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Table
of Contents Introduction Executive
Summary
Introduction
The reader will note
that the product of the assessment has limited itself to primary focus
on the impacts of the changes in the valuation system, automation, and
the infrastructure changes needed to accomplish those goals.
To broaden those areas of concern prior to implementation of
changes called for by WTO/GATT might be counterproductive to the best
interests of Customs. This
is the result of the Assessment of Customs Reform activity carried out
by USAID through the Technical Assistance for Policy Reform (TAPR)
project under the Technical Assistance in Support of Economic Reform (TASER)
program. The project is a
direct result of a request from The Minister of Finance to the U. S.
Agency for International Development. The
Assessment began on Personnel
conducting the assessment were: Harry
M. Allison, Team Leader (Training, Compliance, Process) The assessment used a four-phase development to complete the project in the most effective method. This was:Information gathering
The
assessment team visited a wide range of Customs facilities and reviewed
processes, guiding documentation, laws, and policies. The “trade”,
that is the people representing companies, corporations, and individual
importers, exporters, customs brokers, freight forwarders, expediters,
and associations were also met with and enjoined in the process of the
assessment. In addition to
the foregoing, a large number of Customs managers and staff were
interviewed. A record of the meetings is attached to the report as an appendix. These
discussions and observations were critical to understanding the current
situation, constraints to reform, and exploring potential avenues to
successful change. The
analysis stage included a comparison between where the Customs process
is now, and where it needs to be. The
question answered by the analysis phase is how best to reach the goal.
Knowledge of the subject matter and the experience of the team brought
to light the avenues of approach that might be recommended. In
addressing the resolution of constraints to progress, it is important to
not only see and understand the current system, but to understand why it
is as it is, in order to understand what needs to be changed and what
offers the best potential for success. Changing a process does not
alleviate the concern that was a basis for the previous system. The
reporting phase is included in this report, it contains a detailed
presentation of each of the areas of concern and recommendations for
reform, both immediate and longer term.
Each
of the Areas of Concern is documented in this report as a separate
chapter. The reader will notice there is some duplication in each
report. That is because the experts independently came to the same
conclusions from the perspective of their focus subject.
This overlap was intentional and reinforces the recommendations
for correction. The
recommendations for change are given in two stages; first as those
things that can be done immediately to begin the reform, and second as a
potential or recommended assistance project to provide the guidance,
funding, and advice needed to fully implement the changes. It is the
unanimous conclusion of the team that the goal of full compliance with
the World Trade Organization/General Agreement on Tariffs and Trade (WTO/GATT)
guidelines is accomplishable, as is full automation of the entry process;
manifest, declaration compliance databases, and connectivity to other
Agencies, within a reasonable
time frame. The
team strongly believes that implementing these actions will enable the
Customs Service to more rapidly process imports and collect customs
duties, better identify compliance and non-compliance by importers, and
thereby better support Egypt's more rapid economic development. Findings and Discussion
Finding 1. Customs must take a number of actions before it will be
able to implement the valuation of merchandise methodology described in
the AGREEMENT ON IMPLEMENTATION OF ARTICLE VII OF THE GENERAL AGREEMENT ON
TARIFFS AND TRADE 1994.
Discussion. The change
from a market price reference system of value determination to the WTO/GATT
value method is a major change in procedure and process requiring a
number of skills and knowledge not previously required. It also requires
specific changes in law and guidelines to allow the procedure to take
place as designed. The
first of these changes is perhaps the most problematic.
Customs for years has been accustomed to having the importer
present an invoice that stated a value of the merchandise.
Customs would compare the value declared with a reference value
list and with previous importations to determine the correctness of the
value. The reference lists was based on market value or wholesale value,
consequently the invoice value or declared value was frequently low.
To verify this Customs would require certified commercial
invoices, consular certified invoices, bank certified payments, etc. If
the determined value was low a penalty was assessed. Understandably, the
next importation by an importer would show a higher value. Customs began
to depend on the use of legitimized documents as a justification for
acceptance. Resultantly, the laws, guidelines and decrees followed in
support. This pattern is not
unique to This
caused two major problems that are related to change. First is the
dependence on documents considered legitimate by Customs, and second, it
caused mistrust and confrontation between customs and the trade.
