Empirical Estimates  

As a practical matter, while the above argument is correct and the gain from moving to the Valuation Agreement must be positive on account of the “similarity of product” issue, actually measuring the gain precisely requires detailed knowledge of the dispersion of actual transaction values of products in a given tariff line that are subjected to some higher reference price valuation.  There is anecdotal evidence that this is a problem under current Customs practices [DEPRA, 2000a], and it is easy to verify that there is dispersion of actual transaction values in most tariff lines (For example, the problem has been documented to arise in Egypt even for seemingly relatively homogeneous products such as lumber [DEPRA 2000a].).  But the overall effects have never been calculated.  

Nonetheless, we can get a first approximation of the magnitude of the potential gain for Egypt of this one aspect of reform by making a few assumptions that are not unreasonable.  Suppose that the dispersion of actual transaction values within each Harmonized System (HS) tariff line in Egypt is the same and, on average, represents a 50% price differential.  (Note that this is the midpoint between the case of the lowest actual price being half the highest in the line, as in the example above, and the case of no differential in true prices due to quality or cost differences at all.)  Taking the average trade weighted import tariff in Egypt , t, to be 20% [DEPRA, 2000b], this means that the average effective tariff rate, e, would be 30%.  (This administrative markup of 10% in the invoice unit value appears to be a reasonable assumption for low priced goods.)  Finally, assume that the price elasticity of import demand is –1.85 [DEPRA, 2000b].  Then, the change in the value of shipments owing to adopting the GATT Valuation Agreement would be 15.4% and, using the welfare expression developed above, the change in welfare would be 5.39% of the value of imports.  This represents an efficiency gain for Egypt from adopting the Valuation Agreement on account only of the “similarity of product” issue of LE 3.2 billion, or nearly 3/4% of GDP per year.  While this estimate is surely not precise, the welfare effect will nonetheless be positive and the estimate does suggest that under reasonable assumptions the effect could be quite large.  (Indeed, the estimate would be substantially larger if we used the World Bank unweighted average import tariff for Egypt of 28%.)  

To put this in perspective, this is equivalent to the efficiency gain that would be generated by a nearly 43% cut in tariffs.  Thus, Egyptians would realize a significant increase in real incomes.

Revenue Effects  

One concern of the GOE is that customs reform, as with tariff reform, might result in reduced customs revenue.  (In Egypt customs revenue account of 12.4% of total government revenues and about 20.9% of tax revenues [Ministry of Finance, 1998].)  In the case of moving away from the reference price system, this might occur due to the lower effective tariff rate applied to many goods.  However, the actual changes in revenue could be positive or negative depending on the import demand elasticities.  If these elasticities are on balance sufficiently greater in absolute value than unity, then tariff revenues will go up when the effective tariffs come down because the level of imports will increase by enough to offset the effect of lower taxes.  A recent study [DEPRA, 2000b] estimated that the average import demand elasticity in Egypt was indeed greater than unity -- -1.85 – and found that revenue effects were likely to be small due to tariff reductions of the magnitude involved here.  Tariff revenue is likely to remain about the same on account of adopting the Customs Valuation Agreement.  

Furthermore, to the extent that adopting the Valuation Agreement and implementing other reforms discussed in this Report lower transactions costs of importing, the level of imports and compliance are likely to increase and so revenues will increase as well.
   

Implementation  

As a practical matter, the benefits from customs reform are undoubtedly going to be generated substantially from a reconfiguration of the operational aspects of Customs necessitated by the movement to the transaction valuation methodology.  Indeed, much of the impetus for adopting the proposed reform resides in lowering the costs to business of importing products and so effectively lowering an administrative non-tariff barrier to trade.  

Any coherent customs system strives to provide importers with predictability, transparency, uniformity, and accountability.  Essentially, Customs needs to be assured that importers are not representing their merchandise falsely, and importers need to be assured that they are being treated as they expected to be when they consummated a business deal in the first place.  

The current implementation of the customs system has some deficiencies in this respect, as is recorded in other chapters of this report and in DEPRA [1996, 1998] and World Bank [1999].  (Tohamy [1998] critically assesses the overall Egyptian tax administration, including customs, and transaction costs.)  Without a more centralized and automated system, importers have been confronted with uncertainty and a lack of uniformity across time and place of customs procedures [DEPRA, 2000a].  Although no one is to blame, the current system makes it very hard to implement an even-handed customs treatment.  And this raises the costs to importers and so serves as an implicit tax on imports. These costs are borne by importers in the form of port delays, uncertainty as to treatment, and the necessity of holding excessively large inventories due to the possibility of input supply disruptions at the ports [DEPRA, 1996;  World Bank, 2000a].  

While it is difficult to quantify the trade-inhibiting effects of costly customs compliance, survey data indicates that clearing customs in Egypt acts as an implicit tax on imports equivalent to 10% to 90% relative to firms usual business models [DEPRA, 1996].  Konan and Maskus [1997] estimate the above normal compliance costs to be 15% - 20%.  The World Bank [2000b] estimates the tariff equivalent cost of customs clearance, licensing, and inspection procedures to be 15% and the tariff equivalent costs of quality control to be 5% - 50%.  While Law 106-2000 and the “one stop shop” may help to alleviate this implicit tax, the proposed reforms would go further.  For example, currently some food importers report that in Egypt it can take 30 days for actual clearance time and the appeals process can take as much as 5-6 months.  One significant food importer indicated that the best they could obtain was 21 days for clearance after several years of learning and working the system.  (The experience of this same importer in most other countries is that it normally takes from 1 – 7 days to clear product.)  Also, there are paperwork concerns.  In Egypt , customs clearance involves about $600,000 of product per official per year.  In Singapore , that number is $666,000,000 of product per official.  One estimate is that clearance time at Egyptian ports takes two to three times as long as any other Mediterranean port [World Bank, 1996].  

