MASTER IN BUSINESS ADMINISTRATION

MASTER IN BUSINESS ADMINISTRATION INTERNATIONAL TRADE AND LOGISTICS Unit Title

International Customs Law

Unit number

MTL 506

Assignment number

2

Student Name

LalithEdirisinghe

Student number

u3057456

Name of lecturer

Prof. Stephen Muller

Submission date

26.03.2011

Student declaration: I certify that the attached assignment is my own work. Material drawn from other sources has been acknowledged according to unit-specific requirements for referencing.

26.03.2011 Signature

Date 1

―Understanding International Customs Law: The importance for the Trade & Industry in the current economic context‖.

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INTRODUCTION

International Customs Law is the body of international conventions, treaties, norms and standards which Customs agencies are entrusted by their Governments to implement and observe and which, if breached, would constitute a breach of that Government‘s legally binding international obligations. The World Customs Organization (WCO) has introduced the Revised Kyoto Convention (RKC), to establish benchmarks by which Customs services can best manage their responsibilities in relation to the movement of goods. ―Customs plays a crucial role in trade operations and revenue collection, and it directly affects the private rights and obligations of citizens.‖ (Wulf, L.D. and Sokol,J.B.,2005) It is believed that since its inception in 1952, the WCO has been working to develop Modern principles.

The simplifying and harmonizing of customs procedures was reflected in the Kyoto

Convention, which was adopted by the WCO in 1973 and entered into force in 1974. The realities of modern international trade have prompted modernized customs legislation internationally. Because outdated customs laws constrain social and economic progress by acting as significant nontariff trade barriers. On one hand they prevent effective revenue collection, discourage foreign trade and investment, while creating a potential threat to social and national security. RKC was developed to standardize customs policies and procedures worldwide. Over the years economies have realized that it embodies best practices of national legislation around the world. On the other hand this contributes towards compatibility of the rules of the World Trade Organization (WTO) because implementation of RKC would enable countries to meet international commitments concerning trade and border procedures. The resultant revision of the Convention due to globalization, rapid transformation of international trade patterns, and advances in information technology (IT), is today known as the RKC. To become party to the Convention, a state must accept the Body of the Convention and the General Annex. It is then up to each state to decide which, if any, of the Specific Annexes it will adopt. This means that each party can give different degrees of undertakings – and an almost infinite set of relationships between parties is conceivable. (Harrison, M, et al, 2009) 3

Therefore visualizing the structure of the general annexure is a prerequisite of understanding the International Customs Law.

Figure 1: The structure of RKC General Annex

Source: Author

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CURRENT TRENDS AND DEVELOPMENTS IN SRI LANKA

The country, having successfully eliminated barriers of its civil war, is on the journey towards ―Becoming the Wonder of Asia‖. The Government of Sri Lanka (SL) has stated that investment rates must rise by almost 10 percentage points of GDP from about 25 percent of GDP to about 35 percent to reach the goal of 8 percent GDP growth on a sustained basis. With public investment rates already at a relatively high level of 6 percent of GDP, the majority of the increase will likely come from the private sector, both domestic and foreign. (Okonjo-Iweala, N., 2010) The size of the local economy precludes a domestic demand driven strategy for attaining sustained 8-10 per cent growth, thus SL has to improve its export performance significantly. Sri Lanka has an unparalleled opportunity to approach the fast- growing supply chains in India, particularly Southern India due to location advantage. However the CEPA experienced many criticisms citing constraints on customs cooperation to

exporters from SL. However,

paradoxically, there are nearly 300 Japanese companies operating in Chennai alone in which Nissan, on its own, has a plant that exceeds the size of the Katunayake Free Trade Zone. Table 1: Infrastructure- Selected competitive indicators. Indicator Quality of overall infrastructure Quality of roads Quality of railroad infrastructure Quality of port infrastructure Quality of air transport infrastructure Available airline seat kilometers

Rank (out of 139 countries) 61 55 40 44 62 64

(Source: The Global Competitiveness Report 2010-2011) Government‘s focus on infrastructure development should be commended though. The massive projects initiated while the war was being tackled are gradually completing and exports and imports would be increased thus customs has to play a bigger role.

