| Manual Index | Instructional Modules #25 | Instructional Module Index |


For purchase of the full version of the manual please contact info@itcdonline.com

 

Table of Contents  
Executive Summary

Introduction

Chapter 1       The Economics of Customs Reform
Chapter 2       Customs Duty Collection and Valuation
Chapter 3       Training, A Solution
Chapter 4       Compliance, A Key to Success
Chapter 5       Customs Automation
Chapter 6       Economic Processing (Free) Zones, Bonded Warehouses, 
                      and Temporary Importations
Chapter 7       A Recommended Program of Assistance for Customs
                      Reform
Annex 


Executive Summary  

Introduction  

The reader will note that the product of the assessment has limited itself to primary focus on the impacts of the changes in the valuation system, automation, and the infrastructure changes needed to accomplish those goals.  To broaden those areas of concern prior to implementation of changes called for by WTO/GATT might be counterproductive to the best interests of Customs.  

This is the result of the Assessment of Customs Reform activity carried out by USAID through the Technical Assistance for Policy Reform (TAPR) project under the Technical Assistance in Support of Economic Reform (TASER) program.  The project is a direct result of a request from The Minister of Finance to the U. S. Agency for International Development.  

The Assessment began on June 1, 2001 , and is scheduled to conclude on August 31, 2001 .  

Personnel conducting the assessment were:  

Harry M. Allison, Team Leader (Training, Compliance, Process)
James H. Cassing, Ph.D.  (Economics)
Irina Swift, (WTO/GATT Agreement, Valuation)
Edward Tulis, (Automation, IT Systems)
Robert Drost, (Warehousing, Free Trade Zones, Procedures/Special Schemes)
Mohamed Hagazy
Eftikhar Mohamed

Mahmoud Hamza  

The assessment used a four-phase development to complete the project in the most effective method. This was:Information gathering

  • Analysis

  • Prioritizing

  • Reporting

The assessment team visited a wide range of Customs facilities and reviewed processes, guiding documentation, laws, and policies. The “trade”, that is the people representing companies, corporations, and individual importers, exporters, customs brokers, freight forwarders, expediters, and associations were also met with and enjoined in the process of the assessment.  In addition to the foregoing, a large number of Customs managers and staff were interviewed. A record of the meetings is attached to the report as an appendix.  

These discussions and observations were critical to understanding the current situation, constraints to reform, and exploring potential avenues to successful change.  

The analysis stage included a comparison between where the Customs process is now, and where it needs to be.  The question answered by the analysis phase is how best to reach the goal. Knowledge of the subject matter and the experience of the team brought to light the avenues of approach that might be recommended.

In the prioritization phase those recommendations were balanced against reasonability, potential for success, and the ability of Customs to perform the change. This phase was added after beginning the assessment due to the complexity of the problem to be addressed.  

In addressing the resolution of constraints to progress, it is important to not only see and understand the current system, but to understand why it is as it is, in order to understand what needs to be changed and what offers the best potential for success. Changing a process does not alleviate the concern that was a basis for the previous system.  

The reporting phase is included in this report, it contains a detailed presentation of each of the areas of concern and recommendations for reform, both immediate and longer term.   

Each of the Areas of Concern is documented in this report as a separate chapter. The reader will notice there is some duplication in each report. That is because the experts independently came to the same conclusions from the perspective of their focus subject.  This overlap was intentional and reinforces the recommendations for correction.  

The recommendations for change are given in two stages; first as those things that can be done immediately to begin the reform, and second as a potential or recommended assistance project to provide the guidance, funding, and advice needed to fully implement the changes. It is the unanimous conclusion of the team that the goal of full compliance with the World Trade Organization/General Agreement on Tariffs and Trade (WTO/GATT) guidelines is accomplishable, as is full automation of the entry process; manifest, declaration compliance databases, and connectivity to other Agencies, within a reasonable time frame.  The team strongly believes that implementing these actions will enable the Customs Service to more rapidly process imports and collect customs duties, better identify compliance and non-compliance by importers, and thereby better support Egypt's more rapid economic development.
   

Findings and Discussion  

Finding 1. Customs must take a number of actions before it will be able to implement the valuation of merchandise methodology described in the AGREEMENT ON IMPLEMENTATION OF ARTICLE VII OF THE GENERAL AGREEMENT ON TARIFFS AND TRADE 1994.                                                                          

Discussion.  The change from a market price reference system of value determination to the WTO/GATT value method is a major change in procedure and process requiring a number of skills and knowledge not previously required. It also requires specific changes in law and guidelines to allow the procedure to take place as designed.  

