The Impact of TCO revocation & Reissue

Following is an article I had published in Lloyds List in May 2016.

The objective of the Tariff Concession System was most recently stated in Vestas - Australian Wind Technology Pty Limited and Chief Executive Officer of Customs[2015] AATA 348 (21 May 2015) as “.. the object of the systems is to ensure that industry is not taxed by a tariff where it is serving no protective function. …. a tariff serves no protective function where there are no goods serving similar functions, and so no substitutable goods, made by Australian industry in the normal course of business.”

If a TCO exists then substitutable goods are not manufactured in Australia and there is then no industry to protect. Why then has the revoking and reissuing of TCOs under s.269SD changed over recent years to deny refunds and/or ongoing duty savings to legitimate importers of goods in conflict with the stated intent of the TCO scheme?  This result is occurring because the TCO is either not reissued when revoked with a narrower wording or is not revoked on and from the original operative date, with a new TCO made from that date. This has not always been DIBP practice. In the past the TCO in the second case was revoked on and from the original operative date, with the replacement TCO then operative from that date.

DIBP current view is that if a TCO is revoked under s.269SD (1AA), no replacement narrower TCO need be made. Given that applicants have been required under past guidelines and policy to write TCOs with a broad coverage this penalises applicants whose applications were accepted by DIBP as valid when lodged.

The impact for revocations under s.269SD (2) is as severe. Customs Act s.269SD (2) requires that

“(2) If the CEO is satisfied that:

(c) having regard to written advice on the matter given by an officer of Customs;

the tariff classification that is stated in a TCO to apply to the goods the subject of the TCO has not, with effect from a particular day, applied to those goods, the CEO must:

(d) make an order revoking the TCO with effect from that day; and

(e) make a new TCO in respect of the goods with effect from the revocation.”

If a TCO when made was keyed when made to an incorrect tariff classification, then the legislation seems clear that the revocation should apply back to the operative date given that the tariff classification will always have been wrong, which under s.269SD(2) means that the new TCO should then be made with effect from that original operative date.

The rationale advised to me by DIBP has been that importers will then claim refunds – as they are legally entitled to do had the TCO been keyed correctly – but companies that have used the TCO incorrectly in the past will not then be covered. I query how it is acceptable to support incorrect classification and TCO usage in any circumstance.

I give you the following example, which is for sucker rods for pumps from the Gazette:

“PARTS, OIL AND GAS WELL PUMP, being sucker rods”

The application for this TCO classified the subject goods to 8413.91.10, being parts for pumps for mining equipment.  Application was lodged 9 Jan 2009.

By the time the TCO application was gazetted the tariff classification had been changed by Customs and regazetted on 25 Feb 2009 to 8413.91.90, being parts for pumps, other, i.e. not specially designed for mining equipment. This is not incorrect in a generic sense as this type of horsehead pump, while generally seen in the oil and gas industries, is also used in agriculture for dewatering, but in different configurations. Remember that “as imported” is the key consideration for eligibility.

When made on 17 April 2009 the TCO was keyed to 8413.91.90.  As such, various O&G companies did not claim it for the sucker rods they imported for their mining operations.

After correspondence with Customs the TCO was revoked on 15 April 2014 and reissued the same day back to 8413.91.10. This then denied refunds to those companies correctly classifying the goods as imported and ignored the original classification error was made by the regulator when the TCO was gazetted.

The Act at s.269SD (4) does provide: “(4) The particular day referred to in subsection (2) may be the day on which the TCO that is revoked came into force or a later day.”, but as a matter of equity how is this fair? Acknowledging of course that the law has little to do with fairness or justice.

This practice effectively supports classification and TCO use by word search. It penalises companies whose brokers have correctly classified the goods to support companies that haven’t. It doesn’t mean that the TCO will not apply to the goods already claiming it as it’s possible that the tariff classification is incorrect. Companies claiming the TCO would appear to have often found it through word search rather than correct classification techniques, but should this be supported at the expense of companies that have undertaken proper diligence in the preparation of their FIDs?

The Interpretation of TCOs

Following is an article I had published in Lloyds List in May 2016.

