin can slow supply chains or they may not be provided due to administrative oversight. Origin documentation can also be complex where multiple consignments are sent from a distribution centre to multiple Australian ports.

Limits of the origin waiver benefit

The benefit does not apply to all FTAs, notably, the China or ASEAN FTAs. These FTAs are heavily used and there is a requirement to produce certificate of origin. While the benefit also does not apply to the US FTA or NZ FTA or the Trans-Pacific Partnership, documentation requirements under these FTAs are light and do not warrant an exemption.

It is also important to note that origin documentation requirements under the Korea, Japan and Singapore FTAs can already be satisfied by way of exporter declarations of origin. This is not particularly onerous and does not involve a third party needing to issue the document.

Further, the benefit does not apply to exporters. Exporters will have to examine whether there are any equivalent benefits under any mutual recognition agreements.

Compliance with rules of origin

Most importantly, the origin documentation waiver benefit does not remove the requirement that the goods must still satisfy the rules of origin to qualify for the FTA. Trusted Traders will be required to maintain evidence that the goods comply with the relevant rules of origin. Assessing rules of origin can be very complex, particularly for manufactured goods where key components are imported.

The ABF suggests that Trusted Traders hold commercial documentation, contracts and statements in relation to the manufacture of the goods from the manufacturers. Importantly, the ABF states the information will need to be sufficient to prove the origin of the goods for the purpose of a FTA.

For some products this will be simple. For example, a manufacturer will easily be able to provide a written assurance that frozen berries imported from Chile were grown in Chile and satisfy the rules of origin under that FTA. However, what about a scooter importer from Malaysia. The frame, wheels, brake and handle bars may all come from different countries. The origin and value of these components may change over time. Will the supplier be aware of the impact of any change in origin of components on whether the goods qualify for the Malaysian Australian FTA?

As an Australian importer, how could you prove that the goods qualify for the FTA? For manufactured goods, origin could be proven by the supplier providing proof of the origin of inputs, the cost of inputs and evidencing what manufacturing process is undertaken in Malaysia. While the ABF suggests contractual documentation will be relevant to origin, all a contract will prove is that a party promised certain things. It does not prove what actually happened.

To be a Trusted Trader, the importer must demonstrate a desire to comply with customs laws. This should translate into the importer exercising due diligence regarding the manufacturer’s origin claims and putting in place systems to verify origin. What those systems are should be dictated by the complexity of assessing origin (for example, 100% originating timbered, versus a good manufactured from 100% imported components) and the level of revenue risk. A one off small import will warrant a less detailed system than imports valued in the millions.

Steps to take

If you are not currently a Trusted Trader you need to assess the merits of applying versus the costs. The application process is now much simpler and the online form is estimated to take 5-10 hours to complete. While the costs are decreasing, the benefits are increasing. In a world of increasing trade protection, most businesses will see the benefit of qualifying for a programme offering trade liberalisation benefits.

If you are a Trusted Trader and want to use the origin waiver benefit, the first question to ask is – why is it currently hard to obtain a certificate of origin? If the supplier finds it difficult to assess or satisfy the rules of origin, extreme caution should be exercised. This benefit is not a relaxation of the rules, only of the paperwork required.

If you wish to use the benefit, you need to ensure you obtain sufficient information to prove origin in the event of an audit (which could happen any time over the next four years). This involves a level of due diligence and it will be important to assess the cost of carrying out that due diligence against the benefit of not having to produce origin documentation. You should also consider whether any contractual amendments are required to give you the right to carry out the due diligence and/or compel the supplier to provide you with certain documents.

How we can help

We regularly advise importers, exporter and customs brokers on using free trade agreements and the Trusted Trader Programme. We can help your business decide whether to apply to become a Trusted Trader or, if you are a Trusted Trader, how to manage the risks of using the origin documentation waiver benefit. Please contact us for assistance with the Trusted Trader process.

Indonesia and Australia Finally Ink a Free Trade Agreement

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On 4 March Australian and Indonesia signed a free trade agreement that has been a long time in the making.  Australia and Indonesia are both parties to the ASEAN-Australia-New Zealand FTA limiting the additional benefit of this bilateral FTA.  The major benefits will be for Australian exporters to Indonesia and service providers.

When will it commence

The FTA only commences when each country passes and implements its relevant domestic legislation.  Australia will undertake one or more parliamentary reviews of the FTA before a vote is taken on whether it should become law.  This process could be delayed by the expected mid-year Federal election.  As a guide to timing, the TPP was signed in early March 2018 and became law in late December 2018.