The first of these changes is perhaps the most problematic.  Customs for years has been accustomed to having the importer present an invoice that stated a value of the merchandise.  Customs would compare the value declared with a reference value list and with previous importations to determine the correctness of the value. The reference lists was based on market value or wholesale value, consequently the invoice value or declared value was frequently low.  To verify this Customs would require certified commercial invoices, consular certified invoices, bank certified payments, etc. If the determined value was low a penalty was assessed. Understandably, the next importation by an importer would show a higher value. Customs began to depend on the use of legitimized documents as a justification for acceptance. Resultantly, the laws, guidelines and decrees followed in support.  This pattern is not unique to Egypt . Most countries that used a similar system had the same results.  

This caused two major problems that are related to change. First is the dependence on documents considered legitimate by Customs, and second, it caused mistrust and confrontation between customs and the trade.  Customs felt that the trade could not be trusted to present a real value, and the trade felt they were being forced by customs to inflate values in an arbitrary and capricious manner.  

This confrontational pattern of development was one of the reasons why the GATT met to discuss and revise valuation determination.  It was found that in today’s world of computers, the reference price system had little to do with the actual value of merchandise. It took no account of the ability of the trader to buy at the best price through legitimate international business methods. It tended to level the playing field in favor of the worst buyers. International commerce could not depend on a predetermined cost of customs clearance. From the customs point of view, it was becoming too easy to falsify documents, and values tended to increase over time beyond normal inflation. The system itself was creating a real barrier to commerce.   

The resultant GATT transaction value (the primary basis of valuation, or in the absence or transaction value other means of valuation), method was adopted. For most importations the value became the price paid or payable for the merchandise. Simple, direct, and verifiable are the elements of the system. The verification when needed is done from the business records and financial data of the importer, a much more accurate method than the reliance on other documents.  This however requires a level of knowledge of business and business records that was hitherto unneeded in customs. It also requires that traders keep their records for a specific time period and in a manner in accordance with the Generally Accepted Accounting Principals of Egypt.  

The transition to GATT valuation requires a major training effort and information sharing with the trade. Customs must train employees to use the methods set forth in the GATT rules to determine value, possible adjustments to value, or alternate methods when a transaction value is not applicable, resulting in the use of deductive and computed value when appropriate. Employees must know what business records to ask for and under what circumstances to ask for them. The trade must also know what is expected of them from customs. This training has not been done to the level of competence needed.  

The Customs Law, implementing decrees and guidelines must also be changed to reflect the change in process and procedures.  Particularly, in the demand that documents presented to customs meet standards of official verification, changes must be made to comply with the agreement.   

Finding 2.  That Customs must put in place the appropriate infrastructures to apply the WTO/GATT concepts without risking revenue loss that may be at an unacceptable level.  

Discussion.  Some temporary revenue loss can be expected as the system goes into effect.  This loss caused by the difference in collections based on the lower transactional value, should be at an acceptable level and will be overcome by the natural economic results of the system change.  As voluntary compliance increases, as shown by the experience of many nations, losses will be fully eliminated.  

While voluntary compliance, e.g. importers freely and fully meeting the legal demands of the system of their own volition, is a goal of the transactional value system, it is not automatic.  Risk management must be addressed to assure that the unscrupulous persons who are users of the system do not take unfair advantage of it.  

The Customs first line of defense of the system is in a well-trained staff handling declarations.  These employees, who know when to accept a value, when to question a value, and what verification to seek, is the most valuable asset Customs can have.  This can be achieved only through training and proper management guidelines that are in accord with the agreement.   

Compliance, based on risk management is the key to developing a system of safe guards that protect the system from abuse. The units of compliance are the research and development section (R&D), the intelligence (commercial) section, and the audit section.  

The agreement encourages nations to defend the system through selective verifications and audit. In addition to the well-trained employee handling daily declarations and primary inquiries of value, comes the selective system for examination, verification, and audit.  

This may be done in three permissible methods; for cause, randomly, or when there is a high risk of loss or damage.  The R&D section functions to continually keep the appropriate level of selectivity in place, targeted to the highest risk, through continual review and application of risk assessment.  Intelligence uses all official sources (domestic and international) to develop information of potential violations. Audit is targeted by the three methods also. A final back up to the system is a unit of trained investigators who can carry through on a violation to presentation for administrative penalty or prosecution.While the system of selectivity is much more accurate with an automated compliance database, the infrastructure and a manual system can and should be put in place as soon as possible.  

Finding 3.  The guidance provided to Customs Officers should be revised to clearly indicate the policy of the Government of Egypt regarding the application of the AGREEMENT ON IMPLEMENTATION OF ARTICLE VII OF THE GENERAL AGREEMENT ON TARIFFS AND TRADE 1994.  