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Sri Lanka Ports Authority Chairman says that Sri Lanka has to complete all five proposed ports on time to compete with emerging new ports in the region. "Once construction of the proposed ports are completed, we could become a maritime hub in the region by 2020. Senewiratne,H.H., (2nd March 2011) Nine tax amendment bills were presented to parliament on 22.03.2011 emphasizing the Government efforts to introduce a simple tax system, which has a bearing on reform initiatives of customs especially in customs valuation and associated activities. According to Brian Aitken, IMF Mission Chief for Sri Lanka, "Sri Lanka would have to make the tax system efficient, bring down rates and broaden the tax base so that it becomes business friendly. This must be done in such a way that tax revenues improved. Also, the Board of Investment (BOI) no longer needed to grant tax exemptions to attract foreign investment. There was an overreliance on tax exemptions given by the BOI to attract investment and this is no longer needed. Investments do not require tax exemptions; they would flow in if there was macroeconomic stability and a businessfriendly environment.‖ (Daniel, D ,2010) The obvious question comes now is that whether SL sufficiently reduced other constraints on investors such as ―burden on customs‖ thus shown the commitment in order attracts more investments? In the early stages of Free Trade Zones, the government‘s approach has been to appoint verification Officers (then Authorized officers) of the BOI (then Greater Colombo Economic Commission) with delegated certain customs powers to offer ―Faster‖ service. While such action itself reflects a negative perception on customs, the government should critically assess if the expected results have been achieved through that action. One can argue that rather than making an effective reform in the customs itself such ad-hoc decisions can lead into further disasters. The Luxembourg Chamber of Commerce had received a delegation from the Benelux Business Council of the Ceylon Chamber of Commerce for the first time in May 2010, and several investors from Luxembourg had participated in the ‗Belgium Business Week‘ held in SL in November 2010. The Ambassador said negotiations will commence in 6

Luxembourg in May, 2011 towards signing an Agreement for the Avoidance of Double Taxation between SL and Luxembourg which will give further momentum to broaden and deepen the increasing contact between the two countries. (The Island, March 16, 2011) The customs reforms would have direct impact on tourism sector at multi stages. Commencing from the stage of importing construction materials up to the stage of tourist arrivals/departure the border agency activities play a major role. The attitudes of customs may act as one of the decisive factor of the sustainability of the tourism sector in a competitive environment. It was reported in the parliament on 22.03.2011 that two islands near Kalpitiya have been leased out to two foreign companies for investment in tourism for 30 years. There will be many practical complications from both investors as well as customs authorities in such spontaneous trends that take place in the country today. ―The growth of the tourism sector is expected to be 20 percent higher during the end of 2011. The number of tourists to the country will exceed 900,000‖. (Ceylon Daily News, 22nd March, 2011) The apparel industry is a major contributor to the national economy and the SL apparel industry would achieve the forecasted $5 billion revenue target by 2015 as mentioned by His Excellency the President in his budget speech. In working with world class buyers would essentially need modernized customs practices thus effectively compete with global competition. The overall export sector for that matter is heavily dependent on relaxation of customs burdens. According to Exporters Association Sri Lanka Chairperson, the SL export sector targets US $ nine billion revenue for 2011 by introducing strategic measures to increase market penetration and product diversification. (Jayasuriya, S., 21st February 2011) According to World Economic Forum Trade tariffs, the Trade-weighted average tariff rate 2009 reveals Sri Lanka in the 113th rank claiming 11.8 (W.A) while Bangladesh, China ,India ,Nepal . Pakistan is rank 120, 122, 124, 131, and 133 holding weighted averages of 12.9, 13.3, 14.4, 16.4, and 17.1 respectively. Hong Kong SAR and Singapore have zero weighted averages.

