Tariff Classification – Draft Procedure Tips

One of the questions we get asked often by UK companies is:  “how do I put together a written procedure for tariff classification”?  So we drafted out a skeleton around which companies may add their actual procedures.  We thought we’d share it with you, hope the following helps: Introduction: All UK businesses must declare any imports or exports to HM Revenue and Customs (HMRC). This is to ensure that any import VAT, duty, excise or levies due on them under UK and European law are collected. How different goods are classified largely determines what duties and controls apply to them. HMRC uses commodity codes found in the Integrated Tariff of the United Kingdom (the Tariff) to classify individual products. Classification of commodities is necessary for import and export declarations as well as Intrastat returns. Other government departments also rely on Tariff classification for licences and other documents. The Tariff is based on the EU TARIC (Tariff Intégré Communautaire). Member states of the EU hold commodity codes in the TARIC. Commodity codes and other regulations are updated daily, which ensures that importers and exporters can rely on the same standards and treatment throughout the EU. The UK Trade Tariff uses the daily updates of the TARIC directly, so that Tariff users have access to consistent accurate information. The person responsible for tariff classification matters is ******* (include name/position of persons involved) reliant on information provided by purchasing and sales teams as required.  The instructions are issued to all import agents with regard to tariff classification and import entries are received and checked to ensure compliance.  Data is also managed via the HMRC MSS information received. Records of product data and commodity codes are maintained by ******** as well as being listed on the import spreadsheet The tools used when classifying a new product include the HMRC Tariff Book and the www.gov.uk website link.  Full data is obtained from the relevant internal department.  If no obvious commodity code applies then in the first instance the HMRC Tariff Classification helpline is contacted (Tel 01702 366 077).  Depending on this discussion a Binding Tariff Information Ruling (BTI) may be requested.

A BTI is legally binding throughout the European Union (EU) for up to six years after the date of issue and provides the correct commodity code for your goods with a unique reference number.  Once obtained we must enter the BTI reference number in Box 44 of the Single Administration Document (SAD), which must accompany your goods throughout the EU.  BTI’s currently

TALES FROM THE ROAD 18 – GOING THE EXTRA MILE

It is commonly said that you only get a few opportunities to sell, but actually as business people we are constantly selling: selling our products, selling our services, selling the reputations of our companies, and our individual strengths as human beings. On a one to one basis, your customers will either like you or not, you will make a connection or you won’t. But isn’t that life?

There are times when the time you have in which to impress is limited. Well planned exhibitions and trade fairs can, and should be, intense places for your sales staff. So whatever you can do to alleviate the pressure on them by turning the focus on to the product or service you are selling, or by operating good customer receiving services on your stand, will help to maximise sales performance.  Yes, you’ve got it. I am going to give you a few examples!

The first exhibition I did in the carpet industry was at Batimat in Paris in 1997. Six gruelling days of meeting and greeting and selling from 8am till 6pm, preceded by coffee and croissants, and followed by wine and fabulous French food. The company had agreed to exhibit at short notice after gentlemanly pressure from our French distributor, and it was my decision to go or be damned. So I thought going was the better option, and we arrived at the booth to find that the 6m x 3m raised floor surface for our 500mm square carpet tiles was made up entirely of wooden pallets! So I left it to the gentlemanly distributor to sort it out because his business was flooring contracting and installation. Mine was just selling the stuff, and I had only been with the company for two months.

As a result, it won’t surprise you to know that day one of the exhibition was an unmitigated disaster, with tiles coming loose and causing trip hazards, and the whole stand looking generally amateurish. So by lunchtime I decided to phone the boss who was due to arrive a couple of days later. We took the only decision that we could, and insisted that the floor be re-installed. And rather than wait, we had the distributor bring in a fitter to do the work as we continued to exhibit. An accidental stroke of genius. The refit drew a crowd, and we were inundated for the rest of the day. We repeated the refit at points during the exhibition and it helped customers to understand why the way we cut our carpet tiles was so innovative.

