At times of economic uncertainty, exporters are increasingly looking for cost savings hidden away in the supply chain. Tweaking the supply structure can help maintain a competitive edge in international trade. Sooner or later controllers and customs executives must ask themselves whether they can make savings by using the special customs procedures.
Identifying hidden costs and reducing them using “inward processing”
For example, where input materials are temporarily imported into the EU in order to be re-exported from the EU later on (as part of a finished article), the inward processing procedure may offer customs benefits and even potential savings. Under this procedure, it is sometimes possible to avoid customs duties being levied on materials imported only temporarily because they do not enter economic circulation in the EU. Those who wish to use the procedures and take advantage of the related customs benefits require the authorisation of the relevant customs offices. This depends on specific legal and internal organisational requirements being met.
Critically analyse the cost structure of the supply chain
The more complex the structures, the more important it is to scrutinize the cost structure of supply chains and production processes. This principle especially applies to exporting producers which have diverse supply structures. Their suppliers often import materials from third countries which are subject to customs duties. Once cleared, the materials are then incorporated into intermediate products which the suppliers deliver to producers within the EU. The latter usually procure these intermediates on the internal market or as intra-Community supplies. Since the producers do not import any goods as part of these transactions, they may not realise that the purchase price also includes the duties on third party input materials. If the producers then use these intermediates to produce export goods, they will bear the customs duties on the input materials despite the fact that they will not enter the economic circulation of the EU. Admittedly, the producer will neutralise these “hidden” customs duties by incorporating the amount in the sale price charged to the third party customer. However, this means that the producer is charging a sale price which is unnecessarily high and thereby less competitive than the prices charged by competitors established in the customer’s own country. This is especially so considering the duties which might have to be added when importing the final product to the country of destination.
Competitive advantages by subsequent processing
A further point of reference for identifying customs advantages or potential savings therefore lies in identifying the “hidden” duties on imported input materials contained in the purchase price of German or intra-Community supplies of intermediate products and to eliminate them (also for Europe as a whole) by subsequent processing under the inward processing procedure. This basically concerns several linked inward processing procedures which precede the export of the finished product.
If the producer succeeds in establishing a documented, end-to-end process and chain of customs procedures in consultation with his suppliers, it should be possible to reduce the purchase price of the intermediate products by the amount of duties on the input materials contained therein. The supplier can do this by placing the input materials under the inward processing procedure rather than releasing them for free circulation and paying the corresponding customs duties. The producer can continue this procedure by subsequently placing the intermediate products under the inward processing procedure in order to produce the final product. The final inward processing procedure will then be terminated by exporting the final product.
If the producer of the final product for export can maintain the price level in relation to his third party customer, his profit margin will rise accordingly. However, if he is introducing a new product this strategy may provide him with a crucial competitive advantage.