Customs felt that the trade could not be trusted to present a
real value, and the trade felt they were being forced by customs to
inflate values in an arbitrary and capricious manner. This
confrontational pattern of development was one of the reasons why the
GATT met to discuss and revise valuation determination.
It was found that in today’s world of computers, the reference
price system had little to do with the actual value of merchandise. It
took no account of the ability of the trader to buy at the best price
through legitimate international business methods. It tended to level
the playing field in favor of the worst buyers. International commerce
could not depend on a predetermined cost of customs clearance. From the
customs point of view, it was becoming too easy to falsify documents,
and values tended to increase over time beyond normal inflation. The
system itself was creating a real barrier to commerce. The
resultant GATT transaction value (the primary basis of valuation, or in
the absence or transaction value other means of valuation), method was
adopted. For most importations the value became the price paid or
payable for the merchandise. Simple, direct, and verifiable are the
elements of the system. The verification when needed is
done from the business records and financial data of the importer, a
much more accurate method than the reliance on other documents.
This however requires a level of knowledge of business and
business records that was hitherto unneeded in customs. It also requires
that traders keep their records for a specific time period and in a
manner in accordance with the Generally Accepted Accounting Principals
of Egypt. The
transition to GATT valuation requires a major training effort and
information sharing with the trade. Customs must train employees to use
the methods set forth in the GATT rules to determine value, possible
adjustments to value, or alternate methods when a transaction value is
not applicable, resulting in the use of deductive and computed value
when appropriate. Employees must know what business records to ask for
and under what circumstances to ask for them. The trade must also know
what is expected of them from customs. This training has not been done
to the level of competence needed. The
Customs Law, implementing decrees and guidelines must also be changed to
reflect the change in process and procedures.
Particularly, in the demand that documents presented to customs
meet standards of official verification, changes must be made to comply
with the agreement. Finding 2. That Customs
must put in place the appropriate infrastructures to apply the WTO/GATT
concepts without risking revenue loss that may be at an unacceptable
level. Discussion. Some
temporary revenue loss can be expected as the system goes into effect.
This loss caused by the difference in collections based on the
lower transactional value, should be at an acceptable level and will be
overcome by the natural economic results of the system change.
As voluntary compliance increases, as shown by the experience of
many nations, losses will be fully eliminated. While
voluntary compliance, e.g. importers freely and fully meeting the legal
demands of the system of their own volition, is a goal of the
transactional value system, it is not automatic.
Risk management must be addressed to assure that the unscrupulous
persons who are users of the system do not take unfair advantage of it. The
Customs first line of defense of the system is in a well-trained staff
handling declarations. These
employees, who know when to accept a value, when to question a value,
and what verification to seek, is the most valuable asset Customs can
have. This can be achieved
only through training and proper management guidelines that are in
accord with the agreement. Compliance,
based on risk management is the key to developing a system of safe
guards that protect the system from abuse. The units of compliance are
the research and development section (R&D), the intelligence
(commercial) section, and the audit section. The
agreement encourages nations to defend the system through selective
verifications and audit. In addition to the well-trained employee
handling daily declarations and primary inquiries of value, comes the
selective system for examination, verification, and audit. This
may be done in three permissible methods; for cause, randomly, or when
there is a high risk of loss or damage.
The R&D section functions to continually keep the appropriate
level of selectivity in place, targeted to the highest risk, through
continual review and application of risk assessment.
Intelligence uses all official sources (domestic and
international) to develop information of potential violations. Audit is
targeted by the three methods also. A final back up to the system is a
unit of trained investigators who can carry through on a violation to
presentation for administrative penalty or prosecution.While the system
of selectivity is much more accurate with an automated compliance
database, the infrastructure and a manual system can and should be put
in place as soon as possible. Finding 3. The guidance
provided to Customs Officers should be revised to clearly indicate the
policy of the Government of Egypt regarding the application of the AGREEMENT ON IMPLEMENTATION OF ARTICLE VII OF THE GENERAL AGREEMENT ON
TARIFFS AND TRADE 1994. Discussion.