That lesson was carried through to subsequent exhibitions, but probably had its most important effect at the Yapi Exhibition in Istanbul in 2000. We had recognised some months previously that the installers used by our excellent Turkish distributors were competent fitters of roll carpets but had limited skills when fitting carpet tiles. I had once been called to a complaint at a new Turkcell building on the outskirts of Istanbul where a 2,000m2 floor area had been fitted with beige carpet tiles. On the back of every single tile is a direction arrow to show which way the tile should be fitted. There was also a full set of instructions on how to fit the tiles, translated into Turkish, in every single box of 20 tiles. So when I walked into the area the problem stuck out like a sore thumb: a single tile had been fitted in the wrong direction. Not my problem!

A few months later we had the chance to train the Turkish fitters by getting them to install a complex floor pattern on our distributor’s stand at the Yapi exhibition. We flew over the best UK carpet tile fitter to train them on how to create complex shapes with carpet tiles, and actually cut the distributor’s logo into the floor. So not only did we have the best looking floor in the exhibition, we had also trained installers to fit to the highest standard. Sadly, I had to have my evening meal each night with said carpet fitter, who lived, breathed, and yes probably ate carpets! For each of those four long evenings, I longed for a conversation about football.

In both of these cases, I was there to sell the product. In both cases the product ended up selling itself. It taught me that at exhibitions, sales people are order closers, and that the whole of your exhibition stand, how it is operated throughout the period of the exhibition, and all of your preparation in attracting customers to visit, act as lead generators. And finally the power of demonstrating a skill, at exhibitions where your customers may largely not speak your language, is simply the best sales aid of all.