In contrast, developed and developing countries alike have found that more automated systems using modern risk management techniques have greatly facilitated trade by reducing the customs compliance costs imposed on importers.  For example, after a reform begun in the 1980s, the U.S. now moves cargo rapidly through ports, inspecting only 1% - 3% of shipments, while achieving a high compliance rate with trade laws and a 99% revenue collection rate.  Taiwan has adopted a new system and inspects fewer than 40% of ships (randomly) with shipments clearing customs in 3.87 hours on average.  Jordan inspects about 30% - 50% of shipments.  In South America , fewer than 20% of shipments are inspected due to some modern risk management techniques, and the international norm is less than 5% customs inspection.  Thus, the reconfiguration of Customs to embody more automation and some modern risk management techniques could greatly lower the business costs, including especially time delays and input supply disruptions, of importing.
   

Economic Efficiency  

Once again, if the administrative costs of importing can be reduced, then this will effectively reduce a barrier to trade and bring economic efficiency gains to Egypt .  Analytically, these gains are illustrated in Figure 2 shown on the following page.  The diagram shows the import demand schedule for some good, with t representing the tariff rate and c the tax equivalent of customs compliance.  If the costs of compliance in terms of delays and so forth could be brought to zero (Impossible, of course, but they can be brought down.), then economic efficiency would increase by an amount given by areas a and b.

Mathematically, this increase in welfare is given by,  

DW = c( PQ + 0.5PDQ)  

where, as before, Q denotes the level of imports.  

Of course, if the compliance costs c can only be reduced not eliminated, then only a fraction of this gain will obtain.
   

Empirical Estimates  

As a rough approximation of the magnitude of efficiency gains, we can use the above welfare expression along with some Egyptian data.  Using the DEPRA [1996] business survey data, suppose that the tax equivalent of customs compliance costs is 20%.  (This cost tends to be higher for food products and lower for manufactures.  It is consistent with the study by Konan and Maskus [1997] and the World Bank [2000].)  Again, as above, take the import price elasticity of demand to be –1.85.  Then, using the welfare expression, the gain from customs reform that eliminates all of the “above business model” compliance costs would be LE 14.4 billion, or about 3.6% of GDP.  Again, this is probably an upper-bound estimate as it would be unrealistic to believe that all compliance costs could be eliminated.  Nonetheless, the effect is positive and the assumptions used to derive the estimate are not unrealistic.
   

The Impact of Customs Reform on Exports and Employment  

While Egypt has no export taxes and few non-essential restraints on exports, customs reform can nonetheless augment exports significantly in two ways.  First, there is a direct effect to the extent that exporters rely on imported inputs.  If the effective tariff rate on inputs is lowered due to eliminating the “similarity of product” problem, then these inputs will become cheaper for exporters.  Furthermore, if the compliance costs of importing, especially time delays, can be reduced, export producers will see their cost decline and can become more competitive in world markets.  This effect could be substantial.  In a survey of exporters [DEPRA, 1999], businesses in Egypt reported tariffs on imported inputs and compliance costs to be the single biggest constraint on exports, ahead of things like export procedures or absence of export credit.  

Second, and much more subtle but just as real, there is an indirect effect of import impediments on exports.  Roughly, any tax – implicit or explicit – on imports changes relative prices in an economy and effectively lowers the relative price of exports and non-traded goods compared with protected import-competing goods.  Thus, while not an explicit tax on exports, import-impediments nonetheless implicitly tax exports and reduce the incentive to produce these goods.  (This is part of the so-called “anti-export bias” inherent in the Egyptian import tariff structure.)  Consequently, impediments to imports, like the “similarity of product” effective tariffs or high compliance costs, mimic an export tax and so discourage exporting.  (See, e.g., Greenaway [1989], Wells and Evans [1989], and Clements and Sjaastad [1984].)  

Together, these two effects can have a powerful impact on the level of export activity in Egypt .  Exporters who are not in a position to absorb the increased costs of the implicit export tax will be priced out of international markets.  This is one explanation of why Egypt can export goods like petroleum products, tourism, certain agricultural products, and the Suez Canal, which can absorb the tax, but not non-traditional exports like light machinery and appliances, which cannot.  
 

Empirical Estimates  

The effect of impediments to imports discussed in this report could be quite high and so the benefits of customs reform could equally be large.  Concerning the direct effect of increased costs of imported intermediate goods for exporters, Egyptian exporters on average import 45.36% of their inputs [DEPRA, 1998].  And, since intermediate good tariffs are not very high in Egypt yet they are the main complaint of exporters, it is reasonable to assume that it is the reference price system and the compliance costs that are to blame.  (Indeed, many of the explicit input tariffs can be rebated to exporters.)  

Suppose, as a rough approximation, that we take the tax equivalent of the compliance costs to be 20% above the “usual business model” based on survey results and the Konan-Maskus [1997] study.  Also, add to this the 10% tariff equivalent increase in the average import tariff due to the “effective tariff” argument.  (We take the average trade weighted tariff again to be 20%.).  Then, the total net effect of customs reform, which eliminated these costs, would be equivalent to reducing a 30% import tariff to zero.  