Customs receives guidance in three separate manners: by
law, by direction from higher authority, and by institutional policy. It
may seem that the will of the Government is clear in this regard in the
fact of However,
Customs is an Institution that functions through the application of
specific procedures and processes. In this The
application of the agreement is a major change in the procedures and
processes dealing with the valuation of merchandise to those found in
the agreement. In the agreement these processes and procedures are very
specific. They deal with one of the most basic and important of all
Customs functions, which is the treatment of merchandise arriving,
transiting, and leaving the nation. All
Customs procedures and processes are founded in law, implementing
decrees, and approved guidelines issued by competent authority. If, at
any level of that process there is conflicting information, a lack of
clear direction, or a failure to provide the authority that Customs
needs to act, then the result must be confusion, lack of change, and
delay in implementation. This
calls for a concerted effort on the part of each level of Government,
from the Ministerial level involved in the drafting and enactment of
legislative action, to the issuance of institutional policy, to the
various Customs executive and management levels producing specific
guidance for implementation, to assure that the final procedures and
policies conform to the standards agreed upon. Finding 4. That
commercial importers, exporters, and associated service providers have
not been involved in the planning process to a sufficient level to
assure willing acceptance of the final product. Discussion. Those
persons dealing with Customs in the processing of merchandise being
imported or exported (the trade) must be involved in the process of
change. Beyond knowing what is expected of them in the changed
procedures, they offer a wealth of knowledge that can be shared with
Customs in establishing the information needed for verification of
values and the knowledge of business record systems and trade practices
considered normal in international trade. For
Customs to reach out to them in the planning stage would be an
invitation to the normalization of relations between the trade and
Customs that is fundamental to success in creating an environment for
voluntary compliance. The
trade community must have a clear and full understanding of invoicing
requirements for Transaction Value and knowledge of what charges
(commissions, freight, etc.) are included or excluded from the dutiable
value. In addition, Customs
must clearly set forth record keeping requirements for both the importer
and agent, if used, for example, the retention of full purchase records
(purchase order and payment records, etc.) and the time from entry the
records must be retained. Meetings
between Customs and the trade should be ongoing in all Customs
locations. Seminars should be held in each location to seek input into
the formulation of reasonable policies that are within the options of
the agreement. This can be of great value to Customs in deciding
reasonable documentation for declaration of value. Continuing
a confrontational attitude between Customs and the trade can only be
counterproductive. The relationship does not have to become a “close
friends” type connection, but it should become one of mutual respect
and professionalism. This
begins with professional intra-personal communications and is considered
essential to success. Finding 5. The present
Customs training configuration and methodology of presentation must be
revised and strengthened in order to be able to provide the quantity and
quality of training that is needed for transition to the new system. Discussion. Extensive
training and retraining of personnel are required in order to meet the
skills level needed for application of the new system. The training
system used will have to be specialized career specific within the
context of the work functions to be performed. Present
systems are based on a rote educational model that requires long-term
basic training of a generalized curriculum to produce a “Customs
Officer” that can be assigned to any area in customs. Once on the job,
the employee begins to learn the parameters of the job function. While
this offers some reasonable flexibility in the old work system, where
the learning period on the job can be extended, it does not provide the
rapid integration to a highly skilled specialized field as required for
GATT systems. Under
the GATT systems, skilled specialists are required in the fields of
examination of merchandise, classification and valuation of merchandise,
accounting and audit, investigation and intelligence, compliance systems
analysis, automation, database development and use, liquidation of
entries, bonds and sureties, instructor/course development, etc.
In training the message should convey that each officer has a
degree of independence to make decisions on selectivity, importer record
reviews and that their decisions will not be challenged as long as they
were carried out with the intent to comply with Customs rules. In
each of those areas supervisors and managers must also be brought to a
high level of technical and administrative competence.
It is suggested that this can be accomplished in a reasonable
time frame by the use of Adult Occupational Training systems based on
the task relationship of training objectives to work performance.
Trainees receive this training within specialized career fields in order
to reduce the time spent in training and to increase the retention of
information. The
transition of the training units to the suggested method can be best
accomplished in a reasonable period with some international advisory
assistance, equipment and publishing procurement. Finding 6. That the
Customs Service should provide more detailed direction to the automation
contractors if they are to effectively develop systems and use programs
that will bring computers into the workplace as tools to increase
efficiency and speed in processes. Discussion.
