Tariff reduction is often times lauded as a positive signal of an open economy that is attractive to foreign investments. From this concept, there is a concerted drive at tariff reduction in various parts of the world. This drive has been facilitated by continuing negotiations at the World Trade Organization (WTO) and the various free trade agreements (FTAs) now being forged in different parts of the world.
However, it is important to consider that tariff reduction alone provides no assurance that products would be smoothly traded across borders. Cumbersome processes, tedious paperwork and disorganized systems at a country’s customs administration can wipe off any expected benefits of tariff reduction and produce the same net effect as closing off one’s economy altogether. Thus, in pursuing the objective of opening up one’s economy and reaping the benefits of a liberalized trade regime, the issue of customs administration (among other non-tariff barriers) should be addressed side by side with any tariff reduction strategy. Thus, commitments to Customs modernization and reform are arguably of a level of importance equal to our commitment to open our borders to more fully participate in the global economy.
In an opportune development, the Philippines is now at the threshold of acceding to an important international convention. This convention is seen as a significant catalyst that will pave the way towards modernizing and equipping the Bureau of Customs (BoC) with the necessary tools to cope with the emerging challenges of global trade. I refer here to the “Revised International Convention on the Simplification and Harmonization of Customs procedures”, also known as the “Revised Kyoto Convention” (RKC).
As its title suggests, the RKC is an amended version of the original Kyoto Convention (KC) which took effect back in 1974. The KC was formulated and promulgated under the ambit of the Customs Co-operation Council (CCC) – the forerunner of today’s World Customs Organization (WCO). The Convention aims at establishing a uniform set of rules and guidelines amongst its signatories as to how their respective Customs administrations would operate; thereby improving transparency, reducing transaction costs, and promoting trade. Revisions to the KC (leading to the present RKC) were adopted in 1999 by the WCO Council to render the Convention more adaptive to technological developments and responsive to the changing demands of global business. The RKC however only took effect last 03 February 2006, after the required 40 signatures of the original KC were finally affixed to the Protocol of Amendment. Since then, more countries have acceded to the RKC, bringing the current number of signatories to 56 (as of January this year).
The objectives and principles of the RKC have been widely acknowledged by international organizations including the WTO, the Association of Southeast Asian Nations (ASEAN), and the Asia-Pacific Economic Cooperation (APEC). In fact, the RKC expounds on certain provisions contained in other international agreements such as Articles V, VII, VIII and X of the General Agreement on Tariffs and Trade (GATT) administered by the WTO.
The RKC comprises of three parts: the body of the Agreement, the General Annexes, and the Specific Annexes. All signatories to the RKC are bound to comply with the provisions of the body of the Agreement and its General Annexes. Signatories to the RKC, however, may opt not to subscribe to the Specific Annexes which essentially serve as a compendium of standards and internationally accepted best practices.
The body of the Agreement contains the general provisions on the scope and structure of the RKC, the accession process, the ratification process, dispute settlement procedures, the amendment process and its entry into force.
The 10 chapters and over 600 provisions of the General Annex, on the other hand, stipulate the main principles of the RKC. It requires signatories to comply with, among others, the following standards: establishment of a predictable set of standards for customs clearance, maintaining transparency, preventing arbitrary actions by customs, utilization information technology, and the use of risk management and audit based controls. Certain standards in the General Annex are transitional, meaning signatories are given a longer period of time to implement them. Overall, these Annexes provide a general operational framework for a modern Customs administration.
The Specific Annexes comprise of several chapters and corresponding guidelines which signatories can accede to on an optional basis. Its chapters cover, among others, the following areas: Customs formalities prior to lodgment, warehousing, temporary admission, transshipment, duty relief, re-importation, relief consignments and origin requirements. Notably, if a signatory decides to sign on to a specific annex, or a chapter of that specific annex, it will have to abide by the standards and recommended practices that it prescribes.
Many business groups, as well as the BoC itself have voiced support for the Philippine’s accession to the RKC citing the benefits that it would offer. The primary advantage foreseen for the business sector would be the reduction of transaction costs and the more timely clearance of cargo from Customs jurisdiction. The BoC, for its part, is also expected to gain out of RKC accession particularly in the installment of an organized system that will foster more accurate and efficient revenue collection and monitoring.
It is worthy to note that, unilaterally, the BoC has already implemented initiatives to modernize its operations such as computerization efforts back in 1995 and the installment of non-intrusive container scanners in major ports. Nevertheless, many groups see RKC accession as a more potent indication to the world of the country’s commitment to substantially improve its customs operations.
With a significant change in Customs rules looming in the horizon, a team at the BoC is now closely studying how the Tariff and Customs Code should be amended to make it consistent with the RKC. Efforts are likewise being made by business groups and government agencies at the Senate to prioritize the RKC for concurrence. Now is high time therefore for companies to closely monitor these developments and make the proper assessment this early as to how they could optimize the benefits of a possible accession and mitigate possible risks.
(Raphael Edward B. Madarang is a Manager for Tax and Corporate Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss Cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please e-mail manila@kpmg.com.ph or rmadarang@kpmg.com).