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Business Logistics

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Title: Business Logistics


1
Business Logistics
  • Customs International trade Impact on
    international movements of goods
  • 25 March 2008

2
Agenda
  • Introduction principles
  • Customs Efficient Supply Chain Management
  • Case scenario on cost reduction strategies
  • Trade security
  • Corporate policy on Trade

3
Factsheet
  • 90s great focus on Central and Eastern Europe
    for production and growth in turnover
  • Post 2000 Large corporations and SMEs go
    global
  • global procurement
  • export to emerging markets
  • This presents new challenges
  • Customs regulations impact goods flows and import
    taxes in emerging countries are usually very high
  • The finance impact of so-called trapped duty
    has an increasing impact on the COGS (cost of
    goods sold)
  • Possibilities for optimisation and cost
    reduction?

4
Factsheet
  • Businesses have an increasing dependency on their
    logistical partners (3PL/4PL)
  • For warehousing and transportation
  • For global representation to Customs
  • Information sharing
  • material master data customs data
  • Commercial data invoicing
  • Transport details
  • High liabilities jointly and severally
  • For pricing purposes landed cost determination
  • Large importers and exporters may locally
    in-source their customs compliance but in such
    case the operating model is often a hybrid one
    (partly in-sourcing and partly out-sourcing)
  • Large software providers have entered the space
    of customs management software

5
Cost reduction in international trade is top
priority
  • The three elements that drive how many import
    taxes are due
  • Value of the goods
  • Classification of the goods
  • Origin of the goods
  • Import taxes include
  • Customs Duty
  • Import VAT
  • Excise Duty
  • Anti-dumping Duty
  • Other restrictive measures are import quota,
    import licenses (dual use goods)
  • Export control procedures (dual-use goods, US
    regulations, etc.)

6
Customs valuation
  • Transaction value the price paid or payable
  • To be added if not yet included
  • Royalties and licenses, sales commissions
  • Tools and supplies/assists free of charge
    supplied by the buyer/importer
  • Packaging
  • Transportation and insurance up to entry into the
    EU, etc.
  • Can be excluded
  • Buying commissions, reproduction rights in the
    EU, finance costs, etc.
  • Alternative methods
  • The value of identical / similar goods
  • The re-sale minus value / Cost-plus value
  • Reasonable means

7
Classification - Origin
  • The classification code of a product is the basis
    for the import taxes due as well as any other
    measures
  • There is only one correct commodity code per
    product
  • Examples play station, home cinema, plasma
    screens, etc.
  • Origin is the nationality of a product and refers
    to where the product was
  • Either wholly obtained, or
  • Sufficiently processed to obtain the originating
    status
  • Get legal certainty Binding Tariff Information
    (BTI) Binding Origin Information (BOI)

8
Customs Duties Strategic Overview
Determine baseline duty / risk
Classification
Valuation
Customs
Special Procedures
Origin Preference
Reduces / Remove Duty
9
Agenda
  • Introduction principles
  • Customs Efficient Supply Chain Management
  • Case scenario on cost reduction strategies
  • Trade security
  • Corporate policy on Trade

10
Customs Efficient Supply Chain Management (CESCM)
  • Management priorities are defined around
  • Cost Reduction Strategies
  • Customs Efficient Supply Chain management
  • Replacement for disappearance of export refunds?
  • Risk Compliance Management
  • Trade security programmes (AEO)
  • SLAs with customs agents and freight forwarders
  • SAP Global Trade Services or other technology?
  • Supply Chain Facilitation
  • Optimising Supply Chain Rationalisation for
    Customs
  • Use of preferred trade programs, e.g. AEO, Trade
    Agreements etc
  • Links to cost reduction, compliance and emerging
    markets
  • Strategic Trade Planning
  • Internal Building trade issues into strategic
    planning, eg sourcing
  • External Lobbying, Advocacy, links to
    bi-lateral trade agreements

