New DIBP notice 2016/33 addresses the declaration of overseas freight and insurance for the purposes of calculating Customs Value. While the calculation of Customs Value requires the use of the actual amounts paid, this Notice recognises that in some instances the actual amount paid or payable will be unknown.
Overseas freight and insurance are not elements from which Customs Value is calculated. While it’s important to have the correct amounts if the contract price includes provision for them such as in CFR, CIF or DDP, in contracts using FOB or similar incoterms their only impact is on the GST payable. As we know, a company that is registered for GST claims back any GST payable on business related transactions on the Business Activity Statement. Effectively, it’s just a debit and credit on a bit of paper with no impact on the national accounts. Nevertheless, DIBP focuses on the importance of the correct calculation of GST, whether or not it is also claimable as an input tax credit, and record it is an error if incorrectly calculated.
This Notice attempts to address how overseas freight and insurance should be calculated if the actual amounts paid or payable are unknown. In circumstances in which the sale is at FOB or similar we are given two options:
An estimate may be provided on the proviso that it is “soundly based “and closely approximates the actual amounts paid or payable.
Query: if you do not know the actual amount how can you know the estimate closely approximates the actual amount? Particularly if you are preparing the import declaration early. How do you know what a close approximation is?
Brokers must be able to demonstrate reasonable efforts were made to obtain the actual amounts if required by the Department. If the actual amounts are received and they are incorrect to a ‘material extent‘, then a PWA must be lodged.
Query: what is a material extent? A percentage? What will be accepted as reasonable efforts? Industry knowledge? Your own companies freight rates? Third-party advice?
Industry practice where the broker is not also the forwarder has been to ring the forwarder or shipping company and request the amounts payable for ocean freight or, when advised this is not available, to then request an indicative amount. Will this be a reasonable effort? Can I suggest the broker needs to be very sure they maintain file notes to support the amounts input given that such estimates provided by other parties are not always either reliable or accurate.
What about the insurance? Long-standing industry practice has been to use 0.0025% of the FOB amount as the insurance payable. That practice has been stopped by this Notice, but no realistic alternative appears to have been put in its place. Is this another example of a lack of consultation prior to the issue of ACN’s? The only alternative appears to be option 2.
Following years of negotiation by industry the Australian Tax Office (ATO) has approved a safe harbour that provides that when calculating the VoTI and the actual freight and insurance amounts paid or payable under an FOB contract (or any other contract which does not include the overseas freight and insurance) are unknown, an amount of 10% of the Customs Value may be declared as the freight and insurance amount on an import declaration. This 10% must be apportioned between the overseas freight and insurance. If the actual amount payable become known after the import declaration has been prepared, the FID will not require adjustment.
It should be noted that the 10% safe harbour is not available in contracts in which the goods are imported under CIF, CFR or any other incoterm in which overseas freight and insurance are included in the price.
There are valid reasons that industry associations fought for a long time to have this safe harbour put in place. To suddenly be forced to use it, however, because we do not know the actual amount of insurance payable (if any) and can no longer calculate insurance as 0.0025% of the FOB amount, doesn’t appear to have had a lot of consultation. It will be particularly painful for individuals or companies not registered for GST which will suddenly have a far larger GST bill that would otherwise have been the case. Further, the percentage method was based on a reasonable approximation of how insurance is calculated. This 10% safe harbour has a place, but so does the existing methodology to calculate overseas insurance. It could exist in harmony with the new safe harbour option provided by the AT0 decision. I would urge the regulator to rethink the rationale behind stopping its use.