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Table 2: Selected competitive indicators. Indicator

Rank (out of 139 countries)

Prevalence of trade barriers

103

Trade tariffs

113

Burden of customs procedures

66

Source: World Economic Forum (2011)

The perception on trade tariff and customs procedures too should be considered seriously thus improvements are necessary in many areas. Accordingly, SL would have to reform its customs practices in order to make it business friendly in order reap the benefits of the many opportunities in post war scenario. RELEVANCE OF CUSTOMS LEGAL FRAMEWORK IN THE SRI LANKAN CONTEXT

The modernization of customs laws and

regulations and their supporting legal

environment is an essential component of the reform effort. In this area, countries can refer to (or adopt) the RKC, which provides both the legal framework and a range of agreed on standards to improve customs operations with a view toward standardizing and harmonizing customs policies and procedures worldwide. Countries that are signatories of the Convention can still tailor their policies and procedures in specific ways to meet their unique legal, political, cultural, and economic requirements. (Wulf, L.D. and Sokol, J.B., 2005) Therefore the proposition that ―the legal framework benchmarking for the demanded customs reforms in SL should be based on the RKC‖ is unchallenged.

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THE IMPORTANCE OF RKC BENCHMARKING

The current trends explained in the previous chapter sufficiently justify the need for reforms in the customs. However the RKC through its principles make clear representation in each fundamental requirement that Sri Lanka should exercise in the customs in order make trade friendly environment. In order the revised customs laws, regulations, administrative guidelines and operating procedures fully support the new requirements, procedures, systems, and controls these principles should be sufficiently adhered to. Figure 2: The key governing principles of RKC

Source: Author Mathur. V. (2006) also identifies similar elements that a modern Customs legal framework should include. Given the present context in SL, it would be vital to priorities inter alia following elements.

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1. Allow a minimum Customs value of the goods or minimum amount of duties/taxes; 2. Allow for the use of risk management techniques and audit-based controls for the purposes of Customs control over goods; 3. Encourage cooperation with other Customs administrations and with other border agencies The initiative that are already in place regarding, simplified customs procedures ,the use of modern information technology and communication, modern Customs systems and procedures, such as risk management, post-clearance audit based controls and adequate automation should be strengthened.

The transparency and predictability especially in valuation issues is vital.

Maximum use of information technology is one potential area given the rapid improvements in infrastructure and high computer literacy rate of majority users in related fields. While the efforts in this direction should be appreciated the eternal delays are questionable. Below figure allow to visualize the reduction of communication complexity that leads to potential cost reductions. Figure 3: Tunisia Export Development Project

Source: World Bank (1999)c as cited in Wulf, L.D. and Sokol,J.B.(2005) P 141

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RECOMMENDATIONS

RKC chapter 4, 2.1.2 Self-assessment is a recommended progressive procedure which can expedite the processing of goods through the border. Self-assessment involves the application of risk management principles, post-transaction auditing, administrative penalties, binding rulings, Customs responsibilities and red/green line lodgments. In some administrations, self-assessment is only permitted by certain clients. For instance, those with proven compliance records. As far as SL is concerned, self declaration(SD) by SL imports for customs valuation is predominant. 90-95% of SD are accepted as it is and approximately Rs.900 Million per day are collected as customs duty at the long room. The existing harmony between wharf assistants and Customs is commendable and more efforts in same direction are important. The evolving role of Customs administrations in the 21st century as enforcement agency and facilitator of international trade requires adaptation to the changing environment in which they operate. Customs administrations are entrusted with the implementation of a range of government policies and this requires innovative responses to the execution of their responsibilities. (Blantyre International University, 2011) Competent Customs offices RKC chapter 3 1.1 refers to the need to establish a Customs office that will be based on the volumes of traffic, goods and travelers that enter the Customs territory at land routes, ports, airports and inland locations. Chapter 6 8.2.3. Degree of Centralization and 8.2.5. Local Customs offices sufficiently focus on this matter. Given the fast track development in Hambantota the long term plans should comprise not just commissioning customs buildings but to station suitable trained staff there. Usually government senior officers have more tendency of working in and around Colombo due to obvious valid reasons such as children‘s schooling etc. such factors should not be a barrier to operate well managed trade friendly customs offices in newly developing areas because the first impression can make a big difference in positioning ourselves as a convenient tourist destination. Similarly some companies have finalized deals to operate cruise services between Trincomalee, Chennai, Tuticorin in which the use of Colombo as the only entry point to SL will change. The