Interpretation of Tariff Concession Orders

1.  Changing goalposts and the decision in Toro

The Customs Act s.269 (3) (a) requires that a TCO application must contain “a full description of the goods to which the application relates”.

In Toro Australia Group Sales Pty Ltd v Chief Executive Officer of Customs [2014] AATA 187, the Tribunal reasoned (at [31]) that “a full description” in this context necessarily means a precise description, the goods in question satisfying every element of the description without any additional features.

TCOs must strictly describe the goods as imported but what is a “full” description has become fogged since the decision in Toro. 

2.  The decisions in Brand Developers and Becker Vale

The AAT decision in Brand Developers Aust Pty Ltd and Chief Executive Officer of Customs (2015) AATA 215 conceded that while strict compliance is required as to components, some additional items such as packaging or instruction manuals, could be included and the TCO would apply, but inclusions such as recipe books would make the good ineligible as they are “more than” the TCO wording.

Many instruction books for kitchen appliances are principally recipes. Strictly following the AAT decision it would then appear that kitchen appliances such as microwaves, mixers, toasters etc to which a TCO may apply would not fall under that TCO because the accompanying literature includes recipes?

In Becker Vale Pty Ltd v Chief Executive Officer of Customs [2015] FCA 525, Yates J cited Toro and proposed that this reasoning supported a construction of “comprising” that exhaustively states the “essential components”.  What then are the “essential components”?

Although a full description of the goods is a requirement of the TCO application, the interpretation of what is a “full description” has changed. Until this time TCOs that properly described goods that were “more than” the TCO wording were accepted as being covered provided that the essential nature of the subject goods was as described.  This is no longer the case and it exposes many companies, including the original applicants for concessions, to penalty and post action.

DIBP’s website now contains guidelines in relation to TCO eligibility and the no more and no less criteria, but they do not address examples such as whether an electric motor, complete with a gearbox mounted on the motor, would be eligible for a particular TCO based on the specifications. The legal notes prescribe that the motor and gearbox are to be classified as a motor. DIBP advice is that as the electric motor has a gearbox attached it is more than the full description of the goods in the TCO and the TCO would not apply.

A further example is brake motors. These are motors with brakes. They are still a motor, but current TCOs do not in general also specify the “brake”.

It is our understanding too that significant posts have been issued for “TORCHES, hand held, battery operated, but NOT including underwater OR scuba divers torches”, which include their power supply, the batteries, without which the torch will not work.

DIBP advises that remote controls for goods such as televisions would not impact TCO eligibility. What then if those remote controls contained batteries? How is that distinguishable from the above torches?

Would brackets for wall mounting imported and packed with a clothes dryer make that clothes dryer ineligible for a TCO, which reads “”CLOTHES DRYERS, domestic” ?

Would a hand held cordless electric drill that has a separate power supply be deemed ineligible for a TCO, which reads “DRILLS”?

DIBP interpretation of TCOs and the wording or expressions used changes and changes too frequently for industry to be certain of coverage or clarity. DIBP staff changes and rotation mean that the history of the matter is lost within the Department. An example is that for some time the words “machines” and “plant” were not accepted as suitable descriptors. They are now accepted again. For a long time the words “capable of” were accepted as describing a good but are now regarded as end use.

4.  Change of Practice (COP)

The changed definition of “comprising” is also of concern to industry, given the many TCOs written that include this term together with a non-exhaustive list of components. When made these TCOs were phrased this way at the direction of an officer of Customs and/or the then TCO guidelines.

The decision in Becker Vale reversed long held practice and policy and held that “comprising” means “comprising ONLY”. (DIBP apparently chose to not provide guidance to the Court on past use of this term.) In light of the decision in Toro this further decision has had significant impact.

Clarification from DIBP is urgently required as to whether using such TCOs will be subject to post or penalty action, particularly when this Change of Practice appears to have been ignored and the change is claimed by the regulator not to be a change but a continuation of policy – despite past Customs Manuals showing otherwise.