Discussion. Customs receives guidance in three separate manners: by law, by direction from higher authority, and by institutional policy. It may seem that the will of the Government is clear in this regard in the fact of Egypt becoming a signatory to the Agreement.  

However, Customs is an Institution that functions through the application of specific procedures and processes. In this Egypt is not unique. Internationally, the function of Customs demands this methodology in order to treat merchandise crossing its’ borders with fairness and standardization.  

The application of the agreement is a major change in the procedures and processes dealing with the valuation of merchandise to those found in the agreement. In the agreement these processes and procedures are very specific. They deal with one of the most basic and important of all Customs functions, which is the treatment of merchandise arriving, transiting, and leaving the nation.  

All Customs procedures and processes are founded in law, implementing decrees, and approved guidelines issued by competent authority. If, at any level of that process there is conflicting information, a lack of clear direction, or a failure to provide the authority that Customs needs to act, then the result must be confusion, lack of change, and delay in implementation.  

This calls for a concerted effort on the part of each level of Government, from the Ministerial level involved in the drafting and enactment of legislative action, to the issuance of institutional policy, to the various Customs executive and management levels producing specific guidance for implementation, to assure that the final procedures and policies conform to the standards agreed upon.  

Finding 4.  That commercial importers, exporters, and associated service providers have not been involved in the planning process to a sufficient level to assure willing acceptance of the final product.  

Discussion.  Those persons dealing with Customs in the processing of merchandise being imported or exported (the trade) must be involved in the process of change. Beyond knowing what is expected of them in the changed procedures, they offer a wealth of knowledge that can be shared with Customs in establishing the information needed for verification of values and the knowledge of business record systems and trade practices considered normal in international trade.  

For Customs to reach out to them in the planning stage would be an invitation to the normalization of relations between the trade and Customs that is fundamental to success in creating an environment for voluntary compliance.  The trade community must have a clear and full understanding of invoicing requirements for Transaction Value and knowledge of what charges (commissions, freight, etc.) are included or excluded from the dutiable value.  In addition, Customs must clearly set forth record keeping requirements for both the importer and agent, if used, for example, the retention of full purchase records (purchase order and payment records, etc.) and the time from entry the records must be retained.  

Meetings between Customs and the trade should be ongoing in all Customs locations. Seminars should be held in each location to seek input into the formulation of reasonable policies that are within the options of the agreement. This can be of great value to Customs in deciding reasonable documentation for declaration of value.  

Continuing a confrontational attitude between Customs and the trade can only be counterproductive. The relationship does not have to become a “close friends” type connection, but it should become one of mutual respect and professionalism.  

This begins with professional intra-personal communications and is considered essential to success.  

Finding 5.  The present Customs training configuration and methodology of presentation must be revised and strengthened in order to be able to provide the quantity and quality of training that is needed for transition to the new system.  

Discussion.  Extensive training and retraining of personnel are required in order to meet the skills level needed for application of the new system. The training system used will have to be specialized career specific within the context of the work functions to be performed.  

Present systems are based on a rote educational model that requires long-term basic training of a generalized curriculum to produce a “Customs Officer” that can be assigned to any area in customs. Once on the job, the employee begins to learn the parameters of the job function. While this offers some reasonable flexibility in the old work system, where the learning period on the job can be extended, it does not provide the rapid integration to a highly skilled specialized field as required for GATT systems.  

Under the GATT systems, skilled specialists are required in the fields of examination of merchandise, classification and valuation of merchandise, accounting and audit, investigation and intelligence, compliance systems analysis, automation, database development and use, liquidation of entries, bonds and sureties, instructor/course development, etc.  In training the message should convey that each officer has a degree of independence to make decisions on selectivity, importer record reviews and that their decisions will not be challenged as long as they were carried out with the intent to comply with Customs rules.  

In each of those areas supervisors and managers must also be brought to a high level of technical and administrative competence.  It is suggested that this can be accomplished in a reasonable time frame by the use of Adult Occupational Training systems based on the task relationship of training objectives to work performance. Trainees receive this training within specialized career fields in order to reduce the time spent in training and to increase the retention of information.  

The transition of the training units to the suggested method can be best accomplished in a reasonable period with some international advisory assistance, equipment and publishing procurement.  

Finding 6.  That the Customs Service should provide more detailed direction to the automation contractors if they are to effectively develop systems and use programs that will bring computers into the workplace as tools to increase efficiency and speed in processes.  

Discussion. In order to design and develop the use screens and programs for use in customs, contractors must be told by customs what they want the system to do and what it is to be used for.  The equipment has a multitude of potential for use, but must be designed to produce the specific function required.  

