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Free Trade Agreements: Increasing Utilisation but Emerging Compliance Issues

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Australian traders are embracing the trio of free trade agreements negotiated between 2014 and 2015. DFAT has reported that use of the Japan, Korea and China FTAs is up above 80%. This level of utilisation is a great return on the investment the Government has made with promoting the Northern Asian FTAs. However, it is important to remember that the FTA landscape is not static and there are both emerging opportunities and risks.

Existing FTAs, new opportunities

For Australian exports in particular, lower duty rates are phased in over time. The duty rates generally drop on 1 January (China and Korea) but for Japan the rates drop on 1 April. With each year’s duty reduction, the opportunity and competitive advantage granted by the FTA increases and it is important to periodically review whether using the FTA makes sense for your business.

FTAs on the drawing board

The low hanging fruit has gone but there are still important FTA opportunities which the Australian Government is pursuing.

  • The EU and Australia have concluded a joint scoping exercise on a potential FTA.  This exercise is a prelude to formal negotiations and will form the basis for gaining agreement from EU member states to commence negotiations, and, the scope of those negotiations. While Britain will not be part of this FTA, Germany, Italy and France each fall within the top 15 countries that export to Australia.
  • Speaking of Britain, Liam Fox, the British International Trade Secretary has made a personal submission to an Australian parliamentary committee on foreign affairs and trade in which he advocated an FTA between Britain and Australia. However, any such FTA could not be concluded before Britain leaves the EU (2019). This, Mr Fox submitted, would not prevent preparatory work being undertaken in the meantime.
  • The brakes have been put on FTA negotiations between Australia and India. For 3 years we have heard comments that the FTA with India will be streamlined and it was originally hoped to be concluded by the end of 2015. Now Prime Minister Turnbull has emphasised the need for a quality deal over a quick deal. The delay reflects the challenges of concluding an FTA between two countries with very different levels of economic development and existing protection.
  • After the fall of the Trans-Pacific Partnership, all eyes turned to the Regional Comprehensive Economic Partnership (RCEP) which involves Australia, China, Korea, India, Japan, NZ and the ASEAN countries. Negotiations for this agreement began in late 2012 and were hoped to be concluded last year.  Recently the negotiating parties affirmed their commitment to a quality agreement in the “headwinds against globalisation”. However, “quality agreements” is also code for longer negotiations.
  • The Government has recently announced that negotiations of the Pacific Agreement on Closer Economic Relations (PACER) Plus have concluded. PACER Plus is an agreement covering Australia, NZ and 13 Pacific Islands such as Fiji and Vanuatu. It is not a traditional FTA in that Australia was not seeking a balanced outcome. Rather it was seeking to promote economic development for the Pacific Island countries. From an Australian import tariff perspective, little will change with most member countries already enjoying developing country duty-free status. However, it is likely that the rules of origin will be more flexible under PACER Plus than those currently relating to developing countries. While the removal of some Pacific Island import tariffs is expected, the gains are not likely to be as significant for Australian exporter as achieved under other FTAs. More details should follow in the coming months.

Be careful when using FTAs

There is a catch with using FTAs, if you use them incorrectly, you are liable for underpaid duty.  We are starting to see an increase in issues with the certificates of origin used to justify the use of FTAs. Issues include:

  • The CoO missing key elements such as the HS code of the goods or the rule of origin being used;
  • The CoO missing mandatory information which may not seem crucial. Examples include the quantity and/or brand of the goods. It is also important to remember that many FTAs require CoOs to include a “detailed” goods description.
  • The one CoO is being used for multiple shipments. Issues can arise where the supplier provides the one CoO for an order that is then broken up into multiple shipments to Australia.
  • An ASEAN CoO is provided but the importer seeks to use the Thai, Singapore or Malaysian FTA.
  • The HS code on the CoO is different to the HS code on the import declaration.

The extent to which the above problems prevent the use of a FTA depends on the terms of the FTA and severity of the defect.

Currently, these issues are more likely to arise upon review of a refund application made by the importer. However, the action of the refunds area is almost a crystal ball to the future focus areas of the Australian Border Force. If an issue is stopping refunds in 2017 it is not unlikely to suspect that it will be a compliance focus area in 2018 and beyond. In this respect, it is important to remember that compliance reviews can go back 4 years, but it is generally only possible to correct a defective CoO within 12 months of the export of goods.

If you rely on a FTA for a transaction to be economically viable, you cannot chance whether the use of that FTA will withstand an ABF audit.

