Customs investigation and audit can be seen as one of the inevitable risks for companies to continue their international trade activities. It is a process in which the national customs authorities review the imposition and adjustment of tariffs on a company's imports or exports, and the results may pose a great risk to the company's trade activities and profit generation. Through the article below, we will briefly look at the concept and type of tariff investigation and the risk mitigation strategies that companies can take.
1. Concepts and Types of Customs Investigation
Tariff review or customs investigation is a process led by national customs authorities to assess the suitability and accuracy of imports and exports. Its primary objective is to ensure that tariffs are appropriately imposed or adjusted, correct tariff classifications are assigned to imported goods, origins are verified, and tariff evasion is prevented. These surveys can be categorized into various types based on their scope and purpose.
1) Country of origin
It is an investigation conducted to confirm the exact origin of the product. The country of origin survey is conducted to review compliance with the country of origin regulations of the product concerned, and to identify incorrect country of origin labeling or manipulation of the country of origin. In the process of imposing tariffs, the country of origin is one of the major tariff investigations because the FTA rules determine whether to reduce or exempt taxation.
2) Price
The aim of the mentioned investigation is to assess the factors that impact product pricing. The analysis of prices requires validating precise price information to detect any unexplained alterations or unreasonable pricing. In numerous cases, taxes are determined based on the worth of imported products, thus rendering price a crucial consideration in tariff evaluations as well.
3) Tariff classification
This is done to ensure that the tariff classification of the product is done correctly. The Customs Classification Survey is conducted to verify that the product is classified according to the correct classification system and that there are errors in the tariff due to incorrect classification. It is important to check the exact tariff classification because the tariff rates are different for each HS code assigned according to the tariff classification.
4) Tariff avoidance
Conduct a thorough examination into the potential unfair practices employed by companies to evade tariffs. The purpose of tariff avoidance investigations is to detect and address any illicit activities aimed at circumventing tariffs. Tariff avoidance is considered detrimental as it diminishes a country's tariff-generated revenue and distorts its competitiveness by unlawfully decreasing prices. Consequently, investigations are undertaken with the aim of upholding proper and justifiable tariff procedures.
5) Tariff return
Regardless of the level of effort exerted, mistakes are inevitable. When it comes to investigations, requesting a reimbursement is a necessary process if the company has been charged incorrectly. It is essential to prioritize customs refund investigations based on the enterprise's requirements.
2. Risk mitigation strategies in response to tariff investigations
To effectively address tariff investigations, businesses must implement suitable measures to mitigate risks. The risk mitigation strategy in response to such investigations encompasses the following essential elements.
1) Establish an accurate and thorough internal management system
For businesses, it is of utmost importance to diligently record and preserve data pertaining to the different elements that influence tax rates, including classification of tariffs, labeling of country of origin, and pricing of products. Ensuring transparency and precision within the internal management system is vital for being sufficiently equipped in case customs investigations arise.
2) Cooperation with experts
Close cooperation with customs experts or tax consultants is essential to responding to customs investigations. With expert advice, companies should understand customs laws and procedures correctly, and can develop active strategies for tariff investigations.
3) Data analytics and monitoring
Furthermore, it is imperative for businesses to conduct a thorough examination and regular monitoring of import and export data. This analysis of the compiled information enables the identification of potential risks beforehand, allows for anticipation of tariff investigations, and facilitates timely preparation for such occurrences.
4) Strengthen legality and compliance
Organizations must also enhance their internal operations to guarantee adherence to legal requirements and compliance in anticipation of tariff investigations. By adhering to rules pertaining to product origin, customs classification, and pricing, these measures mitigate the risk of customs inquiries while avoiding potential drawbacks under Customs Law resulting from non-compliance.
5) Create a problem-solving and response strategy
In the event of a customs inquiry, organizations should develop a proactive approach to address issues promptly. It is essential to maintain seamless communication and collaboration with customs officials consistently, while devising swift and suitable remedies to resolve any tariff-related problems.
As above, we looked at the concept of tariff investigation and risk response strategies together. Customs investigations (tariff screening) are conducted to verify the rationality and fairness of tariff imposition, to verify the accuracy of the country of origin and customs classification, and to prevent tariff avoidance. Depending on the results of the survey, it may have a negative impact on the company's operating profit and future import and export processes, so companies should always prepare for customs investigations by establishing appropriate risk mitigation/response strategies.