If guidelines on interpretation change, as they have many times in the past, industry will adapt to those changes, however, it should not be acceptable that:

  1. guidelines can be changed with no prior notification to industry; and

  2. as a consequence retrospective penalty and post action can be taken against importers and brokers

5.          The Role of the AAT

The AAT exists to provide a merits review of an administrative decision, however, only Federal Court decisions are precedent. One queries therefore why DIBP chooses to follow only select cases when the majority of decisions in these matters support the “more than” principle. Examples include:

Klockner Moeller Pty Ltd and Collector of Customs [1989] AATA 283 (18 January 1989)

25. … We would adopt the words of the Tribunal… in ReRobert Bosch AustraliaPty LtdandCollectorofCustoms(1986) 10 ALN N181 (unreported on this point). There the Tribunal, also concerned with the interpretation of a TCO, said "We can see nothing in the wording of the Order to indicate that it was intended that an article which does precisely what the Order says should be excluded because it does more".

Or In Chandler & Co v The Collector of Customs (1907) HCA 81:

"Tariff schedules are often very awkward in their phraseology, but we are none the less obliged to construe them by the rules which govern the legal interpretation of Statutes. Their clumsiness does not justify us in abandoning any of those rules, the wisdom of which has been tested under every kind of difficulty. The chief of them is that we are to treat Parliament in good faith, as saying what it means and as meaning what it says. If in so treating it I find that it has said something which does not commend itself to me as quite reasonable, I, as a judicial interpreter, am to remember that the legislature is the real judge of what is reasonable. My duty of interpretation does not extend to correction, and I am not to mould the words or to torture their meaning so that they may consort with my notions of right and reason. On the other hand, if the words are ambiguous there are at least two constructions to choose from, and I may accept that one which appears the most reasonable."

6.  “Interpretation of wording in TCOs” - the guidelines on the DIBP website

The above notice is now on DIBP website. I urge you to review the regulator’s suggested methodologies to provide “certainty” to importers:

  1. DIBP suggests lodging a Tariff Advice:

    COMMENT: Guidelines for TA decisions are 30 days, but in practice they average 50-70 days. How can this provide a solution given that by the time a decision is made the consignment has landed or is on the water? It should be noted that concurrent TA and TCO applications are note accepted by DIBP.

    Where doubt exists as to the application of a TCO, it is not always feasible to await the outcome of a TA and a new concession application may therefore be required. Most importers are not proactive and consider applying for TCO only in the time leading up to goods arrival. Given the speed of airfreight and the 10 days transit time from Asia by seafreight not much more time is available in many cases.

  2. DIBP suggests that goods could be “placed in bond” until such time as the TA decision is received.

    COMMENT: Unless you have a s.79 warehouse who will pay the storage costs? And what of the costs to the importer in delayed receipt of the goods?

  3. DIBP suggests using the amber line.

    COMMENT: DIBP have said amber line may not protect from penalty action (ACN 2003/40) and their response to an amber line lodgement is frequently to request a TA. See point (a) above.  

The Department may claim it is “committed to working with industry to increase industry understanding and awareness on the correct use of TCOs” but changing goalposts still make it difficult to identify what is required.

 

The "Trusted Trader" scheme for importers may not be all it claims

This is a brief word of caution to importers to carefully consider the current claims by various parties that Trusted Trader (TT) will provide the importer with substantial benefits. Consider for example the oft hyped "savings" that are being promoted in the context of these two scenarios:

  1. Duty deferral - your customs broker already gives you this. How many companies pay at 30 or even 60 days? Under TT the funds will be deducted by EFT direct from your bank account every month.
  2. Reduced costs for customs clearance - the ABS position has so far been that it still requires all the data currently included in the import declaration. This means that the data preparation, review and input for each consignment for Customs clearance will take the brokerage as long, and use as many resources as, currently. Further, as actual lodgement will be required only once a month it is probable that costs will actually increase as new software will have to be developed to sweep the system for data already lodged and awaiting transmission and then massage it into the required format to send one report to DIBP. These costs will be passed on.
  3. Establishing acceptable supply chain security will be an issue for many companies with numerous suppliers, especially those with suppliers in Asia, given the documentary problems that often arise with those consignments.

I'm sure that there will be many other matters that come to the fore as the programme is initiated. I see benefits for myself in compliance auditing, as do other Customs consultants with (and sometimes without) the requisite qualifications and experience, but that doesn't mean that TT is for everyone, whether or not they are a large company. Think therefore before you act and don't sign up to anything until you understand what you have committed to.