Researching Latin American markets: six smart tips to get you started

Based in Uruguay but with over 10 years experience in the UK, Gabriela Castro-Fontoura specialises in making it easier for British businesses to do business with Latin America. Since she founded Sunny Sky Solutions (www.sunnyskysolutions.co.uk) two years ago, Gabriela has helped many UK companies from a range of sectors (from prams to cable cleats, from beer to confectionery) understand and make the most of opportunities in her native Latin America. Here, she gives us six smart tips to get you started in researching markets across Latin America... Accidental exporting happens, and isn’t it great when it does? Luck plays a part in business but would you leave it all to luck?... If you are already an experienced exporter you will know that an export strategy will no doubt have a strong tool in it: market research. If you haven’t exported before, that is the place to start. Without going into much detail, since what I want here is to give you some tips to get you started, it is important to understand why we bother with market research at all. I think it all comes down to risk. Exporting is risky because it involves resources. And I don’t just mean cash (or credit), I mean plenty of time. Now, as a business owner, if I am going to invest my money, my time, my people in something that is inherently risky, I will want to do whatever I can to minimise those risks. And that is where market research comes in. It won’t insure you against the risk, but it will certainly do lots to minimise it. There are other arguments in favour of researching your market. For example, it gives you an incredibly strong starting point for negotiating with potential partners and with potential clients. It shows you know and you care, and you will be taken more seriously. Apart from that, it can be advantageous when applying for finance or when applying for registrations abroad. There are common denominators for researching whatever market you are researching anywhere in the world, so let me make these tips relevant to Latin America, although they can also be adapted and applied elsewhere. 1. Take a step back Before taking the time (or paying someone like me!) to research these markets, take a step back and think... why do you want to export to Latin America? Is it because it is the only region in the world that is missing from your corporate map? Is it because you have a feeling there is potential here? More importantly, what do you want to achieve from exporting to Latin America? The process will be complex, so focus is key. Similarly, what resources  can you commit to this process? What timescales are you working with? Business in Latin America takes time, so even if the market research shows there is potential, things are unlikely to happen overnight... 2.     Are you ready for Latin America? If the research points out that there is a market for what you offer, are you ready for it? Or are you willing to get ready? I recently was contacted by a brand that was keen to expand into South America. They found there was a market and, surprisingly enough (this doesn’t always happen so quickly) we found a partner eager to buy the products almost straightaway. The company pulled out. It just wasn’t ready to cope with what exporting to a continent of 600 million people involves... Now that they are ready for it, the potential partner has very little interest. Timing is key. It is, of course, absolutely fine to “scope” a market and then decide you are not ready for it. But if you are going to invest in researching a market thoroughly and seriously, you should know what you want the research for and how you want to take it forward. In my opinion, the success rate of a British business in Latin America is much higher if this business has already exported not only to the rest of the EU but also overseas to more familiar countries like Australia or the US (or at least attempted to). This is because the company will be used to exporting as a process, will have the knowledge and the skills, and will have got it wrong enough times before to learn from it! There are some exceptions, but most times I would discourage British companies that haven’t exported at all to start by researching Latin America. It is just not a market for beginners... 3.    Correct me, please Did I just say “Latin America is a not a market for beginners”? I hope you have corrected me. That is the first thing you need to know about market research in Latin America: it is NOT by ANY means a one market! Understanding the huge differences across Latin America, from  Mexico to Argentina, from Honduras to Uruguay, is crucial. Never take it as a unit because it is not. Latin American countries vary hugely in almost every variable: political stability, economic indicators, consumer preferences, purchasing power, corruption indexes and so on. 4.     You’ve got to start somewhere... Because countries are so diverse, as we have just discussed, you will have to focus your research. If you are lucky enough to be able to afford researching 20 countries, then that’s ok, but most companies start with 3-8 and narrow it down from there. How do they choose those first ones to start with? I have advised companies based on my knowledge and experience, because I know about factors such as economic performance, free trade agreements or political stability. But if you don’t know, you will almost surely have a preference, maybe because you already get orders from a country or because a member of staff particularly knows a region well. Maybe you read the papers and can work out which countries to avoid, or you have been to a UKTI seminar or roadshow that highlighted some specific countries (do bear in mind that UKTI has a government agenda behind it...). Or check out what your competition (not just from the UK but from the US and Spain, which are always good comparators) are doing. Are they are heading off to Chile? Are they all avoiding Nicaragua? No competition in a country might mean a lovely gap for you to fill, or a complete lack of demand, so watch out! Same happens with plenty of competition, it either highlights huge opportunities or a saturated market. But you will only know this with time. Also, check not only the “stock” of your competition in these countries but the “flow”: are companies still entering a specific market or is it fairly stable? More interestingly, are they pulling out?... From then on, the process is easier since you can “eliminate” or “add” countries to your list as the research goes on... 5.     Narrow it down We have been talking about countries as markets. That is always not the case. For a country like Brazil, for example, with 200 million people, your market might be just Rio de Janeiro, or just Sao Paulo, or just Bahia, depending on what you offer. Or it might even be a neighbourhood of those cities. Narrowing it down can really help focus. You can always then grow from there... 6.     Mind your language Right, so now you have thought about Latin America in detail, decided you want to start exploring these markets, have chosen a few at least for now, have narrowed them down geographically, so what next? Before you go any further, mind your language. Latin America is still hugely Spanish-speaking and any research of some depth needs to be in that language. You will explore the markets much quicker (online or during a visit) and accurately if you speak the language. If you are asking yourself how you get this resource, then that is one important question to address company-wise (even if there’s just 2 of you!) right now, with a vision to succeeding in these markets. Even if you commission some research (to someone like me, who is a native speaker), managing orders, conversations, negotiations and, more importantly, relationships, will force you at some point in the future to think about language resources, so you might as well start thinking now...  You can outsource that resource or bring it into your company, but you will need it at some point (and to some extent). The one exception to Spanish-speaking dominance is Brazil, where Brazilian Portuguese is a must. Mainland Portuguese and Spanish speakers will be able to carry out some level of research but also remember that if things move forward, you will need some language capability here. How much will depend on what you offer, your people, your business set up, and your experience and contacts, so it will be unique to each business. You will almost undoubtedly need at least a translator for your marketing materials, which will be considerably better received if you send them in Brazilian (yes, Brazilian, I insist!) Portuguese. We hope these six tips have given you an idea to get you ready to start researching markets across Latin America. How you move on from here will depend on the nature of the goods or services you offer, what decisions you make, your priorities, your vision and strategy and the resources you have. Keep coming back to read more about exporting to Latin America and send us your feedback!