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tourists will disembark/embark from Trinco in their stay in SL who will travel to Dambulla or NuwaraEliya from Trinco. If the customs failed to paint a enterprising picture in the minds of those ―Customers‖, the country fails in its efforts. Standard 1.3 establishes one final fundamental point, that Customs ‗shall institute and maintain formal consultative relationships with the trade to increase cooperation and facilitate

participation

in

establishing

the

most

effective

methods

of

working

commensurate with national provisions and international agreements‘. (Harrison, M, et al, 2009) Payment of duties RKC chapter 4-Standard 4.6

explains that, ―To facilitate the accounting procedure, Customs

should accept payment of duties and taxes in forms other than cash, such as travellers cheques, money orders, certified cheques, uncertified cheques (in specified circumstances), bonds, credit cards, securities, etc.‖ it is important Sri Lanka customs act fast on this as it was revealed that credit cards are not accepted even at the Air port. Resources Chapter 6 8.2.1 expresses that Customs should identify human, technical and financial resource needs for implementing control programmes by assessing and analyzing current and potential international trading activities in their respective countries or regions. If Sri Lanka wants to market as a tourist destination, customs who act as the front line agents should understand their role. Chapter 6 8.2.2 Management Philosophy and 8.4. Human Resource Development discusses this at macro level. The expected increase of exports and imports in the country would require more resources for customs to carry out duties effectively. As the increase is huge the proportionate increase of resources would not be feasible and be practically impossible. Chapter 6 Appendix II 14.2.1. Risk Management reveals similar situation that we could consider. In 1998, Customs Port Director (United States of America) Susan Parker was facing serious workload and resource problems. Imports into her port had increased 15 percent since 1996, but resources remained the same. 12

Figure 2: Risk Management Process Matrix

(Source: RKC chapter 6 14.2.1-contents reproduced in a new illustrative model by author) The approach has lead to an effective tool that Sri Lanka too may use appropriately. While this case study is simple, its results are real. RKC explains a matrix which is reproduced in an illustrative model. The WTO agreement on Pre-shipment inspection (PSI) is the practice of employing specialized private companies to check shipment details — essentially price, quantity, quality — of goods ordered overseas. This is used by governments of developing countries, primarily to safeguard national financial interests (prevention of capital flight and commercial fraud as well as customs duty evasion, for instance) and to compensate for inadequacies in administrative infrastructures (WTO). Though the potential has been identifies and initiated, no evidence of success in SL, Therefore, implementation of PSI by SL to be expedited. (Presently special cases such as Atomic Clearance for Milk Powder are facilitated under the terms of PSI)

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The mutual administrative assistance. The increase in international trade and the newly developed methods of Customs control have highlighted the shortcomings of a system in which controls are based solely on goods declarations and supporting documents submitted after the goods‘ arrival in the Customs territory. RKC article 6 8.6. Mutual administrative assistance (Standard 6.7) states that it may be desirable for Customs to receive such information at an earlier stage and to have access to further information, from other Customs administrations to obtain pre-arrival information on goods bound for their Customs territory and for other types of assistance to ensure the proper application of Customs laws Examination and Release of Goods Part 8 of Chapter 3 Standard 3.33 requires that the examination be conducted as soon as possible and Standard

3.35 requires Customs to ensure that inspections by other Government agencies

are coordinated with the Customs examination and, if possible, conducted at the same time. In some circumstances, Customs may release the goods before the formalities have been completed. These circumstances are set out in Standards 3.41 and 3.42. special focus on these standards are recommended. MODERNIZATION OR ORIENTATION ?

