Component report-Part B-10-Dec-01

The plan provides for the draft Customs Law to be reviewed against WTO requirements and revised as necessary over the next six months. The Government recognises the need to amend the draft law to comply with the WTO valuation agreement. The law was drafted in 1997 in French and Khmer; however, due to its length (339 articles) no English version yet exists. The draft law has remained with the Council of Ministers since 1998.

Overall, the draft law is a significant improvement upon the existing 7 page, 26 article Law on Import and Export Duties enacted in 1989, and provides sufficient powers of search and seizure and appropriate penalties. However, in its current form the draft does not meet the needs of a modern customs administration. There is an urgent need to enact suitable legislation clarifying the functions and powers of the CED.

The IMF advisor and a visiting consultant reviewed the draft law in August 2001. Initial concerns related to unnecessary repetition of text common to a number of articles and the detailed codification of administrative and judicial procedure. This detail is partly explained by the French legal structure of the draft and partly by the intention to reduce reliance on judicial review in Cambodia.

Another issue relates to what seems to be excessive powers provided to the CED. For example, the draft gives CED the power to seize any goods being transported without CED prior approval within 20 kilometres of the Thai border. Also, no provision is made for electronic commerce — the draft requires declarations to be in writing.

Until the new Customs Law is enacted no licensing rules exist to regulate the activities of customs brokers. Lack of common standards and a process to monitor and regulate brokers can raise CED administration costs. Or to put it another way, the establishment of a professional customs brokers service would efficiently deliver many of the public relations and education services is now likely to be inadequately provided by CED.

Cambodian and foreign owned legal entities are free to import and export provided they first register with the Legal Department of the MOC at a cost of $68. Owners or their authorised representatives have to personally attest in the presence of Ministry officials the identity, location and legal form of their enterprise with copies of supporting documents. Every regular trader must also register for VAT at the Tax Department, regardless of their turnover.

The personal presence requirement adds to the cost of establishing a business for SMEs exporters and importers located in provincial centres and who have not already appointed a representative in Phnom Penh. Furthermore, the $68 fee is likely to be relatively high cost for SMEs while being trivial for large companies. A draft company law is being considered by the Council of Ministers — it could provide for a new fee scale reflecting the cost of registering and monitoring different forms of legal entity.

Most import licences were removed in 1993. Import licences are now only required for pharmaceuticals and for imports of military equipment and gold and silver. Pharmaceutical importers first register the products to be imported with the Ministry of Health and then apply for an import licence for each product valid for six months.

The RGC does impose ad hoc limits on imports from time to time. Imports of live pigs and pork were banned last year for a period. Imports of used tires, shoes and handbags have recently been banned. Imports of any chemical that the Government considers may be used to manufacture narcotics must be approved by the MOH. The Public/Private Sector Consultative Working Group on export processing expressed a concern of the shoe industry that receiving approval for each chemical import from the MOH was expensive and cumbersome.

After the third public/private sector forum in February this year, the Council of Ministers agreed to permit investment enterprises to import chemical raw materials without MOH approval for individual imports, provided:

The VAT Law requires all importers and exporters to register for VAT. Importers comprise the largest group of businesses registered for VAT — 1 507 out of a total 2 747 VAT taxpayers by February 2001 (data provided by Tax Department to IMF). However, CED permits small irregular traders to import or export without registering for VAT, giving CED officials a discretionary power over traders. Furthermore, a simplified one-page form is used to apply for CED permission to import and export consignments valued at less than $300. This lowers the formal costs of trading for SMEs. There is a concern among freight forwarders that unless a good is regularly exported, CED and Camcontrol will delay clearing an uncommon export until they have consulted with all potentially interested government agencies. For example, a hotel waited three weeks before a consignment of fabric, in excess of its furnishing requirements, was cleared for export.