China Free Trade Agreement to Commence on 20 December

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The Free Trade Agreement between Australia and China will commence on 20 December bringing with it an immediate round of tariff cuts and a further round of cuts on 1 January 2016. With only 11 days’ notice of commencement, importers and exporters need to act quickly to prepare.

What goods will qualify?

The benefits of the FTA will not apply automatically. Importers of goods need to claim the benefit of the FTA, and they can only do so if the goods meet the rules of origin and the applicable paperwork is held. For most importers this will be a certificate of origin issued by an authorised body. If a ruling has been obtained from the Customs Authority of the importing country, a self-certified declaration of origin can be provided by the exporter in place of a certificate of origin.

What if I don’t have a certificate of origin?

Certificates of origin will not be issued until after the FTA commences. Further, there will be goods already on the water for which no certificate of origin is held. If those goods arrive on or after 20 December the goods can be entered and duty paid, with the importer having 6 months to retrospectively obtain a certificate of origin. Once the certificate is held, a refund can be claimed.

For goods that arrive prior to 20 December whether the FTA potentially applies will depend on whether an import declaration had already been lodged, whether the goods are warehoused until 20 December and whether the Customs Authority considers that warehousing of goods prior to clearance means the goods are in the process of being transported.

If the arrival of the goods will be close to 1 January, importers should consider delaying the lodgement of an import declaration and clearance of the goods until after 1 January. Delaying clearance until after 1 January will mean that goods will benefit from the second round of tariff reductions.  Of course this is only relevant if the duty rate wasn’t reduced to zero on implementation.

What to do now?

If you haven’t already done so, there are some preliminary steps that need to be taken:

  • Assess how the FTA affects your goods – Are the duty saving significant enough to invest time into ensuring the FTA is utilised? Generally the saving,s on imports into Australia will be a maximum of 5%. Imports into China may have duty savings in excess of 20%
  • If it makes commercial sense, determine whether your goods qualify for the reduced rate. FTAs are underutilised because the qualification rules are difficult. However, with a proactive holistic approach, the challenges of FTAs can be overcome
  • Speak to your supplier (for importers) or customer (for exporters) about the FTA. Will your suppliers be able to provide a certificate of origin? Will your customers actually claim the FTA if you go to the effort of obtaining a certificate of origin?
  • Appoint someone in your organise who will be responsible for your organisation’s use of FTAs. Utilisation of FTAs is much higher for organisations where there is someone managing FTAs.  Use of FTAs requires input from accounting, legal and logistics. This approach needs to be managed as high FTA use will not happen by accident

It is crucial that traders take FTA use seriously. Issues such as tariff concessions are often seen as merely operational matters. However, failure to properly manage FTA use can result in either a loss of competitive advantage, or more alarmingly, customs non-compliance.

Budget 2015: 10 Customs Issues

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Customs will never dominate the headlines on Australian budget night, but this does not mean that there are not measures in the budget that impact the customs and global trade community. Buried away in the budget papers are increases in penalties, increases in fees paid by importers and interesting predictions about the level of duty collections over the next 4 years.

A quick review of the budget papers reveals the following 10 relevant trade-related measures:

  1. Penalties to increase – Fines for most customs offences are measured in penalty units. The amount of penalty units will increase from $170 per unit to $180 per unit from 31 July 2015. Most infringement notices for companies are set at 45 penalty units, meaning a $450 increase in penalties for most strict liability offences.
  2. Impact of FTAs – Customs duty on items other than fuel, alcohol and tobacco is estimated to fall from $2.95 billion in 2014-15 to $1.72 billion in 2018-19. Most of this fall can be attributed to duty savings under the China, Japan and Korea FTAs with the balance relating to the drop in the rate on clothing and textiles from 10% – 5% on 1 January 2015.
  3. Duty on vehicles – We may not have a local industry in 2019 but we are still expected to have customs duties. Estimates of duty in 2018/19 on passenger motor vehicles is $450 million.  This seems a high amount for consumers to pay to protect a local industry that will have left the country by 2018.
  4. Trusted trader – The Government has announced $5.6 million of funding for the development of the Trusted Trader program.  The pilot for this program is set to commence in July 2015.  It will initially comprise of only 4 sea freight exporters but will expand over 40 participants of the following 12 months.  There was no detail in the budget of the revenue measures associated with this program, such as duty deferral.
  5. Taxing of multinationals – The Government will target 30 multinationals which it is alleged are involved in profit shifting. Profits can be shifted via a variety of methods.  Where those methods relate to the cost of goods (such as overcharging) or the payment of royalties or license fees, reversing those profit shifting strategies may have customs implications. The relationship between customs duty and transfer pricing has always been difficult, and this budget promises to put the issue again in the spotlight.
  6. FTA promotion – Expect to hear a lot about the recent FTAs with the Australian Trade Commission and DFAT receiving an increase of $25 million over the next two years to promote FTAs.
  7. Managing Biosecurity Risks – The Department of Agriculture will receive increased funding to manage the risks of an increasingly complex global supply chain. Increased activities will include assessing and auditing offshore supply chains and increased surveillance of sea and air cargo terminals.
  8. Import processing charge – The Government expects that changes to the import processing charge will result in additional revenue of $107 million over 4 years. Part of the changes will cover trade-related reform (presumably the Trusted Trader program), remove different charges based on post/air/sea and increase the cost of manual declarations.
  9. Broker licence charges – License charges for brokers, depots and warehouses will be restructured with increased licence renewal charges and a new warehouse licence variation charge. These new charges will commence from 1 January 2016.
  10. Australian Border Force – The major customs development was announced last budget with the merging of Customs and Immigration. The Government is banking on the new Department of Immigration and Border Protection to be efficient. It has budgeted savings of over $40 million per year to be achieved by the merger.

The budget shows a trend – importing goods is becoming less about payment of duty. It is budgeted that non-excise equivalent duty will fall by nearly 50% over the next 4 years. At the same time, we will see other charges increase, such as import processing charges, license fees and penalties.

The decrease in duty does not mean that the role of a broker is any easier. However, when there is less duty to manage it does become harder to demonstrate the benefits to clients. One outcome of increased compliance activities and the proposed introduction of the Trusted Trader Program is that a high level of trade compliance will be rewarded, even if it does not have a duty impact.

Free Trade Agreement Concluded with Japan – the Second Leg of the North Asia Trifecta has Arrived

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Following a flurry of media speculation on 7 April 2014, the Federal Government announced that Australia had concluded negotiations for a free trade agreement with Japan as Australia’s second-biggest trading partner.  However, it is not called a free trade agreement rather it has been titled the Japan-Australia Economic Partnership Agreement (“JAEPA”).  The use of an alternative terminology is interesting and the explanation for the use of such a term is yet to be provided.

The media release from the Minister for Trade for the JAEPA refers to Australia being the first major agricultural exporting country to conclude such a liberalising agreement with Japan.  At this stage, the full text of the JAEPA has not been released, nor has full detail of concessions granted by each country to the other.  Accordingly, details are limited to those provided by DFAT.

The highlights which can be distilled from the DFAT release suggest the following:

  • Australian agricultural exports will secure significant benefits with tariffs of up to 219% to be eliminated or significantly reduced on many agricultural exports.  In particular, exporters of beef, cheese, horticulture, wine and seafood will benefit from preferential access to the Japanese market and tariffs will be bound at zero for wool, cotton, lamb and beer.  In addition, there appears to be some relief from existing Japanese quotas on many of these products.
  • At the time the JAEPA enters into force, 99.7% of Japan’s industrial imports by value from Australia will enter Japan duty-free with the overwhelming majority eliminated with 10 years.  On full implementation, 100% of Australia’s industrial exports will benefit from duty-free entry into Japan.  This includes eliminating tariffs on a number of resources on which tariffs still apply.
  • In terms of services, the JAEPA is expressed to deliver outcomes equal or better than the best commitments Japan has made in other trade agreements.  There have been improvements for providers of Australian financial services and the creation of an ongoing legal services co-operation agenda providing for greater movement and recognition of each other’s lawyers and improving co-operation on trans-national legal services in third countries following further negotiation.  However, it does not make clear whether any of these commitments are in fact agreed or whether they are still subject to further agreement (as is more likely to be the case).
  • One of the major commitments to Japan is to raise the screening threshold at which private Japanese investment in non-sensitive sectors is considered by the FIRB from $248 million to $1,078 million. However, Australia has apparently reserved the right to screen investments at lower levels in agricultural land and for agribusinesses.  The detail will be of significant interest together with the provisions which apparently provide for enhanced protections and certainty for bilateral investments.  This would tend to suggest the inclusion of some limited form of Investor State Dispute Resolution provisions (“ISDS”).
  • In terms of intellectual property the promise is that Australian holders of intellectual property will benefit from levels of protection “broadly equivalent to protections provided in Australia”.
  • Continuing the trend with other free trade agreements, the JAEPA apparently guarantees Australian suppliers access to the Japanese Government procurement market and contains commitments that will ensure transparency and facilitate participation in procurement processes.  This includes promises of national treatment for goods and services and suppliers for those from both countries for procurement above agreed value thresholds (although those thresholds have not been described).
  • Australian consumers have been identified as major beneficiaries of the JAEPA with tariffs eliminated on imported cars from Japan as well as household appliances and electronics.