USING AN AGENT OR DISTRIBUTOR A Case Study

After working many years in international trade in numerous markets, the question continues to arise – is better to use an agent or a distributor to handle my local business? Frankly there is no one answer. However I do strongly believe that it is not effective or always appropriate to appoint one type of partner only on a global basis. This case study illustrates some practical reasons as to why a market by market solution is preferable. Firstly let’s summarise a few of the pros and cons of each channel. By comparison to Distributors, Agents are a low cost, low risk option. You pay on results through commission. You also benefit from having a direct contact with end-customers as you trade direct with each of them. As a result you are selling at your price. Agents are invariably self employed and are therefore low on resources. They can locate and sell to customers but can offer little additional services. You are also shipping to each customer which may be an expensive option in addition to a high number of potential credit risks. Distributors, on the other hand, offer a company size resource not only by providing a team of salesmen but storage for stock and a local direct delivery to customers. Additionally they should be able to provide local marketing support as well as capably manage the importation of your products. So far so good. The main drawback is the loss of control. Key issues are no direct relationship with end customers as they are ‘owned’ by the distributor, trade prices are set locally by the distributor and you have no influence over sales operations. Additionally it may be difficult to gain feedback on the in-market sales performance of your products. So nothing is perfect! One factor that can influence your choice of channel is your international sales policy. You may work in an industry or provide a bespoke product which is better suited to be supplied to order and shipped direct to end customers. If there is little requirement for a local inventory of product this may better suit the use of an agent. If however you require, local sales & marketing expertise then the use of a distributor maybe more appropriate. The majority of my experience was in the exporting of consumer goods to highly competitive markets. The key issue was never to be out of stock in the marketplace as consumers would seek competitive products in these instances. It was therefore appropriate to maintain inventory in the market to meet demand. Using a distributor not only provided this local stock facility but removed any need to place product in the market on a consignment basis. Product has already been sold to the distributor, albeit on a credit basis. Stock holding was a main criterion for selecting this type of distribution channel alongside the use of a sales team who should be able to provide both regular and comprehensive expert sales coverage. All of the above seems to imply the use of distributors was the global solution to our needs. But this was not always the case. Consider the situation when a new market is being developed and products are being launched for the first time. Whilst best efforts will have been made to assess market potential, particularly for the short term, there will always be a doubt until business is actually transacted. Yet the cost implications can be quite high particularly if using a distributor to who you have passed on some of your margin in your trade terms together with a possible credit risk. From the distributor’s point of view he is also taking a calculated risk. He purchases your products in good faith on the assumption they will sell. He will commit resource before he is paid by his customers. We therefore considered the tactical use of an agent for some market launches particularly where there were concerns over the short term development business opportunities which may not have been attractive to a distributor. Once again tactically if one is able to build some good early business using agent, at relatively low cost and risk, the equity of your business will become more valuable in the eyes of the beholder. I can cite a number of instances where having launched into a market using an agent and built business incrementally over the first years, we suddenly became a more attractive proposition to prospective distributors and in turn our own bargaining power had increased. I have found that at the outset of any trading relationship with a new distributor in a new market they believe you need them more than they need you. Arguably they are right and, not surprisingly, they seek the best possible terms. To be fair to the agent, an agreement will be set up for, say, two years, and he will be targeted to seek x type of customers in y geographical area. At the end of that period business will be reviewed and decisions taken on future handling. If we then decided to switch to a distributor we always tried to find ways of maintaining an on-going relationship with that agent, assuming he had performed well. We believed it was important for good local trade relations and goodwill to ensure all parties were treated with courtesy and respect. In a number of instances we were able to incorporate some of the agent’s good work with the newly appointed distributor. We also possessed a few markets where it was practicable to supply the key customers direct with the agent acting as both a salesman and a facilitator. We gained the benefits of the direct relationship with end-customers whilst controlling our exposure to financial risks in those particular markets.

In summary an agent or a distributor can offer specific services and benefits. My company believed the global solution was to use either on a market by market basis to suit both strategic and tactical needs. 

Pricing, distributors, consumers, strategy

International distribution channels for consumer products can often be complicated due to the number of parties involved in any buying chain. As such all these parties can directly impact on the end selling price, the one the local consumer pays for the product. Management of pricing is, of course, further effected by international logistical costs, local taxation and duties, and the trade margins expected to be enjoyed in any given market.