Negligible trade transits through Cambodia en route to its neighbouring countries. Lao PDR trades through Thailand and Vietnam. For this reason, there has been little incentive to implement appropriate transit procedures along Cambodia’s international frontier. Cambodia is subject to the ASEAN Framework Agreement on the Facilitation of Goods in Transit Agreement. Four of nine protocols have been signed by each member country (Types and Quantity of Road Vehicles, Technical Requirements of Vehicles, ASEAN Scheme of Compulsory Motor Vehicles Insurance, and Sanitary and Phytosanitary Measures). Countries have been considering the draft protocols dealing with designation of border posts and the customs transit system over the past year. At the ASEAN Customs meeting in Manila on 13–4 July 2001, Singapore encouraged members to reduce their list of prohibited and restricted goods annexed to the protocol in order to facilitate transit trade

Most transit cargo in Cambodia comprises goods transported in containers under seal from the port to be cleared at one of three dry ports in Phnom Penh. About half of all exports are consolidated into containers within the dry ports before proceeding to Sihanoukville Port. The dry ports are privately operated under a bond agreement between the operator and CED. The operators provide transport and storage facilities to owners of goods preparing goods for export or wanting to clear goods at the dry port rather than Sihanoukville port. Containers are transported under seal between the seaport and dry port.

CED has a manual system of cargo reporting, declaration processing and revenue accounting. A small computer network has recently been upgraded to compile statistics from manually completed forms. A fully computerised system is urgently required to improve the efficiency of customs clearance, revenue accounting and data collection and analysis. In particular, all transactions would be processed in a consistent manner promoting equity and reducing the opportunity for corruption. Computerisation also enables more accurate systems of risk assessment, post-clearance auditing and duty drawback to be implemented.

A strategic plan for IT development and implementation was prepared in early 2001. SGS is providing limited IT technical assistance under its PSI contract with the Government. CED requires funding to purchase and implement an off-the-shelf system such as UNCTAD’s ASYCUDA or the French SOFIX system. The cost is likely to be in the range of $2.0 to $2.5 million.

The system adopted should be expandable to meet additional functions, as well as complying with international standards and local conditions, for example, supporting Khmer language applications. CED will require sufficient staff training and resources to be able to locally maintain and upgrade the system.

The IMF has recommended that system functions be implemented in the following order: i) manifest control; ii) tariff and documentation control; iii) basic import clearance; iv) revenue accounting; v) basic trade statistics; and vi) simplified valuation. Once the system is in place and is stable these functions can be strengthened in addition to adding export clearance, suspensive regimes and on-line links with users.

During the planning and implementation phases of the comprehensive program to strengthen the enforcement capacity of CED, the RGC is relying upon Pre-Shipment Inspection to support the activities of CED and, in particular, to safeguard customs revenue. PSI is used to monitor imports, conduct physical verification of goods, and provide value and customs classification for revenue collection.

PSI was operating in Cambodia between September 1995 and July 1999. The RGC directly awarded the contract to SGS. However, due to contractual disputes the contract was suspended. An open tender for a new PSI service provider was held in 2000 and the tender awarded to SGS again. SGS has been operating under the new PSI contract since October 2000.

The new contract revises a number of features of the former contract, including the following:

Revenue is maximised if PSI inspects, classifies and values all assessable imports. However, for administrative ease, consignments with a value of less than $4 000 are exempt from PSI and may be declared directly to CED for admission. The RGC has also exempted duty-free imports by CDC registered exporters and certain dutiable goods from PSI, including cigarettes and government purchases.

Despite the reasonably broad PSI coverage of imports, industry observers suggest that importers are evading PSI on 60–70 per cent of their total dutiable imports. The Government is risking substantial revenue loss. Importers are choosing to clear dutiable goods through CED and pay the penalty, equal to 7 per cent of c.i.f. value, for not obtaining PSI from SGS. Importers are able to misrepresent to CED the quantity or value of their goods but are unable to interfere with the PSI assessment because inspection occurs in the exporting country.

Importers avoid post clearance audit on their under-valuation by classifying the goods as ‘other’. In 1999 SGS routinely reported that importers were undervaluing by 50 per cent or more the goods they requested SGS to inspect. The resulting payment of duties, taxes and the penalty is lower than the duties, taxes and 0.8 per cent fee that would be payable if assessed by SGS. Importers also attempt to avoid PSI by undervaluing and/or splitting consignments into loads worth less than $4 000.

In their latest monthly report to CED, SGS state that they have only assessed 63 per cent of the total revenue collected by CED this year. Adjusting total revenue for export taxes and taxes on goods exempt from PSI (of which the major class of goods is cigarettes representing about 10 per cent of total customs revenue) it still indicates that the 60–70 per cent of dutiable imports that are circumvented only contribute in the order of 30 per cent of total customs revenue. This represents significant foregone revenue for the Government.

