(This is the second of two articles examining the challenges companies face regarding international trade and the results of the KPMG Thomson Reuters 2016 Global Trade Management Survey.)
Even before the 2016 U.S. presidential election, trade was a hot button issue. A prolonged period of weak economic growth in Europe and China’s economic transformation have received much of the attention, as have free trade agreements. In the midst of economic uncertainty, experts say, companies can look inward to improve their business operations, including trade management.
Two of the stickiest issues in global trade – product classification and transfer pricing and customs valuation – are also the most pertinent to electronics. Electronics companies must contend with product classification regulations related to sensitive technology. Transfer pricing policies and customs valuation misalignment can lead to scrutiny by customs and even tax agencies. Several high-tech companies, including Apple Inc., are under fire for their international tax practices. These two issues have created the most complexity for multinational corporations, according to the 2016 Global Trade Management (GTM) Survey conducted by KPMG and Thomson Reuters. Centralizing trade management practices, according Taneli Ruda, SVP and managing director of Thomson Reuters ONESOURCE Global Trade, is one of several actions companies can take to better manage complexity.
Accurate product classification is a necessity for moving products across borders. The survey found that 91 percent of respondents have had a challenge with product classification including ambiguity in product description, differing classifications among importing countries, and frequent changes in guidance. Electronics companies also must contend with classification regulations related to sensitive technology.
The majority of electronics products fall under the auspices of Export Administration Regulations (EAR) which cover commercial, dual-use, and minor military commodities. “Dual-use” refers to items which have both commercial and military applications. International Traffic in Arms Regulations (ITAR) controls the export of specific military and space-related commodities through direct commercial sales and through the U.S. Government’s Foreign Military Sales (FMS) Program. The U.S. government identifies and flags nations, businesses and individuals who are prohibited from receiving certain goods and makes that information available to businesses. It is a data-intensive process that some companies automate in-house; others use software or third parties to vet their shipments.
Most companies rely on information provided by governments for customer screening. That process may not offer full protection, according to Ruda. For example, some countries have prohibitions against dealing with materials on behalf of certain parties. The Thomson Reuters ONESOURCE Global Trade product supplements government data with online research, monitoring news stories and investigating shadow entities. When done properly, automating classification workflow can reduce time and resources spent on classification, increase accuracy, and improve collaboration across the organization with the trade department, Ruda said.
Transfer pricing and customs valuation
Transfer pricing policies and customs valuation has become a minefield for international companies, Ruda said. Transfer pricing policy drives prices for related-party transactions that are included in invoices, which are then used for customs import declarations. Transfer prices and any subsequent changes to them therefore have a direct impact on customs valuation and compliance. Adding complexity is the fact that customs agencies typically scrutinize import value of related-party transactions more than import value of unrelated transactions, and the administrative burden of correcting inaccurate customs and VAT declarations is significant.
Only 7 percent of respondents to the trade survey have had no challenges managing transfer pricing.
A majority (59 percent) of companies surveyed are not using formal processes to align internal transfer pricing and customs valuation policies. This poses significant problems, such as potential customs duty overpayments, risk of penalties in the case of underpayments, and manual customs valuation reconciliation after yearend transfer pricing adjustments.
As countries are faced with doing more for less, they have increased scrutiny of how global companies are reporting their profits and comply with tax regulations. The main challenge that organizations face when managing transfer pricing continues to be monitoring transfer pricing throughout the year and achieving compliance with transfer pricing and custom policies, according to the survey respondents. Three other challenges — communicating with other departments, managing current transfer pricing for customs declarations, and declaration of retroactive adjustments to customs authorities — each have a relatively even share of respondents’ attention.
Companies are increasingly considering operational transfer pricing technology solutions as well as innovative practices such as predictive pricing. These systems gather required data into a centralized engine able to determine the most appropriate price on each transaction given the multiple variables mentioned above. This enables multi-nationals to manage tax and customs transfer prices from both a tax and customs compliance perspective in an automated environment on a proactive basis.
As technology can drive the process of monitoring transfer pricing requirements, centralization can streamline how it is carried out.
Trade compliance processes tend to reflect the way multinational corporations manage their businesses: they are often siloed by geography (Americas, EMEA and Asia-Pacific) or by reporting lines (finance, tax, legal, logistics, or other departments). This structure makes setting and following consistent policies difficult, which in turn causes inefficiencies.
Centralization of trade management efforts – like purchasing or global account management – is still not standard operating procedure (SOP). More than half of the respondents to the GTM survey are trying to remedy this by centralizing at least some of the trade compliance activities. Centralization standardizes workflow and processes between divisions and geographic locations; aligns classification decisions and valuations; harmonizes transfer pricing with customs valuation; drives automation of workflows through centralized technology; and provides a focused budget.
“We are beginning to see benefits from centralization,” said Ruda. “For example, if you have 1,000 SKUs and you buy and sell in 100 countries, centralization enables the consistent handling of all these various trade practices.” According to the study, centralization has a slight edge on non-centralization: 53 percent to 47 percent. However, companies need to look at each element of the trade process independently to determine which processes are better handled in a local or centralized manner, according to Ruda.
The near-term outlook for trade may be more uncertain than ever for U.S. companies following the presidential election. Free trade agreements, for example, are under attack. Companies cannot control the macroeconomic fundamentals that shape the industry, experts say, but they can control their approach to doing business and make their trade processes more efficient. Investments in centralization and automation, according to the Thomson Reuters study, is one path toward those efficiencies.