ONESOURCE Global Trade for FTA Systematic approach to prepare for the coming China-Korea FTA
Agenda 1. CHINA-KOREA TRADE OVERVIEW 2. CHINA-KOREA FTA OVERVIEW 3. CHINA-KOREA ORIGIN DETERMINATION HIGHLIGHTS 4. ORIGIN VERIFICATION PROCESS IMPORT / EXPORT 5. IMPACT OF ORIGIN VERIFICATION 6. ORIGIN VERIFICATION AUDIT OVERVIEW 7. ORIGIN VERIFICATION AUDIT DETAILS 8. FTA OVERVIEW 9. TYPICAL FTA ORIGIN DETERMINATION PROCESS 10. SAMPLE ANALYSIS 11. FTA COMPLIANCE AREAS OF IMPROVEMENTS 12. SYSTEM ARCHITECTURE 13. Q & A 2
CHINA-KOREA TRADE OVERVIEW China Global #1 Export, #2 Import Country Korea Global #7 Export, #9 Import Country (WTO, International Trade and Market Access) Investments (100 million USD) o China to Korea 53.5 (2.3%) o Korea to China 634.1 (16.3%) China Trade Unit: 100 Million USD Rank Export Import Country Volume Increa Rate Portion (%) Country Volume Increa Rate Portion (%) 1 US 3,960 8.1 16.8 Korea 1,902 6.1 9.6 2 Hong Kong 3,609-7.5 15.4 Japan 1,626 2.3 8.2 3 Japan 1,494 0.5 6.3 US 1,531 1.3 7.7 4 Korea 1,004 10.8 4.2 Taiwan 1,523 6.1 7.7 5 Germany 727 8.4 3.1 Germany 1,047 11.7 5.3 Korea Trade Unit: 100 Million USD Rank Export Import Country Volume Increa Rate Portion (%) Country Volume Increa Rate Portion (%) 1 China 1,453 0.4 25.3 China 900 8.5 17.1 2 US 703 13.3 12.2 Japan 537 10.4 10.2 3 Japan 322 4.0 5.6 US 452 9.1 8.6 4 Hong Kong 272 1.7 4.1 Saudi 367 2.5 6.9 5 Singapore 239 7.3 4.1 Qatar 257 0.6 4.8 3
CHINA-KOREA FTA STATUS Status The end of negotiation Initialed in February 2015 Expected to be signed in 2015 and take effect in the second half of the year Tariff Rate Reduction Schedule & Trade Volume 100 Million USD 1600 1417.4 1400 1200 1104.5 1000 800 600 733.7 736.4 622.8 418.5 400 312.9 200 113.6 0 Immediate 10 Years 15~20 Years Total Highlights 48 hour customs clearance No Certificate of Origin need for products under $700 Linear cut for most of goods (1/n per year cut) Non-linear cut for sensitive goods China: LCD Panel (10 years), Optical parts (15 years) Korea: Liquid display device (10 years) China Korea 4
CHINA-KOREA FTA ORIGIN DETERMINATION HIGHLIGHTS 5,205 Product Specific Rules defined considering trade pattern between two countries, manufacturing process and industry sensitivity Less strict than originally designed (AND condition reduced from 1,010 items to 47 items) Labors from Kaesung in North Korea Industrial area will be excluded from Regional Value Contents ( RVC ) calculation results in more favorable RVC qualification Change of Tariff Heading ( CTH ) for most of goods, RVC for sensitive goods Petro Chemicals Industry CTH mostly, CTSH (6 digit) for 2710.12 and 2710.19 Machinery Either CTH or CTSH, sensitive items are RVC 45% (LCD) Textiles / Apparels CTH with exclusion rules or RVC 40%, CT or RZVC 40% Steel CTH with exclusion rules Automotive - Both CTH AND RVC 60% required as Automotive Industry is designated high sensitive industry 5
ORIGIN VERIFICATION PROCESS - IMPORT Authority department - Customs Process - Document review is the first step. From our experience, the Customs authority won t often provide a on-site inspection specially for origin verification Customs attention on FTAs - Origin Criteria (WO, WP, PSR) - Rules of Origin (RoO) in different FTA - Rule of Direct transportation - Forms of Country of Origin (COO) Review of Documents 1 st Submission 2 nd Submission 1 Certificate of Origin 2 Import declaration certificate 3 Commercial Invoice 4 Purchasing Contract 5 Transport Documents(Bill of Lading, Air Way Bill, etc) 6 Shipment though non-member party documents Import declaration Document review Inspection Y N Release Y Reject N On-site inspection Compliance 6
ORIGIN VERIFICATION PROCESS - EXPORT Authority department - Entry-Exit Inspection and Quarantine Bureau (CIQ) Process - Need to register the product to authority department - After on-site verification, CIQ will release the registration for the product - Online submit COO application - Annual registration renew Review of Documents 1 Certificate of Origin 2 Business license 3 Management organization 4 Import & export qualification certificate 5 Status of production facilities and production equipment 6 Product list 7 Raw material commercial Invoice 8 Raw material Purchasing Contract 9 Bill Of Material(BOM) Registration CoO Application Document review On-site Verification Result noitfication 7