Customs and International Trade
10
11
Customs Efficient Supply Chain Management (CESCM)
  • Opportunity
  • Customs duty represents a significant opportunity
    to reduce costs globally
  • However, the current economic environment while
    providing a basis for reconsidering the
    commercial structure, also requires a very robust
    approach which must be commercially and
    technically sustainable
  • This requires a globally co-ordinated strategic
    focus on business structure verus duty costs
  • Central strategic planning to establish the
    optimum duty effective commercial structure for
    each territory
  • Local implementation of globally developed
    structural building blocks

12
Customs Efficient Supply Chain Management (CESCM)
  • Goal is to achieve a globally consistent business
    model which minimises duty costs around the World
  • This requires central planning of appropriate
    changes to the model in order to
  • achieve optimum duty effective commercial
    structure for each territory ...
  • without adversely impacting commercial
    objectives, and ...
  • maintaining consistency with the companys Global
    transfer pricing strategy
  • Key to the approach is the
  • central planning of key initiatives
  • central buy-in of key departments which are
    effected, e.g., quality, legal
  • central preparation of robust legal, accounting,
    tax and customs technical support for all
    strategies to be rolled out
  • local implementation of the appropriate
    combination of the initiatives in question on a
    market by market basis

13
Customs Efficient Supply Chain Management (CESCM)
  • Customs Efficient Supply Chain Management
  • Recognises that commercial structure must be
    driven by operational and market realities
  • Puts in place the optimal customs duty solution
    to leverage highly significant duty savings from
    the optimum commercial structure
  • Facilitates repatriation of overseas funds in a
    tax efficient manner
  • Interacts with all other areas of taxation
    (transfer pricing, corporate income tax,
    withholding tax, VAT and sales tax) to minimise
    its impact on the overall tax strategy being
    applied by the company

14
Existing CESCM environment
  • Some level of duty efficient structuring has been
    carried out by many companies in the industry
  • However
  • On a territory by territory basis
  • On an ad-hoc basis
  • Such an approach has the following disadvantages
  • It is not centrally planned and implemented with
    the support of Head Office and of all key
    departments, e.g., tax, legal, warranty, transfer
    pricing, finance
  • If not consistent globally, it is more difficult
    to defend and far more vulnerable to attack by
    local customs authorities
  • It is not leveraged to full effect, if not rolled
    out globally
  • The current economic climate requires a much more
    robust and carefully planned approach.

15
Customs Efficient Supply Chain Management
  • The key structural building blocks include the
    following
  • Impact on valuation (link with TP)
  • Distribution Rights
  • Territorial Franchise Fees
  • Royalty agreeements and license fees
  • Local Advertising and promotion funding
  • Global marketing cross charges
  • Global research cross charges (prospective)
  • Bifurcation of Finance costs
  • Trapped duty duty on raw pack

16
Customs Optimization Strategies for Developed and
Emerging markets
Emerging markets
Developed markets
Global sourcing and export sales
Global sourcing and export sales
Visible duty
Use of preferential trade
?
agreements for duty free
?
Eliminate duty on raw and pack
access
Trapped duty
Valuation
Classification of
?
Recover duty trapped in
?
finished products
to
local purchases or
Advanced duty planning
minimise duty
preference imports
Use advanced planning techniques to create
procurement cost advantages, e.g. equivalence
?
?
Managing risk in volatile Environment, e.g.
compliance, FCPA, penalties etc
17
Agenda
  • Introduction principles
  • Customs Efficient Supply Chain Management
  • Case scenario on cost reduction strategies
  • Trade security
  • Corporate policy on Trade

18
Trapped Duty - the hidden cost
Issue local purchasing of Packaging/Flavours
and ingredients for which raw material originates
from non-EU, e.g. aluminium foil used for wrappers
Pays Duty on Imports of Aluminium (7,5)
Trapped Duty in purchase Price
Exports 40 outside EU No recovery of original
duty
Packaging SupplierManufacturesAluminium Foil
EU Producer
  • Solution
  • Use Producer usage or export documents to
    avoid/recover duty paid by the supplier
  • Supplier imports exempt quantity based on
    Producers documents for re-export
  • Application Materials
  • Packaging Plastics, Metals, Foils etc
  • Ingredients All ingredients and materials
  • Application Sectors
  • Food, beverages, confectionery products

