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PRESS COVERAGE Clearing the cobwebs at Customs Electronic filing is bringing customs documentation out of the dark ages CA MAGAZINE FOR CANADA'S CHARTERED ACCOUNTANTS
THERE ARE TWO PERVASIVE MYTHS ABOUT clearing customs: that completed customs documents must be presented with payment at the border by a customs broker, and that preparing customs documents is complicated. Today, with electronic filing of customs documents, a no-hassle policy of release of goods at the border, and rule-based customs compliance software, these myths have been exploded. Revenue Canada has done an impressive job of making our customs service one of the most efficient and technologically advanced in the world. By making the importing process easier, it has also enabled Canadian business to compete more effectively. Revenue Canada's electronic filing system, CADEX (Customs Automated Data Exchange), has been available since 1988. To encourage its use, Revenue Canada provides companies with a free modem and pays for all phone line charges, an unprecedented scenario in the business world. More than 70% of Canada's commercial import transactions are now submitted to Ottawa through CADEX. The importing process is very simple using CADEX. When your goods arrive at the border, a customs broker, acting on your behalf, puts a bar code label on the documents accompanying the goods, thus providing a service known as RMD (Release on Minimum Documentation). The bar code, made up of your account security number and a unique transaction number, is scanned at the border and the goods released immediately. Under certain circumstances, it is even possible to have your supplier put the bar code on the documents at the time of shipment, thereby eliminating the RMD fee and use of a broker. In addition, realizing that importers make occasional errors or omissions in their customs documentation, Revenue Canada has adopted a "no-hassle" release policy that allows companies to make minor corrections after their goods are released. Almost all customs ports are now connected to the main customs computer in Ottawa. When our bar code is scanned into the system, it is registered with the main computer and you then have five business days to submit your completed customs entry from your PC. Preparing the entry on your PC is routine and easy with rule-based customs clearance software. You can also select the right tariff classification and duty rate on your PC, thanks to database programs that contain the entire Customs Tariff Schedule. The average entry takes no longer than 10 minutes to prepare and send. It typically takes three days to train an employee in either the purchasing, accounting or traffic department of your firm to prepare the entries. In order to use CADEX, you must follow a four-step process requesting authorization to file your customs documents electronically. The first step, getting an account security number to use in your future dealings with customs, is easier than opening a bank account: You simply send or fax a brief letter to the customs department in Ottawa asking for a number. Within a day or two you will receive one. Next, you must post a security bond. Revenue Canada requires assurance that, in the event your company is unable to pay its duties and taxes, payment will be made by the bonding agency. You can use a bonding company to post the bond, or your own bank can extend or apply a portion of your line of credit. The amount of the bond is calculated as a percentage of your average monthly import duties and taxes. Depending on your financial arrangements, the cost of posting the bond can range from a nominal service fee to about 1% per year of the bond amount. A company with monthly imports valued at $1 million, for example, can expect to pay a bonding fee of less than $600 a year. Once you have arranged the bond, you must send a one-page form, supplied E by the bank or bonding agency, to Ottawa for registration. Within a week, customs will notify you that they have activated your account security number. The third step is to apply to pay your duties and taxes at the port closest to you (regardless of where the goods entered Canada). Known as central payment, this also allows you to pay your account at the end of the month, rather than making a payment every time a shipment arrives. The application is routine. You fill in the very basic "Request for central payment privileges" form, available from your local customs office, and send it to your regional customs office. It will notify you by return mail that your application has been received, and send an approval notice within two to three weeks. The last step, filling in the six-page CADEX application form, takes about an hour. The completed form is sent to the CADEX division in Ottawa. A CADEX representative will contact you within two to three weeks to confirm and approve your application, and then make arrangements for your modem and phone line to he installed. Revenue Canada pays for the modem and all your monthly line charges. It can, however, take anywhere from eight to 12 weeks for the phone company to install the line and modem once Revenue Canada has placed the order. (We have heard of a few instances where the line was put in within a week, hut generally count on at least eight.) Once you have the line and modem, you can start filing your customs documents electronically. OVERCOMING RESISTANCE Until now, the role of most corporate customs departments has been to provide information to the customs broker, and to check that the entries are correct and that the company has been billed appropriately. Sometimes their responsibilities also include arranging transportation for the goods, and preparing refund or drawback claims on the entries that the broker has submitted on the company's behalf. If this is the way your customs department has been operating, changing the status quo may trigger resistance from both employees and management. Employees sometimes believe their workload will increase as a result of adopting electronic filing. Actually, the reverse is nearly always the case: While their job descriptions may change, your employees' existing skills and knowledge will be put to much better use. Staff rarely give themselves enough credit for their work in keeping the broker's clerks up to (late, or account for the time it takes to correct mistakes using the old system. Another fear is that it won't he possible to get the documents in on time, but there are five business days in which to submit the entry. Employees may also think they don't know enough or that the won't have time to keep up with regulatory changes. With rule-based software, however, they don't need to be experts. Management, too, is sometimes uneasy. They may he concerned the goods will not arrive at the warehouse as efficiently