What are the benefits for Australian importers – duty rates

Almost all Indonesian imports are current duty free under the ASEAN FTA.  The remaining duties will become duty free on entry into force of the Indonesian FTA.  However, the benefit of this has been reduced due to the time that it has taken to finalise the agreement.  All goods from Indonesia would have been duty free on 1 January 2020 in any event under the ASEAN FTA.

What are the benefits for Australian exporters – duty rates

Duty rates on many Australian exports were not cut to zero under the ASEAN FTA.  The new bilateral FTA does not drop all duty rates to zero, but there are significant improvements.  Here is the DFAT summary of the outcomes in respect of goods.  Key winners are exporters of live cattle, frozen beef, sheep and goat meat, certain dairy products, honey, potatoes, carrots, mandarins, oranges, lemons and bananas.

In respect of manufactured goods, Indonesia had already provided strong commitments under the ASEAN FTA.  However, there are some improvements in respect of steel, copper cathodes, plastics, machinery, textiles, electronics and textiles.

Its not just about the rate of duty – check the rule of origin

The duty rates under the ASEAN FTA and the Indonesian FTA will often be the same.  However, an importer or exporter may find it easier to qualify for one FTA than the other.  The ASEAN FTA has the benefit that it allows content from NZ and other ASEAN countries to count as qualifying content.  However, it may be that for a particular tariff line there is a different rule of origin under each FTA.  For traders of goods that have any non-Indonesian or Australian content, the rules of origin should be closely reviewed.  You may find that a good that did not qualify under the ASEAN FTA will now qualify under the Indonesian FTA.

Certificate/declarations of origin

The biggest win for importers is the possibility of using declarations of origin, rather than certificates of origin under the ASEAN FTA.  A registration scheme will be in place in respect of declarations of origin.  Exporters will need to be registered or certified by the exporting country before they can use declarations of origin.  This will be better than the situation under ChAFTA but it is not as user friendly at the TPP.

Certificates of origin under the Indonesian FTA are not particularly exciting.  It is one COO per shipment, valid for 12 months from the date of issue and there is scope for certificates to be retrospectively issued within 12 months of export.

Declarations of origin will take no set form and can be electronic.  There are key data fields which those registering to use declarations of origin will need to ensure they meet.

Other points

  • The consignment provisions are as restrictive as those in the ASEAN FTA, including the requirement that the transhipment be justified by geographical, economical or logistical reasons.
  • The FTA will apply to goods entered for home consumption after the FTA commences.
  • The FTA requires the origin hardcopy COO to be forwarded to the importer for presentation to their customs authority. We assume this will not be enforced in respect of Australian imports.
  • The FTA contains a chapter on non-tariff measures, a first for an Australian FTA. This is targeted at import/export restrictions or licensing requirements.  Its main practical effect is expected to be a mechanism for raising and resolving concerns regarding non-tariff barriers.

The Australian Border Force has made no secret that compliance with FTA requirements is a focus area.  It is crucial with the multitude of overlapping FTAs that traders pay careful attention to which FTA is being used what are the particular requirements of that FTA.

Australian Tariff Classification Update

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Classification of common household products is not as straightforward as it seems

 What do baby wipes, vitamins, weight loss tablets and apple cider have in common? They have all been the subject of Australian legal decisions regarding their tariff classification. The relevance of the decisions goes beyond just the goods the subject of the decision, but extends to all importers for goods into Australia. The classification principles set out in the below cases need to be kept in mind no matter what the product.

Why is tariff classification important

Many would know that the tariff classification of goods drives the customs duty rate. However, the importance of classification goes beyond this and can be important for duty free goods.  Classification also impacts:

  • the application of free trade agreements
  • whether dumping duty applies
  • import and export restrictions applying to the goods
  • the use of tariff concession orders and by-laws.

Equally as important, the Australian Border Force expects importers to provide the correct information.  Penalties can apply for incorrect classifications, even if it does not have a duty impact.

Classification of vitamins

The Full Federal Court of Australia considered in Comptroller General of Customs v Pharm-A-Care Laboratories Pty Ltd [2018] whether vita-gummies should be classified to heading 3004 as a medicament, heading 1704 as sugar confectionary or 2106 as a food preparation.  A vita-gummy is a chewable gummy item that contains vitamins.

The vita-gummies should be classified to 3004 if they have a therapeutic or prophylactic use and are not a food (including a food supplement).  The Court readily accepted that vitamins have therapeutic or prophylactic uses – they prevent diseases that result from a vitamin deficiency.

