Duty, Relief and Exemption Control

Author:Adrien Goorman

    Adrien Goorman is an independent customs administration consultant, former Deputy Division Chief, Tax Administration Division of the Fiscal Affairs Department of the International Monetary Fund. This chapter has benefited greatly from cooperation with the Inter-American Development Bank.

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This chapter deals with two aspects of customs administration that are of considerable economic, fiscal, and administrative importance-administration and control of duty relief regimes for temporarily imported goods, and administration and control of all other duty exemptions.

Duty relief refers to the customs regimes under which goods are imported with suspension of duty payment pending their re-exportation. Such duty relief might be for temporary admission for inward processing, manufacturing under bond, export processing zones, temporary admission for re-exportation in the same state, customs warehousing, and transit. It also refers to the regime under which duties paid on importation are refunded when the goods are re-exported (drawback).1

Exemption control refers to the mechanisms used by customs to administer and monitor full or partial duty exemptions unrelated to exportation

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BOX 10.1 Duty Relief and Exemption Regimes
Duty relief concerns the exemption from duties and taxes on temporary imported goods or, if duties and taxes were paid on their importation, the refund of these duties and taxes upon reexportation.
Goods imported for re-exportation after processing Temporary admission for inward processing (TAP) Manufacturing under bond (MUB) Drawback Export processing zone (EPZ) Warehousing, temporary admission, and transit Customs warehousing Temporary admission for exportation in the same state Transit Exemption involves importation under full or partial waiver of import duties for reasons unrelated to exportation or re-exportation. These exemptions exist for a variety of government policy objectives or result from international conventions and agreements.
International conventions Embassies and international organizations Government social and economic objectives Government imports Fiscal incentives to investment Foreign financed projects Relief goods Charitable, religious, educational, cultural, and other social purposes Noncommercial imports Migrant workers, persons settling or resettling in the country Baggage allowances Samples of no commercial value Inherited goods, gifts, trophies, medals, prizes, and so forth Other noncommercial imports.
Source: Author.

or re-exportation. The main exemption categories concern investment incentives; imports for the government, foreign-financed projects, and diplomatic representations; imports of relief goods; and imports for institutions with charitable, cultural, educational, or religious purposes.

Experience shows that many developing countries have difficulty properly administering and monitoring duty relief regimes and exemption regimes. This has resulted in abuse, fraud, and revenue leakage. In the absence of smoothly operating duty relief mechanisms, export manufacturers have to produce at higher cost than would be the case if they had full and easy access to production inputs at world prices. Therefore, their competitiveness in export markets is impaired.

The chapter gives an overview of the main duty relief and exemption regimes, and summarizes their economic rationale, as well as the main requirements for effective administration. The chapter also reviews the experiences relating to the implementation of various systems in a number of countries and provides guidelines for best practice. The first section reviews the regimes for duty relief for inward processing. The second section concentrates on duty relief for goods temporarily imported for reasons other than processing. The third section deals with economic and administrative aspects of outright exemptions. The final section summarizes the operational conclusions and guidelines. Annex 10.A provides a checklist for duty relief and exemption control.

A systematic classification of the main duty relief and exemption regimes in operation around the world is presented in box 10.1.

Duty Relief for Inward Processing

This section first reviews the economic rationale for duty relief for inward processing, identifies the main approaches to duty relief, discusses administrative issues relevant to all duty relief systems, then reviews administrative aspects of the main systems one by one.2

Economic Rationale

Governments levy duties on the importation of goods to collect fiscal revenue or protect industrial activity. When the inputs are imported for the manufacture of export products, the duties paid on Page 217 them increase the cost of production and, therefore, make it more difficult for the exporters to sell their products abroad. The objective of duty relief is to remove this tariff burden and to give exporters access to industrial inputs at world prices. This is done through exempting the inputs at the stage of importation, or refunding the duties paid at the time of importation, when the products in which the inputs are incorporated are exported. Customs laws make provisions for these regimes and establish regulations for their administration and control.

The economic justification for relieving export producers of the payment of duties on imported inputs rests on the destination principle of taxation, under which no indirect taxes should be levied on goods that are not destined for domestic consumption. Following this principle, there is no ground for levying import duties, for instance, on goods in international transit, or on materials and components imported for incorporation into manufactured products that are subsequently exported.3 The failure to relieve export producers from import duties would effectively establish a tax on exports, increase their cost, and reduce the competitiveness of domestic manufacturers in export markets.

In line with the destination principle, the refund of duties paid on the importation of industrial inputs incorporated in export products is acceptable under, and fully compliant with, World Trade Organization (WTO) rules provided the refund does not exceed the actual amount of duties paid. A refund that exceeds that amount would be equivalent to an export subsidy and would violate the WTO rules on Export Subsidies and Countervailing Duties.

Clearly, providing duty relief is only a second best alternative to a free trade regime. Free trade eliminates the need for schemes to insulate exporters and obviates the administrative requirements that are often difficult to meet. Most countries do not have a free trade regime, however, and can relieve export products from the burden of import duties and taxes only through the implementation of one or more of the duty relief systems.

In today's highly competitive economic environment, exporters are compelled to attain a high degree of efficiency in production and to cut production and marketing costs to the minimum if they are to survive in export markets. Therefore, it is important that policymakers and customs managers make available to the export sector duty relief systems that provide full (100 percent) relief from the duty burden on industrial inputs. It is also important for policymakers and customs managers to create the conditions for effective administration of these regimes. For customs administrators whose responsibility it is to collect import duties according to the tariff schedule, the implementation of duty relief regimes clearly establishes a problem of customs control. Customs must establish mechanisms to ensure that claims for duty relief are legitimate and correctly executed.

Prior Exemption versus Drawback

There are two basic approaches to providing duty relief for inward processing: (a) exempting goods from the payment of the duties at the time they are imported, conditional upon their re-exportation after processing (often referred to as temporary admission); and (b) drawback, which is the payment of duties on the imported goods, with refund of the duties upon re-exportation of the goods after processing. Prior exemption exists in different forms, including temporary admission for inward processing (TAP), manufacturing under bond (MUB), passbook system, variations on or combinations of these forms, and export processing zones (EPZs).

While prior exemption systems and drawback have the same objective, there are differences in the way they operate, in the benefits they provide to the manufacturer, and in the control measures customs may want to put in place to protect revenue. One system may be better suited to a particular exporter than another. In general, exporters prefer prior exemption to drawback, but prior exemption carries greater revenue risk for the government because of the possibility of diversion of the imported goods, or the products made from them, to the local market without duty payment. Drawback involves less risk to revenue, but one disadvantage is that the manufacturer must pay the duties and taxes first and then wait (often for a...

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