Tax & Accounting Blog

The Case for Automating Origin Determination in Brazil

Blog, Global Trade, International Reporting & Compliance, ONESOURCE August 25, 2017

Usually an origin investigation may be initiated by means of two ways: First of all, a direct complaint to the Brazilian IRS informing that certain imports do not comply with the rules of origin. This complaint may be done by a local company that may be suffering from unfair competition. As a normal course certain imports subject to anti-dumping (ADD) investigations may go through further review in order to identify and penalize those companies that use methods to conceal the real origin of the goods and avoid ADD payment.  Secondly, the IRS itself may want to clarify the veracity of the information stated in the Certificate of Origin.

Certificates of Origin

In the last 10 years, the volume of origin investigations conducted by the Brazilian Government has not been significant. However, a review of previous investigations reveals that the majority of investigations culminated with the disqualification of the Certificates of Origin analyzed.

The most recent disqualification occurred on July 31th, 2017 when Brazil closed an origin investigation related to imports on a footwear company manufacturing goods in Paraguay. The investigation culminated in the disqualification of the Certificates of Origin issued by the manufacturer during the period between 2012 and 2016.

The disqualification was based on two reasons; (i) The Certificates of Origin used by the exporter in their documents had substantial mistakes in regards to rules of origin applied and (ii) The required Declaration of Origin to adequately demonstrate compliance with the rules associated with preferential treatment were not provided. In both cases the preferential tax treatment to the products was denied with all the avoided duties reapplied through the use of these Certificates of Origin to be paid retroactively with the addition of fines and interests.

This particular investigation process began in Jan 31st 2017 through the publication of ADE COANA nº 2017/0005 (Brazilian IRS Act) to investigate the origin of the products categorized in the following tariff classifications: 6406.10.00, 6403.40.00, 6403.91.90 and 6406.90.20, which correspond to protective footwear, its insoles and gaiters.

The Certificates of Origin investigated in the abovementioned period were issued under the auspices of ECA 18 (Economic Complementation Agreement Nº 18), which grants 100% tariff preference to such products, effectively allowing duty-free entry.

Imports of safety shoes into Brazil are subjected to a 35% duty rate, one of the highest rates among those applied by the Brazilian government on Imports.  Independently of the high duty rate,  this particular case  shows how damaging a disqualification of origin can be, especially for Exporters, that typically take advantage of Free Trade Agreements in order to offer theirs products to the external market at the lowest prices under the expectation that duties are avoided in the destination countries.

Besides the enforcement actions taken by the Brazilian Government, in January 7th, 2016 the Brazilian IRS issued a public consultation with the purpose of reviewing the procedure for controlling and verifying origin of goods, currently regulated by the Normative Instruction No. 149/2002.  In its explanatory memorandum, the IRS argued that the regulation of the procedures for verification and control of the origin for imported goods with tariff preference provided for an international agreement is fundamental for the correct use and inspection of these agreements.

This action also protects the domestic industry of unfair competition from foreign producers and domestic importers who try importing, under preferential tariff, products that do not comply with established rules of origin.

This suggests that the Brazilian Government has a renewed focus on origin investigations and will rigorously inspect Certificates of Origin in order to eliminate frauds perpetuated by exporters. Many companies are not truly prepared to handle the proof of origin in a consistent way, potentially leading to a high potential of more disqualifications in the near future. This high complex scenario regarding rules of origin where FTAs are concerned is definitely the biggest enemy that companies have been facing of recent. This is a daunting process to overcome while so many companies still perform origin determination by means of manual activities.

Point in turn; a 2016 global trade management survey conducted by Thomson Reuters and KPMG concluded that some of the key challenges faced by companies in using the benefits of FTA’s are: the difficulty in obtaining documents of origin from its suppliers and the lack of qualified resources to manage the compliance of these operations.

What is commonly observed in practice, and corroborated by the research, is that most companies still rely on manual processes to ensure compliance with free trade agreements. The most significant challenge arising with a manual process involves proof of origin. Technology can be an effective tool in automating and standardizing tasks related to origin qualification.

For FTA compliance, automating the origin determination provides scale, as the time and effort invested to qualify and certify 10 or 1000 products isn’t materially different. Companies can then shift their focus on whether they are fully utilizing all possible FTA’s, to working with their purchasing departments to increase their qualification rates.

Our global trade survey found that 92% of the respondents reported savings from the use of trade agreements, generating a positive return on investment. What occurs is that the manual procedures for the maintenance of the compliance in this area make companies end up avoiding the use of FTA’s precisely due to the fact of not being able to produce all the documentary evidence necessary to support origin determination to support an origin investigation.  In fact, only 23% of the surveyed companies make substantive use of the FTA’s available in their countries and applicable to their products.  Clearly investing in an automated FTA compliance solution yields tangible benefits. We suggest that companies consider the use of FTAs starting with their production planning stage.

Changes in Origin Certificates

Finally, as of May 05th 2017, Brazil and Argentina have adopted the Digital Certificate of Origin which will mean that documentary audits on the determination of origin within the Mercosur region will become more robust, transparent and much more agile for the Customs Authorities from both countries.  The recent measures taken by the Brazilian Government which are directly related to the verification of origin determination consistency in order to identify unsubstantiated tariff benefits supported by FTA’s rules implies that government audits on this subject will definitely increase in frequency and intensity.   The only way to better shield the foreign trade operations, especially those regarding FTA utilization, is by investing in technological enhancements.

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