A comprehensive and modern legal framework is already in existence in SL through the RKC as the foundation upon which the Customs and trade facilitation regime has been built. Many customs reform program that supports the new requirements are made possible to some extent through existing customs laws, regulations, administrative guidelines and standard operating Procedures are in place though not being extensively utilized or practiced by trade. Therefore an obvious question arises as to efforts on orientation of existing reforms should be given priority than new reforms. Electronic lodgment of data or Direct Trader Input are used by only handful of companies especially MNC only. The Customs Declaration Message (CUSDEC) permits the transfer of data from a declaration to a customs administration for the purpose of meeting legislative and/or operational requirements in respect of the declaration of goods for import, export or transit. Once 14

they are fully implemented the clearing systems, the SLPA cargo could be handled electronically enabling to enhance the productivity and efficiency in all Ports in the country. The implementation of the Automated Cargo clearance system, ASYCUDA is expected before June according to customs sources. The shipping community is very keen to see the progress of electronic data interchange (EDI) process to be expedited. The Ceylon Association of Ships Agents is closely working with customs on this and test runs are being done. The Sri Lanka Customs have now taken the initiative to promote Data Transmission Interchange (DTI) through ASYCUDA system, which is a great help for the shipping community. Especially in a transitional cum rapid development period, Customs officers need more training on new Customs techniques and technologies particularly for the implementation of the pre shipment certificates as well as conventional Customs techniques like valuation and rules of origin. Despite customs administrations have regular training activities sufficient budget and long term strategic efforts are needed to provide better human resource development. The initiative such as offering masters degrees in Customs in collaboration with private universities is commendable.

CONCLUSION

The intensifying global interconnectedness make it vital for countries to cross borders thus customs administrations will be increasingly important for managing the impact of the changes at the border. A solid and modern legal framework is the foundation of effective customs operations. This legal framework benchmarking should be based on internationally accepted standards and best practices as set out in the RKC which provides important guidelines for the design and operation of a modern and efficient customs organization.

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In order to perform the important role of customs authorities, the officials should process unique set of skills and knowledge. They represent the government, to facilitate and regulate international trade, and to achieve national policy objectives through the Strategic Risk Management, Compliance Management and Change Management which considered being relatively weak in many countries. Therefore customs reform, modernization or re-engineering considered a priority in many administrations and implementation of change management is needed especially in Sri Lanka due to rapid development expected in the future. ***

REFERENCES

Blantyre International University (2011) Home page retrieved on 16.03.2011 from http://www.biu.ac.mw/Seminars_Law.htm Ceylon Daily News (22nd March,2011) Tourism to record 20 percent growth, Business p.i Daniel, D ,( 13th October, 2010), Now or never! The Island Financial Review p1 Harrison, M, Muller, S., and Holloway, S,2009 ,MTL 506-International Customs Law, Study Guide, Centre for Customs & Excise Studies, University of Canberra Jayasuriya, S.,(21st February 2011) INTRODUCES STRATEGIC MEASURES: Export sector targets US $ nine b , Ceylon Daily News Business p i Mathur. V. (June 2006) Reforming The Regulatory Procedures For Import And Export: Guide For Practitioners The World Bank Group International Finance Corporation Okonjo-Iweala,N., (December 17, 2010) Becoming the Wonder of Asia: Accelerating Inclusive Growth in Sri Lanka,The World Bank retrieved on 21.03.2011 from

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http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22793138~men uPK:34472~pagePK:34370~piPK:34424~theSitePK:4607,00.html Senewiratne, H.H., (2nd March 2011) , Sri Lanka needs its ports up and ready by 2020 to wardoff mounting competition, , The Island-Financial Review p 6 The Island, (March 16, 2011), Financial Review ,‖Cabraal says Sri Lanka will develop as a financial hub in South Asia‖ FR p6 World Economic Forum (2011) ,The Global Competitiveness Report 2010–2011, The Centre for Global Competitiveness and Performance, Page 307 Wulf, L.D. and Sokol, J.B.(2005) CUSTOMS MODERNIZATION Handbook, The World Bank

BIBLIOGRAPHY

Kananathalingam, T. and Weerasekara, P. (2009), Customs Law of Sri Lanka A Manual Volume I and II Revised and Expanded edition& P Associates (Pvt) Ltd Sri Lanka The Revised Kyoto Convention retrieved on 02ndFebruary 2011 from http://www.wcoomd.org/Kyoto_New/Content/content.html

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