In order to design and develop the use screens and
programs for use in customs, contractors must be told by customs what
they want the system to do and what it is to be used for.
The equipment has a multitude of potential for use, but must be
designed to produce the specific function required. Because
of the wide application of automation in Customs, the use requirements
must be defined and prioritized. This
is normally best done by a committee of Customs subject matter experts,
led by a chairperson having the authority to make the level of decisions
required for implementation, and the ability to keep the committee
focused on the tasks mandated. The committee must have the authority to
call upon any subject matter expert within customs, to meet with persons
from other agencies to discuss interconnectability, and to meet with the
trade to discuss system accessibility. Executive
management must continually review the progress of the committee,
changing committee members when required by lack of progress or when
progress makes a particular committee member obsolete by accomplishment. International
advisory assistance may be of help in this area also. Finding 7. That bonds
and other sureties currently used in moving goods from and to free trade
zones may be a precedent for development of early release of merchandise
pending final duty/tax determination. Discussion. In the WTO/GATT
valuation system, a declaration is made by the importer to Customs
containing information regarding the merchandise and the transaction
which took place to purchase it that is sufficient for Customs to
determine the duties/taxes due from the importer.
In a normal or usual transaction, no further information may be
needed, and the merchandise may be released upon the payment of
duties/taxes. This is
effectively a final determination of duty/tax for the transaction. However,
if there is serious doubt as to the validity of the declaration,
verification or further information may be required; or, if the entry is
selected for verification by the selectivity process, then the
possibility that the duty/tax may be increased or decreased exists.
In this situation the merchandise may be released to the importer
while the appropriate duty/tax is being determined.
This is called early release of merchandise pending final
determination of duty/tax. In
early release policy, it is normal to protect the revenue, pending the
final determination of the entry. The
period of time involved may be from several days to several weeks,
depending on the depth of verification that is needed.
The idea is to let the importer have his merchandise while a
final determination is pending. In
discussion with a number of Customs managers, it was felt that the
collection of final duty/taxes would not be a problem as Egyptian law
allows for such collections as a priority tax lien against the
importer’s assets if not paid upon billing. This
may be true and is certainly a lever to assure payment when the trader
is an established business or known resident of the community. However,
as the system expands in the number of traders doing business with
customs, there may come a point in growth of the system that one time
importers increase and unscrupulous persons may attempt to defeat the
system by using a “ghost” or name change, or fictitious entity to
defeat the historical reference of the system. It
is therefore recommended that a system of sureties, supplied by a bank,
surety agent, insurance company, or by cash be emplaced to protect the
revenue. Such sureties could be single event or time termed for multiple
transactions. As
a surety system is in current use for other purposes, then the cost to
traders should be minimal and the benefit to customs as an easy method
of assurance of collection is obvious. Finding 8. That Customs
officers individually are not currently authorized to act on their own
volition in the release of merchandise, or the acceptance of a declared
value for merchandise. Discussion.
Under the GATT system, officers are not only required to
use their judgment in the acceptance of declared value, but must accept
the declared value unless there is a reason to doubt it that is
sufficient to be articulated in writing to the importer demanding
verification. This
is not only a change in philosophy from the old system which demanded a
number of certified documents to justify the officers’ action, but is
an authorized risk on the part of management to trust the judgment of
the officer. The
risk is however one of limited potential for loss.
Whether the value is accepted with or without documentation, the
duty/tax is still collected. The safeguard to the officer’s action is
found in the random selection system that may override the officer’s
decision, or by the random audit system that also allows a cross check
of the officer’s action. The declaration may still be reviewed for
correctness by supervisors after the merchandise is released, and
officers must be able to articulate their rational in deciding to accept
the declared value or verify the value. If
the officer does not have a reasonable doubt, acceptance is the
appropriate action. In the worst case scenario, the duty may be
collected on an undervalued import. But if the under valuation is caught
by audit or selectivity, then the fine or penalty will be severe and
will result in future shipments of the same importer being selected for
cause for verification. The
risk of collusion between importer and officer is reduced by the same
system, supervisor’s review of the transaction, and the selectivity
system. This is another reason for increased technical competence of the
supervisors and managers. A
well-trained officer exercising his/her authority in the GATT system is
not a serious risk to either the revenue or to customs. This authorization, to accept the best judgment of an officer must be included in the management guidance to officers to allow them to develop the confidence to perform the job function as described. Finding 9.