Customs has been considering increasing the current penalty equal to 7 per cent of c.i.f. value for repeated PSI circumvention offences. SGS would like to see circumvention penalties strengthened even further. Goods could be seized and auctioned. The auction proceeds could be shared between the Government and Customs officers responsible for the seizure. The current customs law provides for CED to reward customs officials and other co-operating agencies from penalties imposed on customs offenders.

SGS is also concerned that CED is not returning the Report of Findings to SGS after the goods have been cleared for entry. For a PSI system to work properly the report of findings (ROF) needs to be endorsed with the duties and taxes actually collected by CED. Therefore, SGS has been unable to reconcile revenue collected by CED against revenue assessed by SGS. All border post customs officials are required to collect duties and taxes in line with the assessment made by SGS — without further approval from CED headquarters. CED has now agreed to provide SGS with the ROF endorsed with a breakdown of duty, VAT, excise and fees paid.

SGS is concerned that CED are opening and inspecting containers that have already been examined by SGS and carry the SGS seal. Customs says it inspects a small share of containers and that many SGS inspected containers are arriving without seals and have not been properly inspected before their departure. (One estimate puts the share of inspected containers arriving without seals at 43 per cent of the total.) SGS point out that some inspected containers may arrive unsealed, mainly because shipping lines reserve the right to containerize some time after inspection or a consolidator containerizes different inspected consignments.

In order to maximize trade facilitation, CED should only re-inspect containers sealed by SGS when there is a clear discrepancy. When practical, SGS could be present during such inspections to confirm the discrepancy and the findings of the second inspection.

CED suggests that SGS inspections are too slow and that valuations and tariff classification are often incorrect. Delays may encourage importers to avoid PSI. Freight forwarders estimate that a PSI consignment takes 2–3 days to be delivered compared to approximately two days if PSI is avoided — this is important for perishable goods. This is a significant problem for urgent containers arriving unsealed and triggering an inspection from CED and Camcontrol.

Both sides are working through their differences according to the terms of the contract in their biweekly working groups. The situation could be helped if RGC puts the role of SGS into perspective — as part of a capacity building program for customs administration. RGC, the CED and SGS could agree on a realistic time frame for the CED to take over the functions of SGS.

In order to ease the task of valuing goods and limit under declaration of value by importers, the CED has established set prices for a range of goods to be used by its officials. (Set prices apply to 400 classes of goods, including petroleum, cigarettes, motor vehicles and motor cycles, used appliances, cement, cooking oil, used clothing, steel and iron, generators.) In general, CED sets determined prices at levels lower than market values in order to encourage their declaration and payment of taxes and duties. This is particularly the case for cigarettes and used electrical appliances, which are at risk of being smuggled into Vietnam.

In the past, CED requested SGS to use its determined values rather than the export country fair market values maintained by SGS’s own database. Importers may have complained that SGS market prices are higher than the determined prices. At their meeting in August, CED and SGS agreed that SGS will use the higher of the two values. The only exception is petroleum which is valued according to the determined price.

CED uses the Valuation Support Service provided by SGS to value goods that do not have determined prices and are either exempt from PSI or have evaded PSI. VSS is in place at the airport and in Phnom Penh. Check points at other borders only have the authority to value goods up to $1 200, and must seek the approval of CED Head Quarters above this value.

The current PSI agreement does not comply with the WTO valuation agreement. RGC has informed WTO members that SGS will adopt compliant valuation method after Cambodia’s accession. The New Zealand Customs Service has commenced providing WTO compliant valuation training to CED staff. Furthermore, the PSI fee (0.8 per cent of the fob value) charged by SGS is not WTO compliant. Circumvention may increase for low value shipments when SGS adopts a compliant pricing policy because a new fee structure would set a minimum and maximum fee per container inspected.

The recent SGS valuation training appears to have been effective at detecting under declarations of value. Concern has shifted to under declarations of quantity. Industry observers consider that only 25 per cent of the true volume of goods shipped to Cambodia are being declared to CED. Such under declaration of quantity raises two concerns:

CED could address under declaration of quantity by rigorously reconciling goods listed in cargo manifests against goods actually declared to CED.

Cambodia has a number of features that tend to encourage smuggling and result in revenue loss for the Government. Firstly, the country has long and remote land borders with three countries. Many rivers cross into Vietnam and many bays line the coastline. Secondly, import duties and taxes are relatively high on goods able to be smuggled — consumer goods and petroleum. Thirdly, as discussed in the first section of this chapter, CED officials are underpaid not well resourced and are poorly paid.