Now a study of the incidence of import tariffs on exports in Egypt has shown that a reduction in the implicit import tariff by this magnitude – assuming that the explicit tariffs remain in place -- would be equivalent to eliminating a 16.7% implicit export tax [DEPRA, 1998].  Suppose that the export supply elasticity is unity for Egypt .  (In fact, it is probably much higher for non-traditional exports.)  Then, when the proposed reforms are fully implemented, they should result in an increase in exports of nearly 17%.  And, if employment patterns do not change, this would imply an increase in employment of 17% in the export sector.  (Of course, there will be an expansion of imports and so a contraction of production in the protected import-competing sector.  But, if the transition time to the new customs system is several years, there need be no unemployment as natural attrition of labor in this sector will render involuntary separations unnecessary [DEPRA, 2000a].)
   

Dynamic Benefits, Investment, and Growth  

While the benefits of the proposed reform discussed above are quite large, there are likely to be substantially larger benefits which are very hard to quantify – so-called “dynamic benefits”.  An advantage of a customs clearance system that incorporates increased predictability, transparency, uniformity, and accountability, is that the business community responds positively to the decreased uncertainty.  This response by traders and investors can be quite large.

While there is no way of being certain of the positive impact on foreign investment, if imported intermediate inputs are taken to be around 40% for the whole economy [DEPRA, 1998], then a reduction in the importing business costs associated with the current system of 30% as posited above would lead to cost reductions for foreign direct investment on the order of 8%.  According to DEPRA (2000b), a 1% change in tariffs leads to a $63.3 million change in foreign direct investment in Egypt .  So, to the extent that these cost reductions mirror tariff changes, the increase in foreign direct investment due to the imported inputs cost savings would be about $506.4 million per. In fact, this is likely to be a very conservative estimate since the experience of other countries has been that as investment discovers a country, the investment process is enhanced [Roberts and Tybout, 1997].  Also, notice that since compliance costs act as an implicit tariff, free trade zones, duty drawback, and so on, could not achieve this result.  

Furthermore, note that the compliance cost reduction is likely to result in “better” investment.  Currently, most of the foreign direct investment – and much of the domestic investment as well – is flowing into import-competing industries that are protected by high explicit and implicit trade barriers.  Such investment tends to be in comparative disadvantage, lower productivity industries that need the protection for survival.  More alarming, when foreign-owned firms repatriate their profits abroad, they send artificially large profits that have been protected by trade barriers and so actually create an artificially enhanced drain on foreign exchange reserves [DEPRA, 2000a].  When the non-tariff trade barrier of compliance costs is lowered, investment will be redirected to the export and non-traded goods industries and out of the import-competing industries in approximately equal amounts.  Thus, Egypt will gain both more investment and employment due to the cost reductions and “better”, more productive investment.  

Another way to assess the gain of reform is in terms of the marginal effective tax rate (METR) on real capital investment in Egypt .  Suppose that we take the after-tax rate of return to be 9.25% in order to attract investors.  (This was the nominal deposit rate of Egyptian banks in September 2000.)  Then, Kheir-El-Din, Fawzy, and Rafaat [2000] calculate that a marginal joint stock investment in the manufacturing sector needs to earn a before-tax rate of return of 16.45% in order to invest.  The number when omitting indirect taxes – tariffs, sales, and stamps – is 12.47%.  Now, reference prices and compliance costs work like an indirect tax from the point of view of an investor.  If this implicit tax is taken to be 30%, as above, and if 40% of new investors’ inputs are to be imported, then this works like an additional 12% tax on capital investment and, using the Kheir-El-Din, et al, methodology, would necessitate about a 2% additional before-tax rate of return to induce new investment.  Thus, Customs reform would lower the required before-tax rate of return and consequently induce more investment, both domestic and foreign.  

Any new investment, of course, will translate into higher rates of growth and employment for Egypt .  Since real growth tends to compound, even modest increases in new investment could contribute substantially to the GOE growth targets between now and 2017 as posited in “Vision 2017”.
   

Other Costs and Benefits of Implementing the Proposed Reforms  

The benefits described above are both real and large.  Beyond this, many of the proposed changes in Customs need to be made anyway in order to meet WTO obligations and thus a benefit of such changes is to showcase the GOE as WTO compliant.  

However, it would be unfair to dismiss the substantial costs inherent in the proposed reforms.  As is documented in this report, there is the need for substantial training, automation, and administrative reconfiguration.  The experience of other countries – the U.S. , Taiwan , Singapore , etc. – has been that in the short-run the system encountered high costs of implementation and modest benefits in terms of facilitating trade.  However, trade law compliance and revenue collection responded fairly rapidly, and in the longer run the benefits described above accrued.  

Also, there are bound to be intangible benefits from the reform which accrue to the personnel of Customs and to the GOE.  The reform will equip Customs with state-of-the-art techniques and skills.  Professionalism will be enhanced and the whole customs process will begin to engender mutual respect between importers and Customs agents.  This has been the experience in other countries and should be the same for Egypt .  For example, after the United States reformed Customs and adopted the Valuation Agreement, there was a dramatic decrease in appeals to the courts from administrative determination of valuation [ Jackson , 1997].
   

Conclusions  

In order to conform to WTO obligations, the GOE needs to adopt the Customs Valuation Code.  This is not a trivial undertaking as all of Customs will be reconfigured if it is to be done properly.  But this is an opportunity.  As the report makes clear, there is a path toward automating and streamlining Customs in a way that can confront the challenge and at the same time reinforce the GOE’s goal of facilitating international trade and investment.  

While there will be costs incurred, the benefits to the economy would appear to be large.  Also, the personnel of Customs should benefit from increased skills and knowledge that Egyptian Customs is state-of-the-art.  Administratively, Customs would retain its role in clearance and data collection.  

References used in this chapter are found at the end of this report.
 