Examination by-pass can begin immediately on a percentile
level by executive order to begin the preparation of selectivity
criteria. Discussion. By
Ministerial Order, or Executive Order from the Customs Commissioner to
Customs Managers at Ports of Entry (Air and Sea) to begin a by-pass, or
pass without examination of 20% of importations of merchandise having no
interest to other agencies. They, the Customs Managers would be required
to select the importations for by-pass and report back to the issuing
executive the criteria used for that selection. This
would be the beginning of selectivity. The Customs Managers will
normally select for by-pass those importers that they have had the least
problems with. As the duty/tax will still be collected and the document
process would not be changed at this time. Potential losses would be
minimal and acceptable. This
forces the managers to begin to think about selectivity and to begin to
develop selectivity criteria. It also shows employees that merchandise
may be by-passed without negative results. A
meeting should be held 30 days after the implementation to discuss the
criteria each individual manager used in the selection. At the end of
the meeting the by-pass system should be increased to 25%. As
soon as the legal guidelines are emplaced to allow it, document by-pass
should begin using the same methodology. By-pass levels should not
exceed 25% until the infrastructures of audit and selectivity are in
place. This
is a first very positive step to the acceptance of individual use of
discretionary authority that is not currently a norm in Egyptian Customs
but is a requirement of the GATT system. Records
of merchandise by-passed should be maintained, as should revenue
collections for the same period for comparison uses. Conclusions A
transition period is always needed to implement the changes of process
and procedure having major impact. That transition period at this time
would be considered approximately three years. The
recommendations of this project, if followed, may help to substantially
reduce that transition time and the institutional impacts caused by he
changes. The
current confusion within Customs and to the trade may have a beneficial
unintended result. It
demonstrates to managers the major scope of the changes required and the
need to take the implementation preparation stage seriously. If so a
constraint to implementation will be diminished. Immediate steps that should be taken now: Valuation: 1.
Customs identify and supply WCO materials both the
English/French version and a translated Arabic version to all officers
involved in the valuation process. The
materials should include the WCO Valuation Control Handbook
(Introduction, Parts I-IV, and Glossary), WCO Compendium of Valuation
Decisions, WCO Commercial Fraud Action Plan and any other material that
the WCO recommends. This
material is available to all WCO members. 2.
Immediately begin a dialogue with the Trade Community and
start a discussion of valuation problems, and how to address them.
Provide the trade community with an education process.
Discuss what Customs expects from them and why it is expected
under the new procedures. Provide
all necessary materials and guidelines about any new forms or
expectations for documentary evidence.
Start a discussion about need for procedural changes.
Importers and exporters need to be a part of the process to
effectively make changes both legislative and procedural.
Pass all legislative and procedural changes through trade
associations for comment. Discuss
the need for assistance from the trade community in
training Customs officers on industry sectors, product
manufacturing, negotiations, financing, and business practices.
In a true open and transparent environment, Customs and the trade
work together to promote efficient processes.
The training is essential to familiarize Customs officers with
international business practices as related to purchasing (purchase
orders), letters of credit, payment for goods, transportation, and other
elements related to import transactions. 3.
Review the Kyoto Guidelines specifically the guidelines
incorporated in general Annex Guidelines for Customs Control (Chapter
6), Relationship Between Customs and Third Parties (Chapter 8),
Information, Decisions and Rulings Supplied by Customs (Chapter 9),
Appeals in Customs Matters (Chapter 10), and Clearance and Other Customs
Formalities (Chapter 3). These
will be useful in setting up the procedures for Post Audit, Risk
Management, Rulings and the Trade Interface Process.
The Kyoto Convention guidelines on Customs Procedures are
available for download from the WCO web site and are considered to be
the international standards for Customs procedures. 4.
Consider sending a working level group to the Customs
Department of the 5.
Based on the above create a short-term action plan to
develop materials, and resources for Customs officers, the trade
community and the public sector. 6.
Begin to pass without examination 20% of imports that
represent transactions of least risk. Training: 1.