a necessity for just in-time production. With RMD and no-hassle release, however, the goods cross the border as soon as the documents are presented, so there are no incremental delays. Management may also believe that, given the payment terms extended by the broker, the firm is currently making use of the broker's funds rather than its own. This overlooks any deposit your company may have with your broker. In any case, you can settle your account with Revenue Canada at the end of the month through central payment. To illustrate the process, let's examine how two companies made the transition from using a broker to in-house clearance using electronic filing. Our first example, a Mississauga based manufacturing company, sells its products in both Canada and the United States and buys the parts used in its manufacturing process from various domestic and US suppliers. It receives approximately 4,000 shipments a year from U.S. suppliers. The average monthly import duty and tax payments are $150,000 (15% of the $1 million value). Goods usually cross the border by truck at Windsor, although they are occasionally routed through other crossings. The customs department has two clerks and a manager. In addition to advising the customs broker and checking his entries and invoices, staff was responsible for typing up refund and drawback claims. Drawback claims in the amount of $156,000 were normally filed twice a year. Yearly audits of all customs entries were performed by a consulting firm on a 50% recovery fee basis. The total average yearly recovery was $54,000, 3% of the $1.8 million import duties and taxes paid. Having used the same customs broker for 20 years, the company had negotiated a flat fee of $25 per shipment. In addition to preparing and submitting customs documents, the broker paid the duties and taxes on the company's behalf, billing it weekly for service charges and disbursements. In response to pricing competition from a U.S.-based distributor, the company decided to evaluate how and where it could cut costs. Two areas targeted by its accounting consultant were brokerage fees and duty or tax overpayments. Since electronic filing would allow the company to submit its own documents, while capturing the information needed for drawback and refund claims, the decision was made to bring entry preparation in-house. The controller obtained an account security number applied a portion of the company's line of credit as a security bond, elected to settle its account with Revenue Canada once a month, and submitted the CADEX application. During the two-month wait for the phone line and modem, department staff had customs compliance software installed and took the training course. The company then started using the system to check its broker's entries, catching duty and tax overpayments not normally recovered until the yearly audit. It also built up its own product tariff database and, through automatic tracking of all eligible items, increased the value of it's drawback claims by 35%. Because claims take less time to prepare, they are filed more often, improving cash flow by $5,000 a month. Once the line and modem were installed, the company continued to use a third party, but only to present RMDs at the border for shipments from suppliers who were not bar coding documents (about 25% of all shipments). Department staff took over the tasks of preparing and electronically submitting entries for all shipments. At an average of 15 entries a day, these additional tasks took approximately two-and-a-half hours. (Since additional information was being entered to produce drawback claims automatically, the entries took longer than normal to prepare.) This resulted in tangible savings of $344,000 every year: $100,000 in brokerage fees; $22,500 in overpayment recovery fees; $168,000 in increased drawback claims; and $60,000 in improved cash flow from more frequent claim filing; less the new expenses of the RMD service ($5,000) and the cost of posting the security bond ($600). Intangible benefits included workload reduction and higher staff motivation, which is often a consequence of eliminating manual completion of routine, mind-numbing tasks. The company in our second example has a much smaller import volume of 800 shipments a year. One tariff clerk took care of both the traffic and the customs functions, which included advising the broker of arriving shipments and checking the broker's invoices. Because of its lower volumes, this company was paying brokerage fees of $45 per entry. An audit showed potential savings of at least $40,000 a year if free trade duty rates were applied consistently to qualifying goods. With a workload volume of three entries a day and a minor increase in responsibilities for obtaining certificates of origin, management determined that bringing entry preparation in-house with electronic filing would not require additional staff as long as FTA certificates could be tracked and applied automatically. The company applied for CADEX and negotiated an RMD rate of 56 per shipment with its broker. The results projected for year end show savings of $71,600 ($36,000 on brokerage fees and $40,000 due to lower duty rates, offset by new expenses of $400 for the cost of posting a security bond and $4,000 for the costs of RMD service). While the savings and benefits of electronic filing are already substantial, Revenue Canada has even more in store. National Revenue Minister Otto Jelinek has called electronic filing of customs documents "the most comprehensive and important change made by the customs] department in decades." But according to Mr. Jelinek, the current method of accounting for imports on a transaction-by-transaction basis was developed at a time when technology could not accommodate anything else. He compares transaction-by-transaction customs accounting to requiring retailers to remit GST separately for each sale they make, or requiring companies to submit a separate income tax return every time they receive any revenue. Referring to this as "the dark ages," he has committed to making it part of history by permitting companies that file their customs documents electronically to submit them on a periodic basis, just as they do with their GST and income tax returns. Once this summary reporting is in place, Revenue Canada plans to expand the current GST offset system to include customs offsets. Importers will be able to combine their import duties and taxes (GST) with their regular GST account to arrive at a single payment or refund. In a final dovetailing, Revenue Canada then plans to combine its taxation and customs audits. By providing electronic filing for turns documents as well as tax returns, Revenue Canada is well on its way to fulfilling its commitment to cut the costs of revenue reporting and collecting. |
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