Chapter 2

Customs Duty Collection and Valuation
Irina Swift
   

Background  

Customs authorities play a significant role in the area of international trade.  The efficiency of Customs processes can promote additional investment, as more trade will flow into a country that has an efficient process for moving goods including raw materials and capital goods into the economy.  However, if the movement of goods through Customs and other agencies is viewed to be costly and inefficient, trade and investment partners often migrate to markets that are perceived to exist in a more business friendly region.  Since the mission of Customs is to collect revenue and enforce the import laws of the nation, Customs impact on the economic health of a country is not often well understood even among Customs officers.  

Many nations promote efficient and cost effective operations so as not to have Customs viewed as a non-tariff barrier to international trade and growth.  Those countries have modernized their Customs Services by working with trade partners to create more efficient processes through legislation and practice and by developing automated tools to facilitate the movement of goods.  Both the WTO and the WCO encourage Customs services to incorporate modern business practices and tools into their operational plans and to implement new philosophies for Customs management and trade interface.     

The Government of Egypt is a member of the World Trade Organization (WTO) and the World Customs Organization (WCO).  On June 30, 1995, Egypt became a contracting party to the WTO Agreement on Customs Valuation (GATT Valuation Agreement) and invoked paragraph 1 of Article 20 of the Agreement to delay application of its provisions for a period of five years from the date of entry of June 30, 1995 and thereby was scheduled to apply the provisions of the Agreement by June 30, 2000.  Prior to that date the Government of Egypt requested an additional extension and received one year to prepare the legislation and necessary procedural reform to implement.  The law was amended by legislative action as Law 160/2000 to provide for the Agreement and Ministerial Decree 765/2001 published on June 25, 2001 implemented the Agreement on July 1, 2001 .  

The Government of Egypt is also a contracting party to the Harmonized System Convention and has used the Harmonized System to classify goods since it was officially adopted by Presidential Decree 38/1994 of February 13, 1994 .   

The implementation of the Valuation Agreement can be viewed as an opportunity to initiate reform, to reorient the commercial cargo process, and to further develop and modernize the Customs Department.  The Value Agreement alters the methodology of valuation of imports entering Egypt .  The primary basis for valuation of goods for Customs purposes is the transaction value of imported goods i.e. the price actually paid or payable for the imported goods sold for export to the country of importation adjusted in accordance with the provisions of Article 8 of the Valuation Agreement.  The Agreement specifies six methods of valuation but before a Customs official can reject the transaction value and apply another method of valuation in strict sequential order he must first determine that transaction value may not exist for the imported good, provide the importer with an opportunity supply additional information, and only when that information is not provided or does not substantiate the invoice price as reflecting the price paid or payable move to apply the next method of valuation.   

The World Customs Organization provides guidelines for the implementation of the Valuation Agreement.  The WCO recommends that Customs authorities alter their organization in order to cope with the Valuation System by creating the legal authorities within their laws and regulations, providing an organizational structure that supports post-clearance audit, intelligence gathering, risk assessment, expertise on the Valuation Agreement and international trade, and that structured training on the Agreement be provided to all parties involved in the process.  It is anticipated that when this process matures, a paperless electronic environment can be considered and that Customs Authorities will have the foundation to process shipments electronically and still maintain a level of confidence that the transactions are accurately declared and appropriate revenue is collected.     

The WCO Valuation Control Handbook states “The GATT Valuation System necessitates the active involvement of both importers and Customs in the valuation process.  It presupposes that a process of consultation take place between Customs and the importers to ensure that the value determined is accurate.”  It encourages the use of automated systems to provide efficiency to the process and the creation a historical database that can be used for analysis, risk management, and identification of candidates for further review or for post audit.   

It is due to these factors that Customs is encouraged to consider reorienting its commercial cargo strategy.  The Valuation Agreement does not only impact on how Customs values merchandise but re-defines how Customs officers will perform their work and interact with the trade.  In the current process there is limited capability for trade interaction on the part of valuation personnel.   

The Agreement necessitates: that importers have full information of the Customs laws and regulations and only then can they fulfill their obligation to provide Customs with full and accurate information about the circumstances of the transaction; and that Customs officials have a knowledge of the legal framework and the expertise to examine and verify all the relevant facts of the importation.

The greater degree of interaction between Customs and the trade will encourage the building of relationships based on trust, and an environment that hopefully will promote confidence that specific trade information provided to Customs officers to help them verify the invoice price of the goods will be held in strict confidence within the law and not shared with others except by legal authority.  

The Agreement encourages groups to be developed within specific industry sectors, and necessitates that an orderly rotation policy be developed that does not disrupt the expertise within the group.  It encourages Customs to promote in-house or outside training and provide resources to help officers maintain their level of expertise.  It encourages the use and development of automated systems to help officers do their work with modern tools.  It encourages officers working with like commodities to meet periodically to discuss mutual problems and have the ability to communicate via efficient electronic means to gather information from their colleagues or outside sources.  It encourages a greater degree of decision making at a lower level of authority.  It encourages importers to seek the advice and guidance of Customs authorities prior to importing new products.  It encourages a system of rulings be implemented binding on both Customs and the importer.  It encourages Customs to use information resident in the declaration system to perform trade analysis and identify patterns, areas of concern, risk, compliant importers and transactions that can be given expedited release procedures.  It encourages the ability to verify invoice data, review importer records, provide preliminary release, and the develop risk management and post audit capabilities.  In effect the Customs Value Agreement necessitates a reorientation of the working environment and an opportunity for modernization and reform.  
   

