Along with the competitive advantages of operating global supply chains comes the burden of conforming to an increasing multitude of trade regulations as goods move across national borders. Added to which, since 9/11, have come rigorous security regulations that must be adhered to (and documented). Compliance, once a minor inconvenience in transacting international trade, is becoming a more serious cost of doing business.

World traders well understand the nature of the problem. “As the supply chain gets global, issues around compliance become progressively more complex,” observes Accenture partner Brooks Bentz. He cites as an example a mid-sized shoe company sourcing from 13 different countries. Multi-country consolidation was necessary in order to build full-container shipments, which entailed appropriate compliance processes. Then containers were shipped to a West Coast deconsolidation center, requiring another layer of documentation. Any mistakes along the line and “you get slammed by customs.”

Consultants like Bentz have been busy of late advising clients about this the impact of this sea change in compliance. Compliance reporting requirements impose higher levels of demand on data management. At the same time, however, new requirements can act as a kind of spur to stimulate innovation.

Using global freight security as an example, Jade Rodysill, a senior manager in the Accenture Supply Chain Management group, suggested in a recent white paper that informational and financial flows mandated by programs like C-TPAT and the Hazardous Materials Vulnerability Reduction Act of 2005 can be leveraged to more fully integrate such data into advanced operational strategies.

While optimists may stress the mid-term and long-term opportunities, more hardheaded realists are likely to point out the short-term costs. In the 'no pain, no gain' continuum, the effort associated with implementing compliance requirement makes for a lot of effort (and cost) at the front end. Ultimately, the organization may well possess a more resilient, robust supply chain as a result of having to digest a multitude of compliance requirements, but in the short term the obligations can seem sufficiently burdensome to look for outside help.

Steve Marinis, Manager, Customs Compliance, for C.H. Robinson, International, is the kind of outside 3PL expert companies turn to. “We have a two-fold responsibility,” explains Marinis, who has been in the field since 1975, “to handle clearance and movement of goods expeditiously and operate under license from governments to do it compliantly.”

The beginning of the uptick in compliance sophistication, says Marinis, began with the Customs Modernization Act. A system that had been in place throughout most of the 20th century-mandating mountains of paperwork that brokers and importers were required to store for specified amounts of time in dedicated warehouses-was summarily turned on its head. Electronic filings became acceptable.

Not only was the communication between shipper and customs transformed, so was communication within the supply chain itself as information could be widely shared in real time with the different parties. But as the ground rules changed, so did the standards of performance. Automated processes like electronic payment of duties and paperless releases became legitimated.

“Customs Modernization didn't put on any more responsibilities than weren't already there,” observes Marinis. “But it made requirements much more detailed.” The importer assumed record keeping and classification requirements, the full range of compliance from point of origin to delivery to final facility were covered by this legislation.

Under the old bureaucratic system, all players were equal under the same cumbersome rules; with the Mod Act, there was now home field advantage to the swift and IT-empowered.

A lot of programming changes had to be made to take advantage of the Mod Act, recalls Marinis. The automated procedures permitted paperless by-pass (previously every transaction had to be backed up with paper) and allowed for total electronic interface. Remote location filing, permitting the broker to file customs transactions from a centralized location anywhere in the United States, was authorized. But to take advantage of these rules required automation and training.

While customers were still digesting these initiatives, 9/11 hit and compliance took on another vast dimension. In its aftermath, customs officials talked about the need to push the border outward.

“It instigated a totally new emphasis in the direction of security issues for the importer,” notes Marinis. “The biggest impact on importers was the increased screening of cargo, which led to delays in entry release process and in expense (ports charge between $75 and more than $300 per container for security clearance).”

Prior to 9/11, custom examinations would be primarily to make sure the nature and value of goods were what declared. Even in this context, compliance examinations for known importers were rare. “Periodically,” recalls Marinis, “you'd have 'contraband enforcement exams' depending on country of origin, mostly for narcotics.”

Post-9/11, everything changed. “It instigated a totally new emphasis in the direction of security issues for the importer,” notes Marinis. “We had customers who would bring in 18-20 containers at a time, they had been importing for years, and all of them would be selected for X-ray exams/security exams.”

C-TPAT, the voluntary collaboration between Customs and traders, which certifies members for 'fast track' treatment at the port, was developed soon thereafter. And, it's made a difference. “Robinson as a company focused on participating immediately as soon as we were eligible,” Says Marinis. “And, we encouraged customers to do so as well.” For those who did, like the customer mentioned earlier, the number of exams went way down.

“Our experience is that intrusive exams, where containers are pulled aside and checked inside, have significantly decreased. But there are still all kinds of exams. In ports where customs is screening for radiation regardless of importer, every container that comes in goes through radiation devices.”

There are new FDA regulations, which are 9/11 influenced. As a result of the Bio-Terrorism Act, shippers of food commodities from overseas have to be registered with the FDA and importers are required to make prior notice of arriving food products (ocean shippers must provide 24 hour notice, it's less via truck or air). Customs can deny entry to unacceptable commodities as an inadmissible import.