Because of the wide application of automation in Customs, the use requirements must be defined and prioritized.  This is normally best done by a committee of Customs subject matter experts, led by a chairperson having the authority to make the level of decisions required for implementation, and the ability to keep the committee focused on the tasks mandated. The committee must have the authority to call upon any subject matter expert within customs, to meet with persons from other agencies to discuss interconnectability, and to meet with the trade to discuss system accessibility.  

 Executive management must continually review the progress of the committee, changing committee members when required by lack of progress or when progress makes a particular committee member obsolete by accomplishment.  

International advisory assistance may be of help in this area also.  

Finding 7.  That bonds and other sureties currently used in moving goods from and to free trade zones may be a precedent for development of early release of merchandise pending final duty/tax determination.  

Discussion.  In the WTO/GATT valuation system, a declaration is made by the importer to Customs containing information regarding the merchandise and the transaction which took place to purchase it that is sufficient for Customs to determine the duties/taxes due from the importer.  In a normal or usual transaction, no further information may be needed, and the merchandise may be released upon the payment of duties/taxes.  This is effectively a final determination of duty/tax for the transaction.  

However, if there is serious doubt as to the validity of the declaration, verification or further information may be required; or, if the entry is selected for verification by the selectivity process, then the possibility that the duty/tax may be increased or decreased exists.  In this situation the merchandise may be released to the importer while the appropriate duty/tax is being determined.  This is called early release of merchandise pending final determination of duty/tax.  In early release policy, it is normal to protect the revenue, pending the final determination of the entry.  The period of time involved may be from several days to several weeks, depending on the depth of verification that is needed.  The idea is to let the importer have his merchandise while a final determination is pending.  

In discussion with a number of Customs managers, it was felt that the collection of final duty/taxes would not be a problem as Egyptian law allows for such collections as a priority tax lien against the importer’s assets if not paid upon billing.  

This may be true and is certainly a lever to assure payment when the trader is an established business or known resident of the community. However, as the system expands in the number of traders doing business with customs, there may come a point in growth of the system that one time importers increase and unscrupulous persons may attempt to defeat the system by using a “ghost” or name change, or fictitious entity to defeat the historical reference of the system.  

It is therefore recommended that a system of sureties, supplied by a bank, surety agent, insurance company, or by cash be emplaced to protect the revenue. Such sureties could be single event or time termed for multiple transactions.  

As a surety system is in current use for other purposes, then the cost to traders should be minimal and the benefit to customs as an easy method of assurance of collection is obvious.   

Finding 8.  That Customs officers individually are not currently authorized to act on their own volition in the release of merchandise, or the acceptance of a declared value for merchandise.  

Discussion. Under the GATT system, officers are not only required to use their judgment in the acceptance of declared value, but must accept the declared value unless there is a reason to doubt it that is sufficient to be articulated in writing to the importer demanding verification.  

This is not only a change in philosophy from the old system which demanded a number of certified documents to justify the officers’ action, but is an authorized risk on the part of management to trust the judgment of the officer.  

The risk is however one of limited potential for loss.  Whether the value is accepted with or without documentation, the duty/tax is still collected. The safeguard to the officer’s action is found in the random selection system that may override the officer’s decision, or by the random audit system that also allows a cross check of the officer’s action. The declaration may still be reviewed for correctness by supervisors after the merchandise is released, and officers must be able to articulate their rational in deciding to accept the declared value or verify the value.  

If the officer does not have a reasonable doubt, acceptance is the appropriate action. In the worst case scenario, the duty may be collected on an undervalued import. But if the under valuation is caught by audit or selectivity, then the fine or penalty will be severe and will result in future shipments of the same importer being selected for cause for verification.   

The risk of collusion between importer and officer is reduced by the same system, supervisor’s review of the transaction, and the selectivity system. This is another reason for increased technical competence of the supervisors and managers.  

A well-trained officer exercising his/her authority in the GATT system is not a serious risk to either the revenue or to customs.   

This authorization, to accept the best judgment of an officer must be included in the management guidance to officers to allow them to develop the confidence to perform the job function as described. 

Finding 9. Examination by-pass can begin immediately on a percentile level by executive order to begin the preparation of selectivity criteria.  

Discussion.  By Ministerial Order, or Executive Order from the Customs Commissioner to Customs Managers at Ports of Entry (Air and Sea) to begin a by-pass, or pass without examination of 20% of importations of merchandise having no interest to other agencies. They, the Customs Managers would be required to select the importations for by-pass and report back to the issuing executive the criteria used for that selection.  