Geography
19
Case scenario
Chinese manufacturer
Denim from Portugal
40 EUR
100 EUR
Import duty 12 EUR
Distribution hub in Belgium
60
40
Supplies to EU Customers
Supplies to non-EU Customers
20
Case scenario
Export under OPR
Chinese manufacturer
Denim from Portugal
Re-import under OPR - Import duty (10040) 12
7,2 EUR
40 EUR
100 EUR
Distribution hub in Belgium
60
40
Supplies to EU Customers
Supplies to non-EU Customers
21
Case scenario
Export under OPR
Chinese manufacturer
Denim from Portugal
40 EUR
100 EUR
Distribution hub in Belgium Customs warehouse
Re-import under OPR upon removal from customs
warehouse. Import duty (10040) 12 60
4,32 EUR
60
40
Supplies to EU Customers
Supplies to non-EU Customers
Reduction in duty is top line saving
22
Case scenario
Export under OPR
Chinese manufacturer
Denim from Portugal
40 EUR
90 EUR
Hong Kong buying Agent
100 EUR
Distribution hub in Belgium Customs warehouse
Re-import under OPR upon removal from customs
warehouse. Import duty (9040) 12 60
3,6 EUR
60
40
Reduction in duty is top line saving
Supplies to EU Customers
Supplies to non-EU Customers
23
Case scenario
Manufacturer in Sri Lanka
Denim from Portugal
40 EUR
100 EUR
Import duty 0 EUR
Distribution hub in Belgium
60
40
Supplies to EU Customers
Supplies to non-EU Customers
24
Case scenario Emerging markets
EU production
Customers in Russia
  • Issues to consider?
  • Value of the goods price paid or payable (US
    FCPA regulations vs. Belgian regulations)
  • Import taxes how to optimize using legal
    provisions ?
  • Things to consider
  • Classification of goods
  • Local distribution (assembly) activity
  • Customs inspections on Russian border cargo
    inspection

25
Case scenario Global economy
Developed Markets
CEEMEA
Latin America
Asia

Developed Markets
CEEMEA
Latin America
Asia
Cocoa powder, butter, paste 7.7 - 9.6 Flavours
4.5 -
Cocoa Paste 5 Pasta 15 Milk Powder 15
Cocoa misc 10-14 Pasta 16 Milk Powder 16-27
Coffee Beans 100 Sugar 60 Milk Powder 60
Raw Materials
Finished Goods
Soup 15 Kitkat 15 Boiled Sweets 21
Soup 16-18 Kitkat 18 Water 20
Soup 30 Kitkat 30 Water 20
Soup 11.5 Kit kats 9 Coffee (instant) 9
Packaging
PET 14
PET 15 - 30
PET 2.5
PET Preforms 6.5
26
Agenda
  • Introduction principles
  • Customs Efficient Supply Chain Management
  • Case scenario on cost reduction strategies
  • Trade security
  • Corporate policy on Trade

27
What does the future hold ?
  • The focus of the Customs Authorities is moving
    away from the collection of duty to the safety
    and security in the international trade
  • The Customs Authorities are also introducing a
    fully paperless customs environment with
    dedicated control mechanisms. The European
    Commission has introduced a multi-annual
    strategic plan (MASP)
  • As a consequence, Customs and Trade has become a
    strategic objective for the business