Our company is in
the process of obtaining a copy of the WCO/CCC Customs Valuation Control
Handbook in Arabic. It is
recommended that this handbook be re-printed in quantity, and
distributed to all employees concerned in the valuation of merchandise. 2.
A class be
convened at the Customs Institute in 3.
Trainees of the classes above, upon their return to
the work site, should become mentors for untrained or inexperienced
personnel. There
follows in the chapter on training a suggested course outline. Automation: 1.
Select a senior executive manager reporting at the
ministerial level to manage customs automation 2. Create the steering committee to assist the executive manager in prioritization and scheduling 3. Develop the initial implementation schedule of system components 4.
Develop a matching training schedule and curriculum, and
start training 5.
Identify and acquire funds to support initial acquisition,
development, and training 6.
Acquire funding to support additional programming and
testing 7.
Acquire and install the initial equipment allocation 8.
Begin the programming recommended here to complete the
design 9.
Review legislation to permit customs document review
discretion Please see Chapter 7, A Recommended Program of Assistance for Customs Reform for a longer term suggested program of assistance. Introduction The main points of interest of this assessment have been applied to what we consider to be the most pressing issues effecting customs in the foreseeable future to be presently addressed. These are; the application of the GATT agreement valuation procedures, the expansion of automation in Customs, and changes to infrastructures and training caused by the foregoing as well as other modern techniques found successful in other nations that may benefit the organization.
As
clearly seen in the pie chart, the impacts of the first subjects drive
the rest of the project to a great degree.
The reason for this is that the classification and valuation of
commercial merchandise entering the country for domestic consumption is
the basis of all customs formal duty/tax collections based
on ad valorem tariff rates. It
is truly what customs does in it’s functional operations.
Everything else in customs is ancillary to this process. It is
the heart of the organization Under
the previous “ Revenue
loss becomes a serious consideration also as the valuation methodology
changes. Even with a well trained specialist reviewing transactional
value, the opportunity for false declaration, under value declaration,
and fraud are apparent. This is recognized internationally as an
acceptable risk that can be controlled through risk management
techniques. The point is that the event spins off into a number of
directions. Risk management brings forward the topic of compliance,
which can offer a number of benefits to Customs in the valuation field,
and even into passenger baggage. The
expansion of automation will be needed to meet goals in valuation. The
management priorities of Command, Control, and Communications can well
be enhanced by computer use. Immediate data recall, criteria based data
search, record keeping, and data storage are all easy for computers to
do. Computer use by a trained cadre will expand their capability to
produce high quality courses. We
are sure this will call for more computers, which will call again for
training and perhaps some help to assist managers in formulating
criteria for unit or program use design. So,
then what we have to this point is an assessment that begins with
several points of interest. Addressing
those leads to an expansion of those points in order to serve properly
that interest. Needed change causes impact to a wide range of the
Customs Organization. It also has collateral impact to other parts of
the organization that may well benefit from the changes in perspective
being incorporated. Without
having gotten ahead of ourselves by pre-designing, it is easy to see the
concept of a basic assistance project of three years duration. Many
changes have occurred in the international Customs field over the past
ten years. As trade
practices change and global markets develop, Customs must become more
sophisticated, develop new methodologies, and use technology to keep
pace. The standard Custom
Mission of collecting and protecting the revenue, enforcing customs and
related laws, and protecting developing domestic industry from unfair
competition, while true and never changing must be accepted within the
context that Customs is an extension of the policy of the Government of
Egypt. International trading partnerships and associations are made, not
by Customs, but by Government. Tariffs, which determine the duty rates
that Customs applies, are not determined by Customs, nor, are the
exemptions from duty. Customs is acting on the policy of the Government
of Egypt where from it derives its authority, based on its
responsibility. So it is with the GATT and other international
agreements, trade facilitation, and, meeting the challenge of creating a
Customs environment conducive to trade and tourism growth. As with the
expansion of points of interest in the assessment, the organization,
while meeting the challenges imposed by Government Policy derives
benefits from the changes made in the process. More skilled and
knowledgeable employees, working in a position calling for the exercise
of independent judgement, are a more valuable employee who can be paid
accordingly. The environment of automation is a more pleasant work
environment attractive to the retention of employees. New methodologies
result in bigger, more complex violation cases, resulting in larger
penalties and fines being collected. The image of Customs changes, from
a suitcase checker, to a sophisticated compliance based organization. Therefore
our interest in this assessment, shaped by the items of interest of the
Minister of Finance, known impacts of the Valuation changes effective in
Customs on July 1, 2001, the coming of automation, and knowledge of
customs operations, we feel that the proper study needed is in the
following areas: 1.-
Economic Projections 2.