Review of Current Determination Process (June 2001)  

Customs receives the declaration that either has been transmitted and printed or presented for keying of data from a coding sheet. If another government agency such as Agriculture, Health, or GOIEC (General Organization of Import Export Control) is involved in the import of goods process, that other agency must provide a release or conditional release for Customs release processing to be initiated.  The electronic data is first reconciled with the documents and then the file is presented to the specialized Customs officers for review and designation.  Groups of officers dedicated to specific industry sectors review the declaration and associated documents.  This is a good foundation to further develop expertise to promote full implementation of the Agreement.  The officer reviews the file to ascertain that all documents including any required other agency releases are present, that the information on the declaration reflects the invoice, that a packing list is present, and that the provided Harmonized System tariff item number is accurate. 

During the review we witnessed in June 2001, using the valuation guidelines based on the Brussels Definition of Value, the officer checked the value against the value database using the harmonized system item number to search the database.  If the officer does not locate a product on the database that conforms to the similarity of specifications of the product before him, there may be a process of consultation that will occur between the estimator and his superiors.  It is this process of checking values against a database to identify a market price that will require change and additional expertise in product knowledge.  The Valuation Agreement speaks to valuation of the goods based on the price actually paid or payable, and not based on a market value.   

Draft guidelines addressing this change have been written and distributed to the workforce.  Based on the translation received, the guidelines seem to rely more on price information before Customs and on properly notarized documents than on providing an environment for verification of the circumstances of sale.  There have been forms created to allow for the importer to provide additional information, but time period (15 days) for providing the information on related party transactions seems unusually short considering that the importer may have to contact his foreign supplier to provide Customs with the information.  

It is understood that during the transitional phase there must be time to develop a new methodology for working within the principles of the Agreement, and it is hoped that as the process of invoice value verification matures, there will be less reliance placed on pricing information before Customs or on consular invoices or certificates of origin which seem to be required for every shipment. It may be worthwhile to visit other nations in the region to see how they have implemented the Value Agreement and learn from their experience and work together to discuss methodologies and exchanges of material that have been found to be useful. In today’s electronic age, documents have less meaning. Often commerce is initiated without documents. With computer equipment and software, consular stamps or certificates of origin can be altered and falsified as easily as invoices. This is the essence of expertise development. The process moves from a reliance on documents to a reliance on trade knowledge.      

Additionally all cargo is designated for examination and is examined in the presence of the importer or his agent and the duty, fees, and taxes paid prior to release. Once payment is made the cargo is free to move. Should there be a difference of opinion between the Customs officer and the importer, the importer has the option of paying the additional duty or posting a bank guarantee for the difference and filing an appeal. Since the Agreement provides that if additional verification is needed by Customs the goods should be released under guarantee to the importer, this process may need to be altered as complex transactions may require additional time to verify or audit. This is an area that needs to be reviewed for additional legislative action.    

In the current process, every transaction seems to be treated with the same level of scrutiny.  The only selective processing that occurs is the designation of the percentage of the shipment that is to be examined.  It is as if every transaction is a first occurrence with no previous documented or available historical record. There is no structured methodology of risk assessment or selective processing. It appears to be a time consuming process with no apparent objective or quantifiable methodology to assess overall results. This is also a factor that may actually degrade the work performance of the officer. When there is no specific identified risk regarding the exam or review of documents, the officer may perform his work in a rote fashion and could easily overlook a significant factor.   

Customs services that have initiated selective inspections have found that a greater number of discrepant findings accrue based on the number of exams performed.  When exam and/or review are required based on a specific concern, officers are more likely to take the time to review the transaction with a greater level of scrutiny. Selective inspections and risk management methodologies are modern Customs tools used to grant benefits to compliant importers, provide for more efficient movement of goods, and for the development of annual enforcement plans to promote compliance. 
 

Trade Perspective on Duty Determination Process  

The team interviewed trade participants during the process of developing information.  The interviews were conducted both with import export associations and with individual importers.  The perception of the trade community regarding Customs was one of lack of trust and lack of confidence in Customs to properly perform their functions in the duty determination process.  Although this is a trade perception and may be inaccurate, it is troubling.  Many members of the trade stated: that most customs officers were not well informed about the classification and valuation of goods; that standardization and uniformity did not exist; and information was difficult to identify and locate for both Customs officers and trade participants.   

When one major trade association requested training on the new methodology to be used to value goods under the Agreement, they told us they received a book.  The law and implementing decree was not passed through them for comment.  Although not required, it is normal for countries to discuss major changes with their client community.  In many countries when a major change in procedures is to occur, the trade community becomes an active participant in that change and even helps to promote it.    

When asked about specific portions of the Agreement, there was concern about Customs audit capabilities and additional time allowed to verify the transaction.  One importer expressed his concern by discussing his understanding of how Customs had conducted previous “audits” often involving the seizure of books, computers, and all business records preventing firms from doing any work.  There seems to be little understanding on the part of the importers as to the meaning of post clearance audit or invoice verification.   

Importers also voiced deep concerns about the ability of Customs officers to delay the final duty determination process, as envisioned by the Agreement, in cases of complex issues or the need to further verify additional documentation.  Importers felt they would rather know the duty and tax amount during the release process and not be surprised with additional payment due after they sold their goods.  While in many countries it is considered a benefit and a right to move goods from Customs custody under surety during the verification process, the local trade community viewed this practice with great apprehension.   

There was also concern about the time factor allowed for providing additional information to Customs.  The implementing decree allows 15 days from the request to provide additional supporting information.  This is a very short time period.  There can be complex issues that would require additional time but there seems to be no provision for extensions to be granted.  It may be that Customs authorities are not totally familiar with the process of producing substantiating documents of the type envisioned by the Agreement.  Fifteen days may appear appropriate based on previous experience, but may not be adequate under the Value Agreement.   

Importers also expressed concern about whether Customs had in fact restructured their organization to support the changes needed to properly implement the Agreement.  Once again since the trade community received little information on what the new Agreement necessitated, it is normal for them to be concerned as to whether Customs authorities were in fact prepared to implement on July 1.   