This would be the beginning of selectivity. The Customs Managers will normally select for by-pass those importers that they have had the least problems with. As the duty/tax will still be collected and the document process would not be changed at this time. Potential losses would be minimal and acceptable.  

This forces the managers to begin to think about selectivity and to begin to develop selectivity criteria. It also shows employees that merchandise may be by-passed without negative results.  

A meeting should be held 30 days after the implementation to discuss the criteria each individual manager used in the selection. At the end of the meeting the by-pass system should be increased to 25%.  

As soon as the legal guidelines are emplaced to allow it, document by-pass should begin using the same methodology. By-pass levels should not exceed 25% until the infrastructures of audit and selectivity are in place.  

This is a first very positive step to the acceptance of individual use of discretionary authority that is not currently a norm in Egyptian Customs but is a requirement of the GATT system.  

Records of merchandise by-passed should be maintained, as should revenue collections for the same period for comparison uses.
   

Conclusions  

A transition period is always needed to implement the changes of process and procedure having major impact. That transition period at this time would be considered approximately three years.  

The recommendations of this project, if followed, may help to substantially reduce that transition time and the institutional impacts caused by he changes.  

The current confusion within Customs and to the trade may have a beneficial unintended result.  It demonstrates to managers the major scope of the changes required and the need to take the implementation preparation stage seriously. If so a constraint to implementation will be diminished.
   

Immediate steps that should be taken now:  

Valuation:
(See the full context in Chapter  2, Customs Duty Collection and Valuation)  

1.      Customs identify and supply WCO materials both the English/French version and a translated Arabic version to all officers involved in the valuation process.  The materials should include the WCO Valuation Control Handbook (Introduction, Parts I-IV, and Glossary), WCO Compendium of Valuation Decisions, WCO Commercial Fraud Action Plan and any other material that the WCO recommends.  This material is available to all WCO members.  

2.      Immediately begin a dialogue with the Trade Community and start a discussion of valuation problems, and how to address them.  Provide the trade community with an education process.  Discuss what Customs expects from them and why it is expected under the new procedures.  Provide all necessary materials and guidelines about any new forms or expectations for documentary evidence.  Start a discussion about need for procedural changes.  Importers and exporters need to be a part of the process to effectively make changes both legislative and procedural.  Pass all legislative and procedural changes through trade associations for comment.  

Discuss the need for assistance from the trade community in training Customs officers on industry sectors, product manufacturing, negotiations, financing, and business practices.  In a true open and transparent environment, Customs and the trade work together to promote efficient processes.  The training is essential to familiarize Customs officers with international business practices as related to purchasing (purchase orders), letters of credit, payment for goods, transportation, and other elements related to import transactions.  

3.      Review the Kyoto Guidelines specifically the guidelines incorporated in general Annex Guidelines for Customs Control (Chapter 6), Relationship Between Customs and Third Parties (Chapter 8), Information, Decisions and Rulings Supplied by Customs (Chapter 9), Appeals in Customs Matters (Chapter 10), and Clearance and Other Customs Formalities (Chapter 3).  These will be useful in setting up the procedures for Post Audit, Risk Management, Rulings and the Trade Interface Process.  The Kyoto Convention guidelines on Customs Procedures are available for download from the WCO web site and are considered to be the international standards for Customs procedures.   

4.      Consider sending a working level group to the Customs Department of the Kingdom of Jordan to review their experience and procedures for implementing the Valuation Agreement.  Jordan Customs has initiated a process of risk management, profiling and selective release of cargo.  At some sites as much as 50% of the cargo is released without additional review or physical inspection.  It would be useful to exchange information, ideas, and materials on how to affect cargo release without review or physical inspection based on criteria and risk assessment.   

5.      Based on the above create a short-term action plan to develop materials, and resources for Customs officers, the trade community and the public sector.  

6.      Begin to pass without examination 20% of imports that represent transactions of least risk.  

Training:
(See the full context in chapter 3, Training, A Solution)
 

1.      Our company is in the process of obtaining a copy of the WCO/CCC Customs Valuation Control Handbook in Arabic.  It is recommended that this handbook be re-printed in quantity, and distributed to all employees concerned in the valuation of merchandise.  

2.      A class be convened at the Customs Institute in Alexandria for 30 selected supervisors of valuation units nationwide.  This class should be instructed by Mahmoud M. Abou Alla (X-ray unit), or another person well qualified in GATT valuation, using the handbook mentioned above as a training manual/lesson plan. This course should run for 2 weeks, five days a week, 4 training hours a day.  After the first class graduates, additional classes should be taught by attendees of the first class, in their respective area institute. Again the classes should not exceed 30 people, and the handbook should be the manual. Classes should continue until the valuation of importations is complete.  