IMPACT OF ORIGIN VERIFICATION Origin Verification is to test if rules of origin are met or not. Grounds for Denial of Determination of Origin 1. False application of rules of Origin 2. No conformity of Origin affidavits 3. FTA rules not followed, etc Origin in denial Result 1. Collect preferential tariffs, Penalties and limit the FTA application 2. Loss of reputation and reliability 3. Loss of price competitiveness Cases that Origin was repudiated (e.g. NAFTA) Verification objects Result Ford imported thousands of auto parts from its affiliate in Mexico and received NAFTA preferential treatments, based on C/Os prepared by the exporter. In 2001, US CBP requested origin affidavits and related evidences for imported goods to Ford, but Ford denied submission as it asserted that such documents are only required to be stored by the exporter. US CBP notified the duty of storage of every evidence supporting C/Os and imposed a penalty of 41 million USD to Ford. 8
ORIGIN VERIFICATION AUDIT OVERVIEW Key Verification Points Related Division Risks Verification Report Statement of Origin Origin Verification Questionnaire Transaction Data Purchasing Data Sales Data BOM Data HS Code Classification Supplier Declaration Logistics Sales(SD) Production(PP) R&D Center Logistics Unable to trace from sales data to purchase receipt data by such product Unable to present BOM used for actual production of finished goods False HS application to rules of origin Incorrect HS code classification No conformity of Supplier Declaration Enhancements Analysis & Design of FTA Requirements Inconsistent supplier solicitation results FTA System Implementation Transport Data Bill of Lading Air Way Bill, etc Export team Document Retention for 5+ years Preparation for the transaction basis FTAs with remediated risk points needed. (NAFTA vs. Other FTAs) 9
ORIGIN VERIFICATION AUDIT DETAILS Regional Value Contents Method Calculation Key Risk Point Analysis and review 1 Accuracy of unit cost and origin of the materials 2 Accuracy of the purchase price from affiliated companies RVC (%) = Risk (1- VNM Net Cost )X) 100% X 100% Analyze Key Verification Point to Identify Potential Weakness. Advanced Preparation for the actual verification needed Possibility of the overestimation of the Adjusted Sales Value Example Subject to Verification RVC(%) = 40.8%~42.7% So customs authority ill verify risk point because RVC is unstable compare with PSR (RVC 35%) 3 Definition and calculation of the Adjusted Sales Value 4 Compare the cost of the subject product with the cost of the non-subject products 5 Consistency of supplier`s certificate of origin 10
FTA WORKFLOW Preparation Supplier Declaration Origin Determination Issuing C/O Monitoring & Reporting BOM, Costing, Sales data Supplier and Customer information HS code for finished goods and raw materials Rules of origin for target FTA Obtain Certificate of Origin from key suppliers Link origin information from supplier to raw materials Link BOM to invoices Link purchasing information to BOM Based on BOM constructed, calculate RVC or determine CTH occurred or both for origin determination per each applicable FTA Fill out the form and retain for future verification Submit the form to the related parties (government authority) Monitor ensure origin determination performed for required goods Ensure all required suppliers submit Certificate of Origin 11
TYPICAL FTA ORIGIN DETERMINATION PROCESS The below diagram represents typical origin determination process of a company System in a Company Extraction Origin Determination Account Payable System Tariff Classification database A. Reflect the latest Price paid B. HS code & Origin Information.. Unit cost of material Supplier Information Eligibility for origin HS code BOM Determination of Origin per each FTA Labor cost Financial Information C. Cost Information Processing cost Cost information Other cost RVC (%) = VNM (1- Net Cost )X ) X 100% 12
SAMPLE ANALYSIS Accuracy of unit cost and origin of the materials System in a Company Extraction Origin Determination Account Payable System A. Reflect the latest Price paid Unit cost of material Supplier Information BOM Tariff Classification database B. HS code & Origin Information.. Eligibility for origin HS code Determination of Origin per each FTA Labor cost Financial Information C. Cost Information Processing cost Cost information Other cost Material cost is drawn from accounts payable system and A. reflects the latest price paid for materials at time of production. For applying this methodology, It should be proved there is no price fluctuation which affects the determination of origin. 13