The basic consensus of the trade community was that no matter what the Agreement called for little if anything would change within Customs.  This is the perspective of the trade community and in order to change this perspective there needs to be a major public information campaign and education of the trade.  

There were several discussions about invoices.  Most Customs officers stated that 90% of the invoices indicated under valuation of the invoiced goods, the domestic producers we interviewed seemed to hold a similar view, but the trade associations felt that 90% were accurate and only 10% were in fact undervalued.  This is also a matter of perception.  There appears to be no objective or quantifiable data on this issue.  Since Customs applied a system of valuation based on Brussels Definition of Value, no invoiced value  that indicated a value lower than the right market reference price was usually accepted.  In that system there was little need to verify the accuracy of the invoice price, thus lower negotiated prices would seem to fall into under valuation of goods category.  However, it is possible that not only were the invoice values understated but also in fact the goods misdescribed on the invoice to provide for a lower tariff rate and a lower value.   

One party expressed direct knowledge of misdescription of goods and alteration of the invoices to receive a more favorable duty rate and value from Customs.  Another party stated that although he receives quantify discounts for his goods, Customs officers value his goods at the same value as competitors that buy in smaller quantities and he had no reason to believe anything would change under the new Agreement.   

Confidentiality also was an issue.  Importers did not appear to trust Customs authorities not to disclose confidential business information outside of the work environment even thought there were laws to preclude this from happening and punishment for the disclosing officer.  Importers had no direct knowledge that anyone had ever been punished for disclosing information.  This is another area that may require some additional legislative action within the Customs Law.  Even though the there are current laws governing the conduct of civilian employees of the Government of Egypt and the disclosure of confidential information, there may be need to address this issue separately as part of the Customs Law particularly since this is an important component of the Agreement.   

Generally all importers agreed that the work environment and salaries of Customs officers were a major factor that created many difficulties  and that officers could not properly do their work under those conditions.  Communication was either non-existent or sporadic, work areas were noisy, and personnel had few materials, resources, or tools to improve their expertise and function in a professional manner that is a necessary component in a modern Customs Department. 
 

Development of a Long-Term Infrastructure for Full Implementation of GATT Valuation Agreement  

The following considerations are provided as options to help develop new methodologies to promote a foundation more conducive towards implementing the Valuation Agreement.  Many of the suggestions can be considered as separate and discreet options and developed on as needed basis either within the total organization or as model pilot initiatives at specific sites to serve as proof of concept before considering them for acceptance within the organization.  Certain areas such as the building of expertise, post-audit functions and risk management have been expanded both because of the interest expressed by persons interviewed and because they are recommended by the WCO as basic building blocks in the implementation of the Agreement.  These areas are long-term initiatives that will require both automation and outside support.  
   

Development of Resources and Tools  

In order to move towards the full implementation of the Agreement, Customs officers will require the appropriate reference materials and tools to do their work.  There is an identified need to further develop a central reference or library area at each site for Customs officers to access and review reference materials.  General references such as the Valuation Agreement, Implementing Decree, and guidelines must be made available to all officers.  Additional WCO valuation material such as the Compendium of Valuation Rulings, WCO Valuation Control Handbook (specifically designed for developing countries implementing the Agreement), WCO Value Course, WCO Commercial Fraud Action Plan (Essential Elements for the Control of Fraud Under the WTO/GATT Valuation Agreement), the Harmonized Tariff, the Explanatory notes to the Harmonized Tariff, WCO classification rulings, the applicable Rules of Origin, rulings provided to importers, appeal decisions, and written standard operating procedures on the processing and release of commercial cargo should be available in this reference area.  Specific industry related publications, trade publications, and materials should be identified and procured.  Personnel should have full access to this material and be allowed to extract, copy or borrow material that is specific to their assigned area.  WCO materials need to be translated into Arabic and made available in both the Arabic and English/French version.  This is an area that may require assistance from donors particularly in translation and printing costs.   

Until such time as computers are assigned to individuals, a certain number can be made available to perform research and communicate with counterparts.  They can also be housed at the reference site. Materials that are available in an electronic format can be loaded into the computer for officers to review and copy.  The trade should also be encouraged to use such a site.   

It appeared that general material was difficult to locate and request.  Some reference material may have been appropriated by Customs officers for their own use and not returned.  This is common in areas where reference materials are rare and therefore quickly appropriated by senior personnel for their exclusive use.   

Automated tools need to be developed to allow individual officers to research the specifics of previous transactions and trade trends to make educated decisions about the shipment undergoing processing.  As more computers are made available to individuals, much of the material can be made available on-line and up-to-date information disseminated through the Customs network.  Email is an important aspect of communication in modern Customs services.  Information, instructions, requests, and general communication move electronically to individual officers and everyone becomes aware and has the same information either about procedures or concerns on specific shipments.   

All managers and officers involved the classification and valuation of merchandise should have access to computers and computer training to use basic programs and email.  Electronic communication is also less intrusive to the work process.  Currently telephones ring continuously, intruding on a manager’s time and ability to concentrate.  As computers become available, information and inquiries either from inside or outside should be encouraged to be sent electronically.  It encourages the use of a more efficient method of communication with requests and responses available for review.  It provides greater flexibility within the work environment.  A manager or Customs officer can have time to consider the response and research it before responding.  This provides for a more efficient and quieter work environment.   

Training from outside sectors should be encouraged.  The trade community and domestic industry can provide valuable assistance in product knowledge.  The banking and accounting sectors are excellent sources of determining audit trails for payment and product financing.  Visits to manufacturing plants, processing facilities, warehouses, distribution centers, and common carriers can provide invaluable information about how products are made, financed, bought, and shipped.  