The key issue was whether vitamins fit within the definition of food. The Court took a very simply approach to this question. The judges did not rely on experts or dictionary definitions.  Rather, the judges felt that when a word in issue is an everyday word, the Court can define that word based on its own experience. The Court found that a vitamin preparation would not ordinarily be described as food in the sense in which the word is ordinarily used. The Court did not define the term food, feeling that it is a word that does not have any absolute definition.

Lesson – if the term in dispute is an everyday item, the decision maker should not apply technical or strained meanings. The decision maker should apply their everyday understanding of the word.

Weight loss gummies

In the Pharm-A-Care case the Court also considered the classification of weight loss gummies. These were gummies that contained a garcinia cambogia extract. Again, the competing classifications were 3004 (medicament), 1704 (confectionary) and 2106 (food preparation). The Court found that the goods did not have a therapeutic or prophylactic use (there was no evidence the goods actually caused weight loss). However, the Court considered that a gummy consumed for cosmetic reasons could not be described as food. The Court upheld the earlier Tribunal’s decision that the goods should be classified according to the heading to which they were most akin. This was held to be medicaments.

Given that the product had no proven health benefits, this outcome is very surprising. The product was not classified as a food as it was taken for cosmetic reasons.  There are many foods that are consumed for reasons unrelated to nutrition. Given the weight loss gummies were dusted with sugar and contained sucrose, glucose syrup, gelatine and flavours (together with a plant extract) there is a very good argument that the goods are most akin to confectionary or a food preparation. Alternatively, if the defining feature of the product is the plant extract, perhaps the product was most akin to a plant extract.

Lesson – A product not clearly identifiable as food and consumed for a reason other than nutrition, may not be classified as a food.  This has significant impact for the health food industry.

Baby wipes

In Church & Dwight (Australia) Pty Ltd and Comptroller General of Customs [2019] the Administrative Appeals Tribunal (AAT) had to consider whether certain baby wipes were classified under heading 3401 as non-woven impregnated, coated or covered with soap or detergent or under heading 3004 (medicaments). The notes to 3004 set out that if the goods fit within both heading 3401 and 3004, the goods were to be classified to heading 3401.

One product was described as a water wipe and was impregnated with a solution that was 99% water. The solution used in the water wipes also included polysorbate 20 in a concentration of 0.125%. Polysorbate 20 can be used as a detergent, or as an emulsifier. The AAT received evidence from two experts. One expert argued that polysorbate 20 is a detergent regardless of how it is used in a particular product, the other argued that when used in the baby wipes, the polysorbate 20 has limited cleaning properties and should be identified by its use as an emulsifier.

The Tribunal preferred the more scientific approach which identified polysorbate by its objective properties (cleaning) and not the use to which they were put in the baby wipe. The Tribunal found that polysorbate 20 had cleaning properties and was therefore a detergent, even if it was also an emulsifier.

Lesson – A decision maker will focus on the objective properties of a good over the particular use to which the good is put by the importer. 

Fun fact – the detergent polysorbate 20 is sometimes used as an ingredient in ice-cream.

Apple cider

In Australia there are certain limited circumstances under which apple cider will not attract large excise equivalent duties. To be an excise free apple cider it must not have had added to it, at any time, any liquor or substance (other than water or the juice or must of apples or pears) that gives colour or flavour. In Woolworths Group Ltd v Comptroller-General of Customs [2019] the AAT had to consider whether apple cider that contained caramelised apple juice concentrate fit this definition.

The caramelised apple juice concentrate was added to enhance the colour and taste of the cider. Custom argued that through caramelisation, the additive could no longer be identified as “apple juice”. Rather, it has been transformed into something else.

The importer produced expert evidence that the caramelised concentrate was  still apple juice, just more concentrated. It was argued that only water needed to be added to produce apple juice which could be consumed or sold as apple juice.

The Tribunal held that the caramelised concentrate was still apple juice, it had not been made into something else. Rather, it has just been made more delicious.

Apple juice is a word of ordinary meaning. It is surprising that the Tribunal needed the evidence of an expert to define this term.

Lesson – Cases are inconsistent. Despite the approach advocated by the Full Federal Court, even with words of everyday use, decision makers will still refer to expert evidence to make decisions. If you are unhappy with an outcome by the Australian Border Force, it is worth engaging a lawyer to present your case to the AAT.

Classification can be difficult and it is an area where reasonable people can come to different conclusions. We are happy to review your case and provide you with an honest opinion as to the chances of a successful appeal. Given the complexities of tariff classification and the impact of getting it wrong, this is an area where importers and their customs brokers need to proactively manage the risk and not simply hope that there is never an audit.