3.      Trainees of the classes above, upon their return to the work site, should become mentors for untrained or inexperienced personnel.  

There follows in the chapter on training a suggested course outline.
 

Automation:
(See full context in chapter 5, Customs Automation)  

1.      Select a senior executive manager reporting at the ministerial level to manage customs automation  

2.      Create the steering committee to assist the executive manager in prioritization and scheduling

3.      Develop the initial implementation schedule of system components

4.      Develop a matching training schedule and curriculum, and start training  

5.      Identify and acquire funds to support initial acquisition, development, and training  

6.      Acquire funding to support additional programming and testing  

7.      Acquire and install the initial equipment allocation  

8.      Begin the programming recommended here to complete the design  

9.      Review legislation to permit customs document review discretion  

Please see Chapter 7, A Recommended Program of Assistance for Customs Reform for a longer term suggested program of assistance.    

 


Introduction  

The main points of interest of this assessment have been applied to what we consider to be the most pressing issues effecting customs in the foreseeable future to be presently addressed.  These are; the application of the GATT agreement valuation procedures, the expansion of automation in Customs, and changes to infrastructures and training caused by the foregoing as well as other modern techniques found successful in other nations that may benefit the organization. 

As clearly seen in the pie chart, the impacts of the first subjects drive the rest of the project to a great degree.  The reason for this is that the classification and valuation of commercial merchandise entering the country for domestic consumption is the basis of all customs formal duty/tax collections based on ad valorem tariff rates.  It is truly what customs does in it’s functional operations.  Everything else in customs is ancillary to this process. It is the heart of the organization  

Under the previous “ Brussels ” Valuation System, duty was applied to a “Customs Value”, or value determined by customs based on market reference or wholesale value. Customs could change the value declared for customs purposes based on past imports or a reference price list. This required some skill and knowledge of the merchandise and use of reference material, but much less knowledge than is required for the proper application of the GATT transactional valuation methods.  The consequence of improper application of those techniques are loss of revenue, confusion on the part of importers and customs officers, under valuation, complaints, and fraud. Efficient application will require an absolute knowledge in detail of the GATT agreement, exact application of the principals, an in-depth knowledge of the merchandise and fabrication methods, a more than working knowledge of international commerce, business practices, business relationships, financing, and transportation. Therefore training becomes an important adjunct and long-term consideration to implementation. Customs must be congratulated for making available introductory training to as many employees as they have.  However long term training must be considered, as well as on the job re-structuring to meet the standard of expertise that will be required for sustainable success.   

Revenue loss becomes a serious consideration also as the valuation methodology changes. Even with a well trained specialist reviewing transactional value, the opportunity for false declaration, under value declaration, and fraud are apparent. This is recognized internationally as an acceptable risk that can be controlled through risk management techniques. The point is that the event spins off into a number of directions. Risk management brings forward the topic of compliance, which can offer a number of benefits to Customs in the valuation field, and even into passenger baggage.  

The expansion of automation will be needed to meet goals in valuation. The management priorities of Command, Control, and Communications can well be enhanced by computer use. Immediate data recall, criteria based data search, record keeping, and data storage are all easy for computers to do. Computer use by a trained cadre will expand their capability to produce high quality courses.  We are sure this will call for more computers, which will call again for training and perhaps some help to assist managers in formulating criteria for unit or program use design.  

So, then what we have to this point is an assessment that begins with several points of interest.  Addressing those leads to an expansion of those points in order to serve properly that interest. Needed change causes impact to a wide range of the Customs Organization. It also has collateral impact to other parts of the organization that may well benefit from the changes in perspective being incorporated.  

Without having gotten ahead of ourselves by pre-designing, it is easy to see the concept of a basic assistance project of three years duration. Many changes have occurred in the international Customs field over the past ten years.  As trade practices change and global markets develop, Customs must become more sophisticated, develop new methodologies, and use technology to keep pace.  

The standard Custom Mission of collecting and protecting the revenue, enforcing customs and related laws, and protecting developing domestic industry from unfair competition, while true and never changing must be accepted within the context that Customs is an extension of the policy of the Government of Egypt. International trading partnerships and associations are made, not by Customs, but by Government. Tariffs, which determine the duty rates that Customs applies, are not determined by Customs, nor, are the exemptions from duty. Customs is acting on the policy of the Government of Egypt where from it derives its authority, based on its responsibility. So it is with the GATT and other international agreements, trade facilitation, and, meeting the challenge of creating a Customs environment conducive to trade and tourism growth. As with the expansion of points of interest in the assessment, the organization, while meeting the challenges imposed by Government Policy derives benefits from the changes made in the process. More skilled and knowledgeable employees, working in a position calling for the exercise of independent judgement, are a more valuable employee who can be paid accordingly. The environment of automation is a more pleasant work environment attractive to the retention of employees. New methodologies result in bigger, more complex violation cases, resulting in larger penalties and fines being collected. The image of Customs changes, from a suitcase checker, to a sophisticated compliance based organization.  