And, there are other frequently occurring exams not security related. One, for example, involves the inspection solid wood packing materials-crates and wood pallets-that must be treated against insect infestation and carry approved seals. This has been in place for shipments from China for some time; it's now a United Nations' driven worldwide program, which the United States Department of Agriculture has signed off on.

“Auditors were not that concerned with documentation retention policies or customs compliance matters per se prior to Sarbanes Oxley,” notes Marinis, “but now the level of security is much greater in these areas and there's an expense associated with that.”

As a result of experiences like these, shippers are looking more to third party operatives to manage compliance requirements. Consultants like Accenture are quick to note that 3PLs are usually better equipped than individual companies to maintain the overhead and expertise required to oversee the documentation process. While Marinis doesn't believe Robinson has acquired new customers solely to facilitate compliance, he does think that “the requirements would prompt more 3PL usage. It's not that they're complicated so much as they're voluminous. Many importers in the past did things on their own in house, but now because of the volume of regulations and procedures, it's very beneficial to go to a third party provider who is involved in this every day and has systems set up to deal with the rules.” This is particularly the case with smaller companies or those that are relatively inexperienced in world trade.

Sidebar: Transfer Pricing and Customs Rules-a Compliance Dilemma for Global Supply Chain Optimization By Bernhard von Thaden

Over the past few years the tension inherent to the process of managing compliance with transfer pricing and customs rules has emerged as a challenge to many multinational companies, especially those with integrated supply and distribution chains.

What is the issue?

Tax as well as customs authorities generally follow the so-called arm's length principle for pricing and valuation of a sale of goods between related parties (“intercompany transactions”); that is, the intercompany transaction needs to be priced as if it had been negotiated between two unrelated parties. Both tax and customs authorities are concerned with such transactions as a taxpayer can potentially manipulate the price of goods transferred between related parties for the purpose of either reducing a company's income tax burden or customs duty or sometimes both.

Using the example of a common intercompany transaction, the import of product into the United States, the customs duties will generally increase with an increase in value of the imported good while taxable income of the same entity will decrease with the increase in price and, as a result, its cost of sales. As both agencies, the IRS and U.S. Customs, are trying to maximize its collections on behalf of the same government, it is easy to understand why a multinational company can thus be between an institutional “rock-and-a-hard-place” without access to an effective dispute resolution process at a governmental or intergovernmental level. This issue is in no way unique to the United States, but rather common to all globally integrated economies with advanced transfer pricing and customs regimes.

The trend to more frequent and more material conflicts between transfer pricing and customs valuation is exacerbated by the fact that tax and customs authorities are increasingly exchanging pertinent information, which forces multinationals to reconcile and explain differences in transfer pricing and customs valuation.

This year, the World Customs Organization (WCO) and the Organization for Economic Cooperation and Development (OECD) co-hosted a conference for representatives from customs administrations, tax authorities, academia, tax and customs advisors, and the business community to discuss solutions to this dilemma in the face of rapidly growing international investment and trade, and to develop proposals for more convergence between transfer pricing and customs rules and procedures.

Despite valuable proposals, the pendulum is still swinging towards increased compliance burdens and more exposure for the typical multinational. Fortunately, there are ways to manage or eliminate the exposure:

1. Structure intercompany transactions specifically, such as the point at which ownership contractually and economically passes between parties, the point that triggers valuation, and the role of third parties or the insertion of additional entities in the supply chain;
2. Document the business, market environment, and intercompany transactions, always with a view to both transfer pricing and customs valuation methodologies;
3. Obtain a binding customs ruling on customs value issues;
4. Develop an analytical and systematic process for compensating transfer pricing adjustments and participate in the Customs Reconciliation Program to allow for retroactive adjustments for customs valuation purposes; and
5. Develop a detailed game plan for transfer pricing or customs audits that detail the type and level of documentation provided at various stages of an audit and involve an outside advisor to assist in managing the audit process at an early stage.

Bernhard von Thaden, Senior Economist at DLA Piper, specializes in international transfer pricing, and business and intangible valuation for publicly-traded and private multinationals in a wide variety of sectors. He can be reached at Bernhard.vonthaden@dlapiper.com.

Sidebar: Shipping Across Borders: Risky Business or a Sure Bet? By William S. Ansley, Jr.

While there are no “sure bets” in international trade, as with any other type of business venture, going international doesn't have to be all “risky business.” There are three critical keys to success in international trade: careful planning, having the right partners with the necessary experience and expertise and implementing best practices to help you navigate any potential pitfalls.

You will need the help of experts with a solid understanding of international trade issues that may impact your business-particularly those involving compliance, tariffs and trade agreements.

The world has never been more open to international trade; the time is right for testing the waters once you have the right guides on board.

Planning is critical when it comes to international trade. With the right strategy and forethought, companies can avoid some potentially serious “What If” customs situations that could have a negative impact on their business.

