Tax & Accounting Blog

FTA and AEO Mutual Recognition Agreements (MRA) are Two Sides of the Same Coin

Blog, Global Trade, ONESOURCE July 24, 2015

Since 1950 international trade has been growing annually in every continent. We are watching a slow but strong change in the way we understand the movements of goods between countries. Two main facets of this change are the trade agreements and the security certifications known as Authorized Economic Operators. These are two sides of the same coin; one for the goods and the other one for the operators.

The main purpose of an economic agreement is to improve trade between two or more countries. As every country seeks to protect its own production, in all those agreements they need to indicate very precisely the goods affected by the tax reduction from the agreement. Different types of agreements can be settled depending on the level of trust and economic integration among the signatories; we can choose: Preferential Trade Agreement, Economic Integration Agreement, Free Trade Agreement or even Customs Union.

Globally there are 405 Regional trade agreements in force and notified to the GATT/WTO, plus 38 under negotiation[1]. This is more than a trend; it is the way we are doing business in the 21st century. From a business perspective and in order to be competitive, the purchasing department and the export department are studying the origin/destination of the goods to improve their supply chain by mainly working with countries which offer a kind a preferential agreement.

In this scenario, companies at the same time: align their trading strategies with these agreements to achieve effectiveness on an international perspective, and increase their trade to and from countries with this type of legal framework.

Companies also have to choose the best and most secure partners to move their goods as fast as possible. Since 2001, the Authorized Economic Operators (AEO) has appeared in many countries around the world. The AEO is a certification created by the states to share its security responsibilities with the private sector, while at the same time rewarding them with a number of facilitation benefits[2]. During the past 15 years, we have reached 53 AEO programs covering 80 countries. The certification system was created to improve the security of the supply chain and avoid tax fraud in international trade. The administrations realized that they do not have staff to allocate and time to control all the operations, at the same time they need to enhance security to fight against terrorism, criminal organizations, drugs traffic, tax evasion, etc.  The solution was to switch the mindset controlling the operators and not the operations.

AEO certification is a voluntary process recognized by an audit performed by the customs administration. In general they invite the main companies, representing the largest part of the international trade, to obtain certification. In order to promote their thinking they allowed the certified companies to benefit some advantages. Every country provides a list of benefits, In general they allow the certified companies to reduce the bonds, realize less documental and physical controls an ability to deliver a partial declaration pre-clearance with the obligation to complete the declaration later) Thus the border’s Administrations can dedicate most of their resources to control “unknown” operators.

According to the expansion of the AEO system, some countries realized that they could control all of the supply chain, end-to-end, from a security point of view if they received specific information from other administrations involved in the operation.  The Mutual Recognition Agreements (MRA) appeared in 2007. During the last 8 years, 23 MRAs have been signed (12 are under negotiation)[3]. Pursuant to these agreements, the countries exchange information related to their secure operators, allowing them to obtain faster border controls.

Two sides of the same coin

The will of all the participants is the first step and the key to success with this initiative. However there are some big challenges to face to make those benefits effective.

Trade agreements are a common practice between countries, often much older than the IT systems being used by most of the administrations. For this reason they configure their software incorporating mechanism to easily apply the tax reductions established in an agreement. An adequate combination of boxes in the model, indicating country of origin and classification number of the goods, directly authorizes the tax reduction assuming the company qualifies and has the right documentation).

Nevertheless, concerning the AEO certification and mutual recognition, challenges are bigger:

  • The contents and the regulation are slightly different in every country.
  • More actors are involved, not only the importer/exporter but also the transporter, the customs broker, the warehouse owner, etc.
  • More data is needed: certification number, type of certification, name of the company, Value Added Tax (VAT) number, Economic Operators Identification and Registration (EORI) number, etc.

To apply the solution is more complex because the IT system will check more boxes and the models are not prepared to process all of this information. The administration’s software is using filters for the purpose of selecting the operation for customs controls; if the IT system is not able to realize properly this selection, companies will not notice all the benefits of the certification.

We can imagine that the solutions will focus on technology but also on simplifying the models and trying to centralize processes. The single window is recommended by the United Nations, the World Trade Organization (WTO) and the World Customs Organization (WCO)[4]. Some countries have demonstrated that it is possible to simplify and centralize the processes and the companies feel more comfortable with a single entry point. .

Even so, international trade won the battle against protectionism; the two sides of the same coin are on scene, with the goods and the actors getting preferential treatment in certain situations. There are real operations affected by a tax reduction from a trade agreement, with multiple parties enjoying benefits because of the AEO certification. As soon as the minimum level of technology is aligned in most of the countries, an environment facilitating international trade and coordinating the controls will be realized. If the security criteria are fulfilled, the system will eliminate stopping and checking a single operation in the origin and destination of the goods. Can we consider that this scenario is the vanguard of what we will see in the next decade? It looks quite logical as trade agreements enhance the economy between countries/regions and the mutual recognition of security aspects supports the companies with the best internal control of operations. Public and the private sectors are aligned and have scenarios offering mutual benefits to both. Basically saving money and saving time. Let’s see how far we can go together!

Comparison: Trade Agreements and AEO Mutual Recognition Agreements
Countries AEO MRA Trade Agreement*
New Zealand – USA June 2007 0
Japan – New Zealand May-08 0
Canada – USA June 2008 January 1994
Jordan – USA June 2008 December 2001
Japan – USA June 2009 0
EU – Norway July 2009 July 1973
EU – Switzerland July 2009 January 1973
Canada – Japan June 2010 0
Canada – Korea June 2010 January 2015
Canada – Singapore June 2010 Under Neg.
EU – Japan June 2010 Under Neg.
Korea – Singapore June 2010 April 1989
Korea – USA June 2010 March 2012
Andorra – EU January 2011 July 1991
Japan – Korea May-11 Under Neg.
Korea – New Zealand June 2011 0
Japan – Singapore June 2011 November 2002
EU – USA May-12 Under Neg.
China – Singapore June 2012 January 2005
China – Hong Kong October 2013 June 2003
India – Hong Kong November 2013 0
Hong Kong – Korea February 2014 0
Korea – Mexico March 2014 February 1973
China – EU Under neg. 0
China – Japan Under neg. 0
Japan – Maylasia Under neg. July 2006
China – Korea Under neg. June 1976
Hong Kong – Singapore Under neg. 0
India – Korea Under neg. June 1976
Israel – Korea Under neg. February 1973
New Zealand – Singapore Under neg. January 2001
Norway – Switzerland Under neg. may-60
Singapore – USA Under neg. January 2004
USA – Israel Under neg. August 1985
USA – Mexico Under neg. January 1994

*Date of the entry into force of the first agreement

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[1] http://rtais.wto.org/ui/PublicMaintainRTAHome.aspx

[2] http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/tools/~/media/B8FC2D23BE5E44759579D9E780B176AC.ashx

[4] http://www.unece.org/fileadmin/DAM/cefact/recommendations/rec33/rec33_trd352e.pdf