Therefore our interest in this assessment, shaped by the items of interest of the Minister of Finance, known impacts of the Valuation changes effective in Customs on July 1, 2001, the coming of automation, and knowledge of customs operations, we feel that the proper study needed is in the following areas:  

1.- Economic Projections  

2. – The valuation of merchandise in the WTO/WCO GATT system  

3. – Training  

4. – Compliance  

5. – Automation  

6. – Warehousing, Free Trade Zones, and Special Schemes for Delayed Duty Collections.  

7. – The Customs Organization  

8. – A Recommended Assistance Project for Consideration  

Effectively this assessment will cover the entire operational base of customs. The recommendations apply to all areas within customs.  These are the areas that demand immediate action to avoid confusion, loss of revenue, and severe complaints from the trade and public.

 


Chapter 1

The Economics of Customs Reform

James Cassing, Ph.D.  

Introduction  

The Government of Egypt (GOE) has committed to creating an economic environment conducive to growth in the gross domestic product at an annual rate of around seven percent.  (Specifically, the targets are 6.8% by 2002 and 7.6% through 2017.)  An important part of the strategy for achieving this ambitious target is policy reform aimed at enhancing international trade and investment.  Such a “globalization “ strategy is probably well suited to Egypt at this time as the world economy continues to prosper, other nations continue to open their borders to trade, and there is a large pool of international capital seeking productive investments.  Also, the new European Association Agreement portends increased trade and investment opportunities.  

As the GOE continues to pursue lower barriers to trade, there is a recognition that an important part of creating a trade-friendly environment is to ensure that products can move across the border expeditiously and are treated in a manner compatible with WTO obligations such as the Customs Valuation Agreement.  (See, e.g., Trebilcock and Howse [1999] for an extensive discussion of the Agreement.)  Indeed, around the world, nations are adopting a transactions cost, or “actual value”, customs valuation system and, more generally, are embracing ever-sleeker systems of customs clearance.  For example, in the port of Kaoshiang in Taiwan , after implementing a new customs system, it now takes 3.87 hours for shipments to clear customs.  In the Mediterranean area, Morocco, Tunisia, and Israel have all recently streamlined their customs clearance and adopted the GATT mandated Customs Valuation Agreement.  

As a contracting member of the WTO, the GOE is also obligated to abandon its current Brussels Definition of Value based reference price system of valuation and to adopt the GATT Agreement.  However, as a way of implementing such compliance, the GOE has an opportunity to overhaul the entire customs system in a way that will modernize Customs and create a state-of-the-art customs clearance operation.  The nature and implementation of this new system is described at length in the other chapters of this report.  

The purpose of this chapter is to recount how, well beyond simply meeting a GATT obligation; the proposed customs reform is likely to bring substantial gains in economic welfare for Egypt .  Furthermore, when implemented, the reform will probably lead to increased levels of exports and foreign investment, possibly quite large.  Thus, the proposed reforms will keep Egypt squarely in the camp of the global economic community and serve a purpose consistent with the GOE policy of enhancing international trade and investment.  

In what follows, we address the sources of potential benefits of the reform proposed and offer some empirical measures of the magnitudes of those benefits.  Section 2 addresses the so-called “static benefits” owing to adopting a transaction valuation system and to streamlining clearance.  Section 3 explains how exports will be enhanced and provides some estimates of the potential size of export enhancement.  Section 4 explores some “dynamic benefits” and addresses the impact on direct foreign investment.  Finally, the last section considers Customs’ overall role after reform and offers some conclusions.
   

Static Benefits of Customs Reform  

Any customs clearance mechanism consists fundamentally of two components: the “system”, or the laws and best practices, and the “system implementation”, which is how the system is run de facto.  The current proposal would change both.  Not only would the system begin using the actual valuation method for valuing shipments, but also a fairly complex mechanism for coordinating information and reducing inspections (so-called “risk management”, a “post-audit” structure, and so on) would be put into place.  The whole operation of Customs would become highly automated and interfaced with other agencies with the aim of greatly facilitating customs clearance and thus reducing the time and other costs currently imposed on importers.  

These changes will, in turn, lead to increases in economic efficiency, or “static benefits”.  Here we will consider the potential benefits of adopting the Valuation Agreement and of implementing the new system separately.
 