However, in the recent tradition of market releases regarding free trade agreements, there is much yet to be known on the content of the JAEPA including specific Rules of Origin, whether there is a need for certificates of origin (and their content) and rules regarding permitted movement of goods other than between Australia and Japan which will still allow concessional treatment of those goods.

We also await details of the ISDS contained in the JAEPA.

At this stage, the parties have yet to refer to any proposed commencement dates for the JAEPA.  Following this announcement, the specific terms of the JAEPA will be reviewed by the lawyers for each country and the JAEPA will then need to be approved through the domestic processes of both countries.  In Australia’s context this will mean review and approval by the Joint Standing Committee on Treaties and the introduction and passage of domestic legislation required to implement the commitments in the JAEPA.

Customs Issues Two New Important Notices Regarding Changes for 1 January 2012

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Australian Customs and Border Protection Notice No. 2011/62

This Notice is entitled “HS2012 Product-Specific Rules of Origin for Free Trade Agreements”. This Notice refers generally to changes to classifications associated with HS2012 changes. The Notice then refers to the fact that some of those changes will affect the Rules of Origin in a number of FTA including ANZCERTA, SAFTA, AUSFTA, TAFTA, ACFTA and the ASEAN-Australia-New Zealand Free Trade Agreement. The Notice then makes the following commentary.

  • TAFTA still employs Rules of Origin based on HS2002 and as a result, ACN 2006/66 remains unchanged as a guide to claim a preferential duty under TAFTA.
  • Australian officials and officials from FTA partners are still discussing the finalisation and implementation of HS2012 to Product-Specific Rules of Origin (“PSR”) for the FTA mentioned above after which further Notices will be issued advising when HS2012 PSR will be implemented for each FTA.
  • Pending further advice, Certificates of Origin (“CoO”) and self-certification of origin for goods imported into Australia under particular FTA may continue to be issued by exporters and producers in FTA countries under HS2007. However, even when CoO or certification has been issued overseas using HS2007, Import Declarations must be completed according to HS2012, which may well create some level of difficulty.

The Notice also indicates that Customs and DFAT have developed the following guidance for traders to determine whether a good qualifies for a preferential rate of customs duty.

  • Start with the Tariff Concordance to determine if tariff classification of goods imported under HS2012 will change compared to HS2007.
  • If there is no change in classification arising from HS2012, then current tariff classifications should be used.
  • If there is a change to tariff classification under HS2012, importers must use HS2012 when completing Import Declarations.
  • Customs indicates it will issue a further Notice when HS2012 changes have been implemented for each of the FTA.

Customs also observes that Origin Advance Rulings issued under HS2007 remain unchanged.

Australian Customs and Border Protection Notice No. 2011/63

This Notice is entitled “Changes to the Australian Harmonized Export Commodity Classification (“AHECC”) effective 1 January 2012”.

This Notice, as with earlier Customs Notices, confirms that new AHECC for export goods are to take effect from 1 January 2012.

The Notice confirms that AHECC 2007 should be used for goods being exported before 1 January 2012 but that for exports departing after 1 January 2012, AHECC 2012 should be used. The Notice includes links to the 2012 version of AHECC from the ABS website. It also refers to an information paper having been issued by the ABS referring to background on the major update to AHECC as well as other correspondence including where Codes will change.

Warning – the need to juggle old and new classifications

Unfortunately, the content of Notice No. 2011/62 may well create some issues for a number of importers and their service providers given that the overseas classification of FTA goods in CoO and based on self-classification may well differ to classification to be used on Australian Import Declarations. The Notice makes no reference to any moratorium or relief from penalty when errors may arise from the conflict between FTA tariff classification overseas and HS2012 classification in Australia. Accordingly, those associated with Import Declarations need to carefully read and implement Notice 2011/62 until further notice.