– The valuation of merchandise in the WTO/WCO GATT system 3.
– Training 4.
– Compliance 5.
– Automation 6.
– Warehousing, Free Trade Zones, and Special Schemes for Delayed Duty
Collections. 7.
– The Customs Organization 8.
– A Recommended Assistance Project for Consideration Effectively this assessment will cover the entire operational base of customs. The recommendations apply to all areas within customs. These are the areas that demand immediate action to avoid confusion, loss of revenue, and severe complaints from the trade and public.
Chapter
1 The Economics of Customs Reform James Cassing, Ph.D. Introduction The
Government of Egypt (GOE) has committed to creating an economic
environment conducive to growth in the gross domestic product at an
annual rate of around seven percent.
(Specifically, the targets are 6.8% by 2002 and 7.6% through
2017.) An important part of
the strategy for achieving this ambitious target is policy reform aimed
at enhancing international trade and investment.
Such a “globalization “ strategy is probably well suited to
Egypt at this time as the world economy continues to prosper, other
nations continue to open their borders to trade, and there is a large
pool of international capital seeking productive investments.
Also, the new European Association Agreement portends increased
trade and investment opportunities. As
the GOE continues to pursue lower barriers to trade, there is a
recognition that an important part of creating a trade-friendly
environment is to ensure that products can move across the border
expeditiously and are treated in a manner compatible with WTO
obligations such as the Customs Valuation Agreement.
(See, e.g., Trebilcock and Howse [1999] for an extensive
discussion of the Agreement.) Indeed,
around the world, nations are adopting a transactions cost, or “actual
value”, customs valuation system and, more generally, are embracing
ever-sleeker systems of customs clearance.
For example, in the As
a contracting member of the WTO, the GOE is also obligated to abandon
its current Brussels Definition of Value based reference price system of
valuation and to adopt the GATT Agreement.
However, as a way of implementing such compliance, the GOE has an
opportunity to overhaul the entire customs system in a way that will
modernize Customs and create a state-of-the-art customs clearance
operation. The nature and
implementation of this new system is described at length in the other
chapters of this report. The
purpose of this chapter is to recount how, well beyond simply meeting a
GATT obligation; the proposed customs reform is likely to bring
substantial gains in economic welfare for In
what follows, we address the sources of potential benefits of the reform
proposed and offer some empirical measures of the magnitudes of those
benefits. Section 2
addresses the so-called “static benefits” owing to adopting a
transaction valuation system and to streamlining clearance.
Section 3 explains how exports will be enhanced and provides some
estimates of the potential size of export enhancement.
Section 4 explores some “dynamic benefits” and addresses the
impact on direct foreign investment.
Finally, the last section considers Customs’ overall role after
reform and offers some conclusions. Static Benefits of Customs
Reform Any
customs clearance mechanism consists fundamentally of two components:
the “system”, or the laws and best practices, and the “system
implementation”, which is how the system is run de
facto. The current
proposal would change both. Not
only would the system begin using the actual valuation method for
valuing shipments, but also a fairly complex mechanism for coordinating
information and reducing inspections (so-called “risk management”, a
“post-audit” structure, and so on) would be put into place.
The whole operation of Customs would become highly automated and
interfaced with other agencies with the aim of greatly facilitating
customs clearance and thus reducing the time and other costs currently
imposed on importers. These
changes will, in turn, lead to increases in economic efficiency, or
“static benefits”. Here
we will consider the potential benefits of adopting the Valuation
Agreement and of implementing the new system separately. While
much of the economic benefit will be generated by changes in
predictability, transparency, uniformity, and accountability –
discussed below – a potentially large, but subtle benefit arises
simply from moving away from the current reference price system.
The issue involves “similarity of product”.
A problem associated with the Brussels Definition of Value is
that it frequently leads to the assignment of value based on a reference
price for products that are really very different in value due to
quality differences or differences in the costs of production abroad.