The Valuation Agreement  

While much of the economic benefit will be generated by changes in predictability, transparency, uniformity, and accountability – discussed below – a potentially large, but subtle benefit arises simply from moving away from the current reference price system.  The issue involves “similarity of product”.  A problem associated with the Brussels Definition of Value is that it frequently leads to the assignment of value based on a reference price for products that are really very different in value due to quality differences or differences in the costs of production abroad.  Thus, if a lower priced import is assigned a higher reference price value, the “effective tariff rate” is in fact higher for this product than for higher priced imports assigned the same reference price.  (In fact, the process of assigning a value to imports is not this straightforward in Egypt .  Often the final assigned customs valuation of a shipment is somewhere between the declared value and the reference price, depending on some discussions during clearance.)  

Specifically, suppose that there are two products on the same tariff line, but that one is produced at a low cost abroad and priced well below the reference price, while the other is actually produced and priced at the reference price.  Now the tariff rate relevant to the importer is the “effective tariff rate”, or the tax amount paid per unit relative to the actual price.  If the reference price is applied to both goods, then the per unit tariff paid will be the tariff rate, t, times the reference price, Pr, or tPr.  And the “effective tariff rate” will be the tariff amount paid divided by the actual price of the good, or tPr/Pi, where Pi is the actual price of good i.  But note; if there is a low priced good, Pl, and a high priced good, Ph, then the “effective tariff rate” will be higher on the low priced good.  That is,  

                                    tPr/Ph < tPr/Pl

Furthermore, the effective tariff rate applied to any good whose actual price, or more specifically the true transaction value, is below the reference price will confront a tariff rate higher than was intended.  That is,  

                                    t < tPr/Pi , where Pi < Pr  

For example, suppose that the high priced good is actually comparable to the reference price, Ph = Pr, and that the high priced good is twice the price of the low priced good, Ph = 2Pl.  Then, from the formula for the effective tariff rate, the high priced good is taxed at the rate t, but the low priced good is taxed at a rate twice as high, 2t.  Thus, two goods on the same tariff line of 20% could see one taxed at 20% and the other effectively taxed at 40%.
   

Economic Efficiency  

Aside from giving the appearance of unfairness, more seriously the reference price system creates increased dispersion in the effective tariff structure and this reduces economic efficiency.  Although a technical term, economic efficiency can be thought of as the Egyptian pound amount of money that Egyptian consumers and producers would net be willing to pay to alter various policy constraints.  While no payments would actually be made, the measure is useful as a guide to the costs or benefits from policy changes.  The net gains or losses for consumers are measured in “consumer surplus” and for producers in “producer surplus”.  Using the standard welfare measure of consumer and producer surplus, this is illustrated in Figure 1 on the following page.  Shown are the import demand schedules for a low and a high price good in the same tariff category with the same reference price applied.  We assume that Ph = Pr and, of course, Pl < Ph. If goods were taxed at actual value, then the tariff inclusive price of the goods would be (1+t)Ph and (1+t)Pl.  The efficiency loss owing to the tariff – or, “deadweight loss” – is given by the triangles labeled “a” and “b”.  (As is well known, of course, while raising revenue, most taxes including tariffs impose some economic efficiency losses.)  

Now if the reference price is used to value the low price good, then the importer confronts the effective rate of tPr/Pl > t.  In this case the effective tariff inclusive price now rises to Pe > (1+t)Pl.  Thus, the efficiency loss rises by the additional area labeled c and d in Figure 1.  

Mathematically, after some rearrangement of terms, this increased efficiency or “welfare” loss is given by,

                        D W = (t + 0.5e)Pl DQ

where D denotes “a change in”, e = tPr/Pl is the effective tariff rate, and Q denotes the level of imports for the good.

For example, if t = 0.2, or 20%, and Ph = 2Pl  (The high price good is twice the price of the low price good.), then the effective tariff rate for the low price good is 40%, that is, e = 0.4.  Thus, the reference price system has doubled the tariff on the low price good.  Now, if we assume a unitary price elasticity of import demand, this will lead to about a 17% decline in imports of the lower price good.  Using the welfare expression above, this means that welfare will decrease by about 7% of the value of those imports in the absence of the reference price system.  Thus, in this example, if the value of shipments were LE 10 million, then moving to the Valuation Agreement would lead to a LE 700,000 increase in economic efficiency.  

More generally, for all goods i subjected to some reference price and for all commodities j in the same tariff line, the gains from adopting the Valuation Agreement relative to the current system are given by,  

DW =  SjSi (tj + 0.5ei)(Dvalue of shipments of good i)  

where ei denotes the effective tariff rate, tj is the actual tariff for products on tariff line j, and S represents the summation operator.

 

Continue to Next Page