As always, happy to discuss and assist both industry and the importing community.

Productivity Commission argues that Anti-Dumping Measures may not be good for the economy

The Productivity Commission has released a report today arguing that anti-dumping measures consider only a narrow set of industries, remove the need for innovation, and don’t consider the overall cost to the economy.

"Once the emotive terminology is stripped away, any general distinction between anti-dumping protection and conventional tariff protection is a fine one," The Australian Financial Review quotes the report as saying.

Read the report at http://www.pc.gov.au/research/completed/antidumping-developments/anti-dumping-research-paper.pdf

 

Incoterms 2010 in commodity sales contracts

Incoterms® 2010 are a set of standardised rules recommended for use in international sales contracts to define the responsibilities of sellers (exporters) and buyers (importers) for the delivery of goods. They are published by the International Chamber of Commerce (ICC) and are widely used in international commercial transactions.

Incoterms® provide a common set of rules to clarify responsibilities of sellers and buyers for the delivery of goods and the transfer of risk under sales contracts. They apportion transportation costs and responsibilities such as insurance associated with the delivery of goods between buyers (importers) and sellers (exporters) and reflect modern-day transportation practice

This interesting article by Jay Leary and Louise Bell from Herbert Smith Freehills provides tips to avoid disputes involving incoterms in commodity transactions.

 

Changes to GST Treatment of Cross Border Transactions

PwC have written a good article on the changes proposed by the new provisions for the GST Things to note from this review:

  1. start date MAY be 1 July 2016;
  2. compulsory reverse charge provisions;
  3. Changes to the calculation of the value of a taxable importation by providing importers with an election to use a 10% uplift factor (unless an alternative amount is included in the regulations to the Act) to the customs value, in lieu of determining the actual value of transport and related coststreatment of cross border transactions.

 

Trans Pacific Partnership (TPP) signed by Minister Robb

The TPP, which will see the elimination of 98 per cent of tariffs among 12 countries, was formally signed by Trade and Investment Minister Robb on 4 February 2016 in Auckland, New Zealand.

The TPP is being widely promoted as the world’s most significant trade and investment agreement finalised in more than two decades, with member countries accounting for around 40 per cent of global GDP.

Australia’s exports of goods and services to these countries were worth $109 billion last year – a third of Australia’s total exports. Tariffs will be eliminated on US$9 billion of Australia’s dutiable exports to TPP countries, including $4.3 billion worth of agricultural goods with new levels of access for beef, dairy, sugar, rice, grains and wine. A further $2.1 billion of Australia’s dutiable exports will receive significant preferential access through new quotas and tariff reductions.

Lets not forget however that of the 11 other countries that signed the TPP (USA, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru), Australia has already has FTAs with all but Mexico, Peru and Canada, but has a trade agreement with Canada (CANATA) that provides duty free entry to goods in nominated classifications. When reviewed with that information the benefits slip somewhat.

Changes to Customs Import Processing Charges

As part of the 2015-16 Commonwealth Budget, the Government restructured the Import Processing Charges. There are two changes:

  1. Removal of the current price differential between airfreight / post and seafreight;
  2. Making FIDs lodged manually more expensive in terms of fees payable so as to encourage electronic lodgement.

The new charges are as follows:

  1. SACs & N10 with CVAL less than $1,000: NIL
  2. N10 & N20 CVAL $1,000-$10,000: $50 ($90 for manual FIDs);
  3. N10 & N20 CVAL more than $10,000: $152 ($92 for manual FIDs);
  4. N30: $23 ($63 for manual N30)

Fees may have dropped but no reference at all to the ongoing cross subsidisation of SACs by FIDS over $1,000.

Certificates of Origin for ChAFTA

The Chinese authorisation bodies are:

1             AQSIQ: General Administration of Quality Supervision, Inspection and Quarantine (国家质量监督检验检疫总局) where the actual certificates will be issued by provincial Entry-Exit Inspection and Quarantine Bureaus, which are administered by AQSIQ; and

2             the China Council for the Promotion of International Trade.

Details are now also in the FAQ section of DIBP ChAFTA information.