Thus, if a lower priced import is assigned a higher reference
price value, the “effective tariff rate” is in fact higher for this
product than for higher priced imports assigned the same reference
price. (In fact, the process
of assigning a value to imports is not this straightforward in Specifically,
suppose that there are two products on the same tariff line, but that
one is produced at a low cost abroad and priced well below the reference
price, while the other is actually produced and priced at the reference
price. Now the tariff rate
relevant to the importer is the “effective tariff rate”, or the tax
amount paid per unit relative to the actual price.
If the reference price is applied to both goods, then the per
unit tariff paid will be the tariff rate, t, times the reference price,
Pr, or tPr. And
the “effective tariff rate” will be the tariff amount paid divided
by the actual price of the good, or tPr/Pi, where
Pi is the actual price of good i.
But note; if there is a low priced good, Pl, and a
high priced good, Ph, then the “effective tariff rate”
will be higher on the low priced good.
That is,
tPr/Ph < tPr/Pl
Furthermore,
the effective tariff rate applied to any good whose actual price, or
more specifically the true transaction value, is below the reference
price will confront a tariff rate higher than was intended.
That is,
t < tPr/Pi , where Pi < Pr For
example, suppose that the high priced good is actually comparable to the
reference price, Ph = Pr, and that the high priced
good is twice the price of the low priced good, Ph = 2Pl.
Then, from the formula for the effective tariff rate, the high
priced good is taxed at the rate t, but the low priced good is taxed at
a rate twice as high, 2t. Thus,
two goods on the same tariff line of 20% could see one taxed at 20% and
the other effectively taxed at 40%. Economic
Efficiency
Aside
from giving the appearance of unfairness, more seriously the reference
price system creates increased dispersion in the effective tariff
structure and this reduces economic efficiency.
Although a technical term, economic efficiency can be thought of
as the Egyptian pound amount of money that Egyptian consumers and
producers would net be willing
to pay to alter various policy constraints.
While no payments would actually be made, the measure is useful
as a guide to the costs or benefits from policy changes.
The net gains or losses for consumers are measured in “consumer
surplus” and for producers in “producer surplus”.
Using the standard welfare measure of consumer and producer
surplus, this is illustrated in Figure 1 on the following page.
Shown are the import demand schedules for a low and a high price
good in the same tariff category with the same reference price applied.
We assume that Ph = Pr and, of course, Pl
< Ph. If goods were taxed at actual value, then the tariff
inclusive price of the goods would be (1+t)Ph and (1+t)Pl.
The efficiency loss owing to the tariff – or, “deadweight
loss” – is given by the triangles labeled “a” and “b”.
(As is well known, of course, while raising revenue, most taxes
including tariffs impose some economic efficiency losses.) Now
if the reference price is used to value the low price good, then the
importer confronts the effective rate of tPr/Pl >
t. In this case the
effective tariff inclusive price now rises to Pe > (1+t)Pl.
Thus, the efficiency loss rises by the additional area labeled c
and d in Figure 1. Mathematically, after some rearrangement of terms, this increased efficiency or “welfare” loss is given by, D W = (t + 0.5e)Pl DQ where D denotes “a change in”, e = tPr/Pl is the effective tariff rate, and Q denotes the level of imports for the good.
For
example, if t = 0.2, or 20%, and Ph = 2Pl
(The high price good is twice the price of the low price good.),
then the effective tariff rate for the low price good is 40%, that is, e
= 0.4. Thus, the reference
price system has doubled the tariff on the low price good.
Now, if we assume a unitary price elasticity of import demand,
this will lead to about a 17% decline in imports of the lower price
good. Using the welfare
expression above, this means that welfare will decrease by about 7% of
the value of those imports in the absence of the reference price system.
Thus, in this example, if the value of shipments were LE 10
million, then moving to the Valuation Agreement would lead to a LE
700,000 increase in economic efficiency. More
generally, for all goods i subjected to some reference price and for all
commodities j in the same tariff line, the gains from adopting the
Valuation Agreement relative to the current system are given by, DW
= SjSi
(tj +
0.5ei)(Dvalue
of shipments of good i) where
ei denotes the effective tariff rate, tj is the
actual tariff for products on tariff line j, and S
represents the summation operator.
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