SAMPLE ANALYSIS Accuracy of unit cost and origin of the materials In case of 110103TA0A, purchase price in July is $364.89, but the price in August is $13.94. Even though there could be many reasons, such severe price difference cannot be justified under normal course of business concept, unless otherwise it can significantly influence the reliability of origin determination. Thus, it is important to consistently review and correct the unit prices of the materials, in order to prevent any unreasonable price difference. 14
SAMPLE ANALYSIS Appropriateness of the HS Code and Origin Information System in a Company Extraction Origin Determination Account Payable System A. Reflect the latest Price paid Unit cost of material Supplier Information BOM Tariff Classification database B. HS code & Origin Information.. Eligibility for origin HS code Determination of Origin per each FTA Labor cost Financial Information C. Cost Information Processing cost Cost information Other cost B. HS code & Origin Information is the basic information for the determination of origin. The verification officer will review the appropriateness of the Tariff Classification in accordance with the Harmonized System. 15
SAMPLE ANALYSIS Analysis of the BOM with origin information The RVC proportion of the item(870063tf18b) which were purchased from supplier 100430 is 6%. It will have effect on the determination of origin if the supplier can not verify the origin by certificate of origin. 16
SAMPLE ANALYSIS Significance of Origin Information <870063TF1B> < 682003TA0B> < 490013TA1A> Upon the review of the certificates of origin, it is sufficient to prove the originating status of the goods. Customs authority can request more information to major suppliers who issue certificates of origin. Therefore, it is important to manage suppliers so that they can be responsive in case of origin verification audit. 17
SAMPLE ANALYSIS Accuracy of cost information System in a Company Extraction Origin Determination Account Payable System A. Reflect the latest Price paid Unit cost of material Supplier Information BOM Tariff Classification database B. HS code & Origin Information.. Eligibility for origin HS code Determination of Origin per each FTA Labor cost Financial Information C. Cost Information Processing cost Cost information Other cost C. Cost Information is the basic information for the calculation of net cost. The accuracy of the net cost calculation should be verified for the determination of origin. 18
SAMPLE ANALYSIS Accuracy of cost information Sensitive Analysis on Cost Proportion of cost of Direct labor + Processing cost + Depreciation + Indirect Labor & TAX is 9% of the total net cost. There will be no change in determination of origin even if the cost fluctuates by unexpected reasons. 19
FTA COMPLIANCE AREAS OF IMPROVEMENTS Typical risks and challenges Data Gathering Extracting Relevant Data From ERP System - Determining what data to extract - Multiple division involved to gather data - Timeliness of data gathering - FTA specific data maintenance (Supplier C/O, HS code) - Manual intensive data integration for further calculation Origin Calculation Accuracy of Origin Calculation - Determining correct RoO for origin calculation per FTAs - Large number of manual calculations Issuing C/O Issuance of Appropriate FTA Forms - Keep track of latest forms per FTA for compliance Document Retention - At least 3 year document retention for post verification FTA Compliance Monitoring Areas of Improvement Data Gathering and Management Automated data extraction from ERP Scheduled extraction for timely data gathering Supplier C/O solicitation and management Systematic Origin Determination Applying correct Rules of Origin (RoO) for current and future FTAs Systematic origin calculation to improve accuracy Timely origin determination for required sales Document Retention Systematic generation of supporting documents System based document retention for easier verification support Monitoring of Overall FTA Compliance Support of management s monitoring of FTA compliance 20
SYSTEM ARCHITECTURE ONESOURCE Global Trade (FTA) Company System Interface Rule Engine ERP Purchasing Sales Legacy Other Material Ledger BOM Rules of Origin (Rule Plug-in) Origin Determination (Qualification) Interface FCR Master Data External Systems Compliance Customs Authority Purchase Ledger Sales / Export ITEM Master HS CODE Parts Inventory Management FTA Material Ledger BOM Material Ledger Companies Interface External Logs of Certificate of Origin issuance FTA BOM Logs VENDOR Master Customer Rule Management FTA Costing Results Company Information FTA Settings HS CODE FTA RULE Base Settings System Settings 21
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