28
EU MASP
2009 2014 Automated Import System (incl.
centralized clearance) / Automated Export system
(EU)
Mid 2005 WCO SAFE Framework / Customs Security
Program (EU)
2006 2009 Common Risk Management Framework
(EU)
Jan 08 AEO (EU)
2001
2014
Mid 09 Pre-arrrival and pre-notification (EU)
2001/02 C-TPAT (US)
Mid 2003 NCTS - First step to a paperless
environment (EU)
2006 2009 Import/Export Control system (EU)
2007 - 2011 Single Authorisation for simplified
procedures (SASP, formerly known as SEA) (EU)
2005 2014 Single window (EU)
29
Authorised Economic Operator - what is it?
  • The World Customs Organisation as well as the
    European Customs Authorities are responsible to
    closely guard our borders to combat the terrorist
    threat, imports of counterfeits and pirate goods,
    illegal drug imports, fraudulent imports, etc
  • Equally so, the Authorities do not wish to
    adversely affect trustworthy and compliant
    businesses. The AEO accreditation is proof of
    such status and also gives access to extra
    customs simplifications
  • It is still early days though everywhere in the
    world equivalent programmes are being kicked off
    and Authorities are discussing green lane
    operating models which will facilitate a fast
    track customs clearance and thus reduced lead
    times

30
AEO programmes pop up everywhere
Initiatives resulting in approved supply chain
green lanes
AEO (EU)
Pre-arr/Pre-dep (EU)
CSP (EU)
FAST (USA-CAN)
CSI (USA)
AEO (JAP)
C-TPAT (USA)
24hours rule (USA)
STP (SGP)
102 (USA)
FAST (USA-MEX)
AEO (KE)
(Selection of initiatives)
Blue Line (BRA)
31
Who should apply for AEO and where ?
  • Any party involved in international supply chain
    is eligible to AEO
  • In practice
  • EU establishment required (exception regional EU
    offices of airline/shipping line)
  • You should apply where you are established, where
    you manage your logistical/customs compliance
    (keep your records)

source EU taxud 2006/1450
32
Why does a business go for AEO?
33
AEO benefits operationally
  • Improved management of risks, examples are
  • SLAs with freight forwarders and customs
  • Split-up of contracts by service types such as
    compliance, customs clearance
  • Avoidance of increased inspections (risk
    assessment framework).
  • Inspections cause time delay 1 to 3 hrs delay
    for trucks
  • Extra admin cost
  • Opportunity costs for internal resources
  • Impact on lead time certainty increased
    inventory requirement (buffer stocks)
  • AEO should lead to a reduction of logistics
    overhead feasible through review contracts and
    increased efficiencies

34
AEO criteria crossing the line
People know how
Processes compliance
TechnologyAudit trail
Trader Information - Customs Processes
Appropriate customs compliance record
Governance, Risk and Compliance
Authorised Economic Operator (AEO)
Accounting Logistical accounting and controls
Financial solvency
A safe and secure physical supply chain
35
Agenda
  • Introduction principles
  • Customs Efficient Supply Chain Management
  • Case scenario on cost reduction strategies
  • Trade security
  • Corporate policy on Trade

36
Building a corporate strategy
  • Corporate Priorities and Focus is increasingly
    touching Customs and Trade
  • Having a reliable supply chain makes or kills a
    business
  • Financial Risks, Internal Controls and other
    regulatory requirements (SOX, JSOX, AEO, C-TPAT,
    ISO, TAPA, etc.)
  • Product and Supply Chain Integrity (Counterfeit,
    Terrorism, Commercial Threats)
  • Bribery and Anti-Corruption Risks and Controls
  • Highest Revenue Growth increasingly from emerging
    markets where customs and border processes still
    heavily impact physical supply chains
  • Making global procurement activity and export
    sales cost efficient is an absolute priority and
    customs regulations often offer potential for
    cost reduction

37
Building a corporate strategy
  • What is the current and future role of the
    logistical company?
  • Render logistical services
  • Integrate with their clients operational model
  • Help the clients to streamline their processes,
    reduce cost and lead times
  • Challenges
  • Most logistical companies are one brand though
    locally managed with distinct processes and
    strategies
  • Global companies require a flexible but
    streamlined approach

38
Contact details
  • Franky De Pril
  • Partner, Global Strategic Trade Team
  • Brussels, Belgium
  • 32 497 05 10 96
  • e-mail franky.de.pril_at_be.ey.com
  • Chris Horckmans
  • Director, Customs International Trade
  • Brussels, Belgium
  • 32 479 98 43 69
  • e-mail christina.horckmans_at_be.ey.com

39
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