By Mark Caplan
A company doesn't have to be in the Fortune 500 these days to have global expansion plans. Indeed, many small and mid-sized companies are taking advantage of a global marketplace to produce or sell products abroad. In doing so, though, it's important for companies to keep in mind the significant international trade risks they may be exposed to, which - if not managed properly - can lead to significant ramifications.
Increased government scrutiny of exports due to heightened security concerns, a surge in special trade programs and increasing trade activity has made managing international trade risks more difficult than ever before. Every transaction may be subject to numerous regulations, with many government agencies involved. Companies who don't comply with relevant import/export rules face significant penalties, ranging from monetary fines to suspension or debarment from any further export activity to imprisonment in severe cases.
While managing trade risks may seem a daunting task for a small business, a first is to be aware of some of the most common import/export errors. These include:
Undeclared import values - Determining a product's import value is critical because, in most cases, it directly affects the duty owed¡ªgenerally a percentage of the value assigned. This value should include the price of the imported merchandise, plus any additional costs of (re)manufacturing or other payments related to the product borne by the importer.
IRC section 1059(A) - Section 1059(A) prevents an importer from simultaneously declaring a lower value to customs in order to pay less duty and a higher value to the IRS in order to pay less income tax.
Exporting without a license - Many exports, including software and technology, require a license from the BIS or some other government agency. License requirements are based on a number of factors, including technical characteristics of the exported item, its destination, the end user and the end use.
Re-exports - Companies cannot bypass the export regulations by shipping items through a third country. For example, an exporter cannot bypass the U.S. embargo against Country A by shipping an item to a distributor in Country B and asking the distributor to transship the item to a customer in Country A. This would be considered an export to Country A, even though it does not go directly to that country, and both the U.S. exporter and Country B could face liability.
Tariff classification - Improper classification of tariffs could result in a company's paying duty at the wrong rate. Since duty typically is included in the cost of goods sold, an incorrect tariff could have a direct impact on the accuracy of a company's cost of goods sold account.
While there are common areas for errors, how a company approaches these risks will vary based on the countries and products involved, the size of the company, the potential penalties and the company's overall import/export structure.
Regardless of the specifics, however, all companies can benefit from having an internal control framework in place around trade compliance. Key ingredients in a risk management plan may include:
Identifying risk. Develop a systematic approach to identifying risks, and evaluate each risk area separately, as the types of trade risk are specific to each company. One way of identifying risk is to analyze the company's import and export trade data, to give management a better understanding of their company's import/export trade patterns and help determine the highest risk areas.
Testing the adequacy of internal controls. Reasonable-care standards require companies to incorporate a risk-monitoring program into their internal control framework. Such a program would include not only frequent post-entry reviews of trade documentation, but also a test for high-risk transactions.
Due diligence reviews. Many import and export risks are inherited through acquisitions and only arise years later. Including trade risks as part of the due diligence process during a merger or acquisition can be a worthwhile step in risk management.
Voluntary self-disclosures. Both Customs and the Bureau of Industry and Security accept voluntary prior disclosures of past problems, which could reduce or eliminate penalty exposure or be a mitigating factor when negotiating settlements.
Importer self-assessment program. Importer self-assessment is a partnership between Customs and the trade community that gives importers maximum control of their own import compliance. Customs expects companies that participate in the program to adopt internal control standards in line with the Committee of Sponsoring Organizations' (COSO) internal control components. There is no question that many small and mid-sized companies have benefited from the relative ease of being able to trade internationally. However, before sailing into new territories, management should be aware that a myriad of risks might swamp or sink their ambitions. Without proper risk management, the result can be costly in terms of both penalties and damaged reputation.