General and specialized joint seminars for Customs and the trade can be considered.  Often there is a misconception among the trade community on how goods are classified or valued.  To bring together Customs officer and the trade community in a seminar environment and provide either a general or industry specific course on product classification or valuation would benefit both parties and it would create a greater atmosphere of trust.  Currently there seems to be a perception among traders and the business community that Customs officers are not applying the Harmonized System properly nor according to trade interview will they apply the Valuation Agreement properly.  Joint training could alter that perception and promote more trade interface.  Not only should clearing agents attend, but also importers should be encouraged to send representatives involved in the import process.  The same process should be put in place for other Customs functions.  It provides a common understanding of the rules in an open and transparent environment.  Customs and the trade should be encouraged to do their work together and receive their information from the same sources. 
   

Development of Expertise  

One option is to give consideration to promote the development of a working level commodity expert with responsibility for a finer industry sector focus and greater exposure to the trade.  In major developed countries teams dedicated to specific industry sectors work under the direction of a team leader and develop expertise within the sector.  As specific industry groups are already in place, it would be useful to consider developing those officers into commodity experts that have the necessary background and product knowledge to be able to easily detect either non-compliance or fraudulent practices.   

Another option that some countries employ is to create a group of national commodity experts that: provide information; identify resources; initiate trade seminars; and serve as a central place of consultation to both Customs officers and the trade community.  A system of orderly rotation must exist so as not to disrupt the efficiency of the process and the expertise needed to properly classify and verify the value of the merchandise.   

In order to implement properly the Value Agreement there needs to be a different level of specialization and expertise than was necessary under the system of valuation based on Brussels Definition of Value when values were researched and identified as reflecting market prices.  Such values were used in valuation of goods and not the price paid or payable by the importer.  As this system is no longer applicable under the Value Agreement consideration can be given to reeducation and realignment of the workforce.   

The Valuation Agreement necessitates the active involvement of the importer in the process.  Although the clearing agent plays a significant role in the processing of the goods, he is not the knowledgeable party about the specific transaction.  The importer or buyer of the goods is the knowledgeable and responsible party.  The importer needs to be part of the process.  He needs to be educated or have member of his staff educated in what documents, records, and books are to be kept and made available to Customs on request; that Customs has the authority to review those records, books, financial arrangements, and even the specifics of what happens to the imported goods.  Visits to plants and processing sites should be encouraged.  Importers should be encouraged to educate Customs officers about their business environment and Customs in turn needs to educate the importer about the Customs environment.  To make this process  efficient and less time consuming, only those officers dedicated to processing goods in specific industry sectors would visit importers’ premises.   

Any information learned about the transaction or use of the goods must be subject to the confidentiality laws of the GOE and the Agreement.  If the importer can trust the officers to not disclose proprietary trade information to outside sources, he will be more willing to educate them about his business practices and product line.  This is envisioned as a long-term process that requires confidence building in both areas.   

Customs authorities can also promote the development of expertise by allocating funds for training, for resource material, for seminars, and for meetings at the working level with other Customs Services to discuss mutual problems.  A degree of independent decision-making comes with expertise. Managers can be encouraged to manage the process and not the task.   

Customs authorities can work towards creating better process for internal record keeping were results of examination of goods and review of documents whether in an electronic or paper format be kept in an orderly and accessible manner and available in a timely fashion to other officers, managers, auditors, or parties involved in the appeals process.  Only then can risk management and post audit techniques be properly applied.  There will be a need to have a historical record and baseline in order to properly assess risk.  
   

Development of a Binding Rulings Process  

One area to be considered is an efficient and published binding ruling process.  It is understood that there is a process that allows for importers to receive rulings from Customs authorities.  Apparently it does not appear to be binding on either party.  In fact if an importer receives an unfavorable ruling there may be no current methodology to even know that such a ruling exists particularly if he brings his goods through another port.  Rulings should be binding on both parties.  They should be published and made available to all sites processing cargo.  Once computers become available to the majority of the workforce, rulings can be made available on-line.  However, a database of rulings can be developed in the current system.  It would allow for rulings to be numbered and abstracts entered into the automated system by importer name.  This would allow the customs officer processing an importer's shipment to review if a ruling was made on a specific product.  Rulings can cover HS classification, origin determination, method of valuation, or any number of Customs processes.  By deleting specific importer information, and describing the issues only, rulings should also be made available to the trade which may alter the current view about lack of uniformity and standardization in applying HS, origin or value determinations.   

If the imported product is the same as described on the ruling, Customs officers would be obligated to use the ruling even if they disagreed with it.  If an error on the part of Customs was discovered, Customs could only change the ruling to be effective after a specific notification period.  Clear guidelines on such issues would have to be published and followed.  If Customs has all the facts and makes an incorrect determination, Customs should not have the ability to change the ruling without proper notification and only for future imports.  Importers have priced and sold their goods based on a ruling that was issued and should not be requested to pay additional revenue.  However, if the importer has in fact misrepresented the product or issue, the ruling cannot be considered to be binding for the product or issue before Customs.   

By deleting specific importer information, and describing the issues only, rulings should also be made available to the trade which may alter the current view about lack of uniformity and standardization in applying HS, origin or value determinations. 

Many Customs services publish their binding rulings, appeal decisions, court decisions, and make them available on-line for anyone to review.  The United States , Australia , the European Union, and many other nations have web sites that include rulings available for review and download either to the public or to members.  These are designed to eliminate the keeping of manual records, to promote uniformity and provide information to a wide audience including other governments.  The WCO publishes tariff rulings and makes them available for review.  All of these can be used as tools and can help to provide formats for the binding ruling process.  
   