Here's a protypical example:

What If-a large shipment of popular MP3 players had been unplugged at the border with Customs delays-causing the manufacturer to miss meeting seasonal demand for these trendy products? Believe me, if they are still being held in Customs on January 1 when holiday season has come and gone, company investors and management will call on someone to face the music. Furthermore, retailers will suffer empty shelves and lost sales during peak season and could decide to hold the manufacturer responsible for loss of income.

There are many opportunities for things to go wrong when companies participate in international trade. There is a great need for knowledge about changing regulations, declaration of proper values on import and export entry documentation, how to manage customs brokers and forwarders, managing the international procurement and purchasing process, maintaining records and monitoring regulations that apply at U.S. borders and much, much more.

The good news is that companies don't have to do it alone. There are trade consultants who have the functional expertise and tactical resources to deal with complex customs requirements. These consultants employ several methods that can affect change both internally and externally for a company:

Internally: A trade consultant can provide trade compliance assessments following reviews of the company's processes, focusing analysis on the company's strengths and weaknesses. The consultant also can perform reviews on import and export records to determine areas for improvement and evaluate purchasing practices to ensure that the company is compliant with regulations and meeting government mandated recordkeeping requirements.

Externally: Trade consultants can help companies better understand the many aspects of customs rules and regulations to strengthen their management of international logistics.

Once a company has met with a trade consultant to help them through the initial planning stages, it is then incumbent upon the company to decide how to go forward. Do you handle some parts of the operation yourself and hire trade experts in logistics and customs brokerage only? Do you engage multiple parties and hope for the best? Or, do you hire a comprehensive provider who can help?

Opting for a comprehensive provider who can help you manage the aspects of international trade-from the time goods leave the manufacturer through logistics planning, packaging, labeling, freight forwarding, customs brokerage and all delivery transport (whether it be ocean, air, rail, ground or, a combination of two or more), deconsolidation, storage/fulfillment, final shipment and even, reverse logistics is often the best bet.

A good global customs brokerage provider will be ahead of the curve on the latest customs programs such as remote filing services and entry reconciliation-to help you keep your business on the leading edge.

Specifically, your global customs brokerage should:

• Minimize the number of customs brokers you need and simplify your customs processing
• Provide customer service 24 hours a day, seven days a week in multiple worldwide locations
• Focus on compliance management to help reduce cargo delays and costs associated with non-compliance to customs regulations
• Provide online visibility to entry, delivery, tracking and billing details as well as, offer flexible reporting capabilities
• Offer flexible Electronic Data Interchange (EDI) solutions to help minimize data entry errors, which can impede shipment progress
• Provide document imaging for easy archiving and retrieval of important customs brokerage documents and minimize the need for physical storage space
• Centralize entry processing and customer service so you can increase compliance, consistency, quality and ease of doing business when unusually high volumes occur
• Be a C-TPAT (Customs-Trade Partnership Against Terrorism) certified provider, with security measures that meet or exceed the latest requirements established by CBP.

The importance of best practices

When it comes to moving goods across borders, best practices are essential to success. The processes that keep commerce moving safely in a quick, efficient and compliant manner are often the same processes that can cause confusion and frustration and cause delays at the border. Add the importance of accurate paperwork filed in a timely manner to the equation, and you have an example of how things are changing when moving goods around the world and into the U.S.

I think there are five important best practices that are most important to success:

1. Review and analyze import data periodically to identify supply chain opportunities. By using an analytical process, importers can look for ways to reduce duties by sourcing in countries subject to favorable Free Trade Agreements, such as the North American Free Trade Act (NAFTA) and Generalized System of Preferences (GSP). In addition, companies should analyze transportation modes to ensure that their requirements are being met. Identifying ways to lower costs in the supply chain can provide competitive advantages for your company.
2. Work with your customs broker to create an electronic/paperless entry process for non-restricted goods using your broker as a gateway to receive EDI feeds. One of the fundamental things you should provide your broker is a database of imported items, complete with item or part number, a detailed description of the item or product and the appropriate Harmonized Tariff System United States (HTSUS) classification number. Your broker will use this information to make accurate classification declarations to CBP on your behalf.
3. Consider having your customs broker centralize the processing of your entries nationwide using Remote Location Filing. This will result in consistent processing regardless of port, a single point of contact for customer service and mitigation of customs compliance risks.
4. Conduct a Compliance Assessment with a customs expert to identify areas of possible compliance risk.
5. Join Customs-Trade Partnership Against Terrorism (C-TPAT), which gives you optional entrance into the CBP's Importer Self-Assessment (ISA) program. Both programs help identify you as a low risk importer, thus potentially reducing your customs exams, increasing your paperless entry response from CBP and speeding your product to market.

With the right planning strategy, the right partner and the right best practices in place, companies can reap a world of benefits through international trade. Knowing the challenges of international trade and having the experience behind you to navigate the complexities associated with it are critical to success in today's business world.


William S. Ansley, Jr. is Vice President of Trade Management Services, UPS Supply Chain Solutions.

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• Bernhard von Thaden