My main international trade experience was gained with a consumer products company which possessed valued brands which required the appropriate price to be paid by consumers and the trade alike. Each Brand/product had a target consumer price set on a market by market basis taking into account local competitive activity.

These notes describe the process we carried out to ensure a target consumer price was established in each market. Whilst this process was broadly successful throughout the world, we will take the English Caribbean markets as a practical example.

The background is this. The region comprises of a number closely grouped countries, each with their own taxation and duties in addition to a Caricom common external tariff (CET) and a common local currency the East Caribbean Dollar (EC$). For many islands (all being independent countries) one could see the next island a few miles away. In other words a closely knit business community with few secrets between each country.

The first step was to set an agreed target price for each product so that a local resident travelling to a neighbouring country would find his preferred product at the same price on the shelf. For this exercise to be more than a strategy it required the wholehearted understanding and cooperation of all of the company’s distributors within the region.

Therefore all distributors were regularly consulted on the target price taking into account the economy of each country, level of local competition pricing and, quite simply, what would their consumers be prepared to pay for the product taking into account the perceived value of the brand/product. They also had to subscribe to agreeing a regional target price rather than one just set wholly for their own circumstances.

My company would then set about establishing the appropriate price for our goods, country by country, to ensure the target price could be achieved. Again this could not occur without the wholehearted assistance of the distributor.

We would use a price model format to calculate each product price and work downwards from the target consumer price which is invariably a retailer’s price on the shelf. The following is an abbreviated summary:

Target consumer price

       ↓

Retailer margin

               ↓

Distributor price

               ↓

Distributor price

               ↓

Landed cost

               ↓

Taxes & duties

                ↓

CFR

                ↓

Ex-works

Within this Region all distributors preferred a CFR arrangement so a specific figure was calculated for each product for each country. In practice due to the varying taxes & duties it meant that each distributor was charged a different price for the same products. In normal circumstances this would have created a major problem between the company and its distributors.

Some distributors were making more, some making less cash profit as compared to some of their fellow distributors. It was not a problem because this was an open trading situation where all parties had subscribed to mantra that a standard consumer price was the most beneficial for business.

There were other problems as well. Politicians of the day would wish to influence the policy. I well remember on two separate occasions meeting with finance ministers to discuss how we did business and the rationale used. Naturally my local distributor was also in attendance. I used the price model to illustrate both our thinking and how we literally structured our prices. We had nothing to hide.

We pointed out the key criteria of targeting (not setting) a consumer price. This was set to ensure we were not undersold or oversold by the trade; we wanted the consumer to pay the right price for our brands/products. It should be added that in these two situations there was local manufacture of similar products albeit of a lower quality and retailed at a much lower price point. We highlighted the need to ensure there was real separation in pricing between these local products and our own as we were not seeking conflict.

We also illustrated the key fact that any difference in prices charged to the distributor were wholly in line and due to the duties and taxes charged in their country. In both instances after a   long discussion both ministers were satisfied with our approach. There is no doubt that using the price model as an illustration rather than just discussing figures was the critical factor.

These local concerns lead on to the legality of this approach. Today anti-trust laws in many countries actively prohibit any selling party imposing a margin or a selling price onto another. This is not suggested in this process.

Our view was to quite simply agree with a distributor a target consumer price bearing in mind he is the only person who can ‘police’ its implementation locally through recommendation and the active use of his salesforce. Without this process the consumer price of the product would float and in most instances become unaffordable for the local consumer.

This case study has highlighted a common group of markets where we to tried to ensure some consumer price conformity across them all. This principal of setting a target consumer price was adopted in all of our markets as standard practice. As already discussed the pricing strategy would be first discussed and agreed with the distributor for him to follow through locally. We would set our FCA price accordingly.

When appointing a new distributor we would, at the outset, introduce him to the concept and process to ensure he was actively involved at the start.

So does this work? The short answer is yes. In most markets we would find our products being sold at or close to our target consumer prices.  In these instances we knew consumers were buying at the right price for the right product at the right quality.