Development of Analysis and Research Capability  

Another possibility or option is to develop a group dedicated to analysis and research of trade sectors, importer and commodity histories, and processes.  This group would need to have good research and computer skills.  They would work closely with estimators to develop trends based on historical data and evaluate risks associated with specific commodities or traders.  They could help develop criteria for selective processing, identify candidates for the post audit, become a repository of commercial intelligence, and develop management information.  If the estimator needed information about specific risk associated with a commodity, an industry sector, or an importer, the analyst could perform internal and external research to provide that level of information.   

For this process to be effective there would be a need to develop an on-line historical database on the results of physical examination and documents review.  While a database development process occurs, input of this level of information from current paper documents could begin using an off-the-shelf software database such as MS ACCESS.  This type of action could help develop the specifications for creating an on-line tool that would be part of the declaration process.  It could be a proof-of-concept.  This type of approach has been used and found to be efficient in the development of both lookout criteria and selective processing.  However, to be an effective participant in the cargo process, such a group must be part of that process and have significant interaction with personnel dedicated to duty determination.  Analyst positions could be filed from both inside and outside the current Customs staff.   In the future as more computers become available to the general workforce, this group could help educate the workforce in the use of software and research tools.  
   

Development of Conditional Release Capabilities  

Some goods declarations are more complex than others and require a longer period of time to verify the circumstances of sale.  In some cases there is a requirement to consult with the importer either on the specific transaction or to audit the books and records of the importer on multiple transactions.  This process necessitates that the cargo be released to the importer under a guarantee or surety obligation which provides that if any additional duties or taxes accrue after the review of the transaction documents or financing arrangement, the Customs Authorities have a guarantee of payment.  This procedure also necessitates that a reasonable and specific time period be established to finalize the action and allow the importer to have an opportunity to protest or appeal the action.   

All of these actions must have clear and specific guidelines as to the obligations of Customs and the importer to produce books and records, and of Customs to finalize the action within a specific period.  The business and trade community cannot function without having clear and legal guidelines.  They need to have predictability and a clear understanding when final action occurs and Customs cannot re-open the declaration to assess additional revenue due to an error on the part of either party.  The same rules are to apply to the importer seeking a refund.  At end of the time period the action is final and closed.  The only option available to re-open the process would if there was some evidence of fraudulent practices. Article 13 of the Value Agreement anticipates a process of conditional release be in place to allow Customs authorities to verify the circumstances of the transaction.  
   

Development of Confidential Procedures  

The Value Agreement specifies a greater level of involvement of the importer in the Customs valuation process.  It provides a great degree of latitude for Customs to access and review proprietary business records and information to verify the price paid or payable.   For the importer to provide that level of information and for Customs to properly perform the verification process, the importer must be secure that all information provided to the officer will be kept in strict confidence and not released to outside parties or other government agencies without his consent or only as part of a specific judicial proceeding.   

There may be a need to review the current procedures and possibly initiate legislative action to further define the responsibilities of Customs officers in handling proprietary business records.  It is possible that there are confidentiality guidelines in place for government personnel handling anti-dumping investigations.  Those officers deal with very sensitive business information and those guidelines could be studied and possibly incorporated into the Customs confidentiality regulations.  Clear guidelines must be established and adhered to by both parties.  The obligations of providing information to Customs must be clearly defined and the Customs Authority’s responsibility to keep the information confidential and secure must also be well defined within the Customs regulations.  This is an essential component of the Agreement and covered within the Agreement under Article 10.  
   

Development of a Post-Clearance Audit Process  

The area of post clearance audit was expanded and further defined because of questions that were asked by Customs officials during the interview process.   

The Value Agreement provides for release of cargo and in some instances for final determination of value to occur after the release of the goods.  In cases of complex issues there is a need for specific audit expertise. It is suggested that a group of audit personnel be developed.  It is often effective to have a commodity expert assigned to the audit group when they perform an audit in the area of expertise of the estimator.  This is additional reason to develop expertise within commodity sector.  An auditor is an expert in reviewing records and audit trails but will have no classification and little valuation expertise.  This expertise needs to be part of the audit process. Only such a joint effort can properly evaluate the importer’s compliance level.   

In the broadest sense, post-clearance audits are reviews of the records and accounts of an entity, private or public, by an independent authority, and to verify that they conform to generally accepted accounting principles. 

Many entities also have their own audit staffs, which conduct internal audits to determine whether funds and assets are accounted for, and properly managed.  

As used by Customs authorities, post audits are financial examinations of the books and records of importers to reconcile their accounts with the information contained in customs declarations and with the goods themselves.  Customs post audits may be conducted on other international trade participants for similar reasons.  As an example of one such reason is to reconcile the financial records of privately owned customs warehouses with the inventory of goods stored therein and customs records of the goods.  

Post audits allow Customs authorities to check importations and importers for compliance with the laws and regulations after release of the goods to the importer.  Consequently, such audits are referred to as post-clearance audits or simply post-audits.
   

 Increased Use of Customs Post Clearance Audits  

The use and practice of post clearance audits by Customs authorities has grown considerably in recent years for several reasons: emphasis on trade facilitation has led to increasingly rapid clearance times; increase in the complexity and volume of importations has created a need for post release review; and in some countries the number of Customs officers has failed to keep pace with the increase in international trade due to economic, political, and social factors.   

Post clearance audits allow a check of importers accounts, not just of individual importations, and they are understood to be a more efficient method of verifying compliance with customs laws than review and clearance of individual importations.  However, it is not intended that this process completely replace document and physical checks done at the time of importation.