History of Customs: The mysterious link to Year 3

Anyone who is interested in the history of the Music Hall may know the catchphrase of an old comic legend “Now here’s a funny thing!” (Max Miller – in case you are wondered).  Well, here is a funny things – most of the anniversaries relating to Customs take place in a year ending with a 3.  Here’s a few – 743 -  The earliest written record of Customs dues chargeable on medieval ships is to be found in a Charter dated 743, granted by Aethelbad, King of Mercia, to the Abbey of Worcester.  This allowed the Abbey the dues of two ships: “Which shall be demanded by the collectors in the hithe of London Town”.  1203 - The centralized English customs system can be traced to the Winchester Assize of 1203, in the reign of King John.    1303 -  The custuma parva was introduced by Edward I in the Carta Mercatoria which placed both trade and customs duties on a firmer footing and involved the levying of the Aliens Customs or butlerage, a tax on wine to be paid only by aliens (anyone who is not a national or citizen of the United Kingdom). 1643 - Excise duties on home produced articles were first imposed to provide money for Cromwell's Parliamentary Army and then continued by King Charles II for ‘royal purposes’. Excise duties are inland duties levied on articles at the time of their manufacture, such as alcoholic drinks and tobacco 1673 -  Charles II established the Board of Customs 1683 -  Charles 11 set up the Board of Excise to run alongside the Board of Customs 1803 – The Customs Act passed this year led to the construction of new customs warehouses in nearly every port around the coast of England.  The Act permitted the placing of all types of goods into a customs controlled warehouse pending payment of duty, not just excisable goods 1823 -  The foundation of the modern whisky industry can be dated from this year when an Act was passed to reduce the small stills in the Highlands and introduce not only an annual licence fee for distillers but also a duty on the alcohol produced according to the proof gallon. 1973 -  Purchase Tax was superseded by Value Added Tax (VAT) in the UK.  And, of course, UK joined the European Community (EEC) 1983 – CEDRIC: Customs & Excise Departmental Research and Information Computer – was set up to store records held by the Investigation Division on the Central Reference Unit (CRU) and the manual Investigation Division Indexes. 1993 – the Customs Union was established, bringing with it harmonized customs duties and Intrastat declarations. 2003 – NES was adopted at all airports in the UK

2013 – well, we’ll have to wait and see but we were originally going to get the introduction of the Modernised Customs Code in July 2013.  This has now been renamed the Union Customs Code but changes will probably miss the “Year 3” connection.

Responsibilities under some Customs Procedure Codes

Along with the cash advantages, some of these codes make the importer legally responsible for controlling, reporting or re-exporting the goods within a set time period.  Poor use of CPCs, or a lack of understanding or control, can leave an importer open to Customs audits and potential penalties for non-compliance.  Most of the responsibilities are easy to undertake and control - the most important thing is to be aware of the responsibilities under the CPC you choose.  These are clearly detailed in Vol. 3 of the Tariff. Following are some examples of the responsibilities that may be incurred with a CPC.  1. You must be authorised by HM Customs before you use it. 2. Proof of export will be required when the goods arrive in the UK to allow the relief from import duty/VAT. 3. The goods must be exported within a set time period. 4. After re-exporting a duty reclaim must be made within a stated time. 5. Quarterly reports must be submitted to HM Customs. 6. Good audit records that permit tracking and tracing of imported items may be required. 7. The end-use of the goods is controlled and they cannot be diverted or scrapped without Customs approval. Where appropriate the format of the seven digit CPC’s link the import and the export of goods, so allowing Customs to see that you have fulfilled your responsibilities.  For example:  • Goods imported to be repaired under a simplified procedure will be entered to CPC 51-00-001. When these goods are re-exported from the EC the CPC used will be 31-51-000 - the middle pair linking the export CPC with the reason for import, i.e. 51.  The use of the correct export CPC cancelled the importer’s responsibilities.  If an incorrect CPC is used at export then the importer will have problems.

An understanding of the Customs Procedure Codes that relate to your particular activities is desirable; that is not to say that your current use of CPC’s is faulty or that your import clearing agent or forwarder is incompetent, but merely to emphasise that responsibility and control should rest ultimately in the importer’s or exporter’s hands.