Fighting smuggling and increasing revenue collection involves a number of policy and administrative interventions. Lowering the returns to smuggling, that is, lowering customs duties on consumer goods, and raising the costs of smuggling, that is, increasing the chances of being caught and the level of penalties, can actually increase net revenue collection. Improving the chances of being caught involves not just increasing the anti smuggling capacity of the CED, but also raising salaries and co-operating closely with neighboring customs administrations.

The petroleum distribution companies, Nestle, Coca Cola and the Pepsi franchise holder are very concerned over the level of smuggling of competitor’s products and smuggling of their own brands from Thailand into Cambodia. This lack of expected import protection is driving demands for tax incentives.

A study prepared for the Manufacturing and Distribution Working Group estimated that $35 million was foregone per year from the smuggling of beverages, petroleum and milk products into Cambodia (see the Minutes of the Working Group on Manufacturing and Distribution, 22 March 2001). These three goods were considered to be the most profitable to smuggle into the country due to their high rates of import tariff. The group considered that the recently enacted Product Quality and Safety Law should be rigorously enforced to ensure that domestically produced and legally imported food products are labelled in Khmer.

Armed threats reduce ability of customs to collect revenue from car imports. Only 10 Toyota Land Cruisers were assessed for duties and taxes in 2000, despite 149 410 cars being registered with the Ministry of Transport in 1999 (Tait, Benon and Simard 2001 and National Institute of Statistics Yearbook 2000).

RGC has acted to address these smuggling concerns. A mobile anti-smuggling task force comprising 100 officers work has been established by CED, with support from a military police unit, to operate on main roads leading from sea and road check-points. The task force determines if goods have circumvented the CED check point upon their entry into Cambodia. In the first quarter of 2001 the task force filed 300 cases of smuggling contributing CR0 0.7 billion. In 2000, 1066 cases of smuggling were filed. The task force also visits businesses suspected of possessing smuggled goods and patrols land and river borders.

The Government has lifted most export taxes and non-automatic licensing arrangements. The majority of exports only require an export declaration to be completed in triplicate accompanied by the invoice and packing list. However, export licences remain on certain goods in order to conserve the environment (wood products including furniture and plywood), food security (rice and fish) and protect to antiquities being removed from the country (handicrafts). The EU requires licences to demonstrate Cambodian origin for exports of shoes and garments.

Although the fixed quantity licences can be extended for a further 45 days, having to apply for four licences a year imposes unnecessary transaction costs on exporters. The law on commercial invoices for garments provides for six-month licences on garments exported to the EU, although such licences do not serve to limit exports of garments. Only inspection of the consignments will determine if the exporter is in breach of any quantitative restrictions imposed upon him.

In practice, at least one freight forwarder commented that unless a clear process was in place, customs officials were unwilling to approve uncommon exports. Only about a dozen categories of goods are exported from Cambodia and garments and shoes comprised 92 per cent of total exports in 2000. Informal payments and uncertain procedures discourage SMEs from exporting low-volume exports. MOC agreed to an issue raised by the public/private sector export processing working group that export licences fees were discouraging SMEs exporting handicrafts.

Small farmers have expressed concern over obtaining licences to export rice and fish (see fishing and garment sector chapters). A recent study estimates the costs of exporting one tonne of rice to comprise $5 of formal fees (for Camcontrol phytosanitary inspection and rice handling) and $9 of informal fees paid to each of the six agencies involved (CED, Camcontrol, phytosanitary inspector, economic police, border police, and handling workers). These costs represent 10–15 per cent reduction in the farmgate price on one tonne of exported paddy (Sik Boreak 2000)

In addition to the trade diversion costs, the quantitative restrictions placed on garment imports by many developed countries impose considerable administration and compliance costs in developing countries. The Cambodian authorities have entered into textile agreements with the US and EU to manage quota access to these markets for Cambodian garment producers. It is in the interest of both producers and the government to facilitate this trade. However, the government has to implement a system to ensure that garment makers comply with local content rules and to defend the country’s quota access from third country producers disguising their garment exports as having a Cambodian origin.

Table 3.2 outlines the documentary steps required to export garments to a country requiring proof of origin. The following table summaries these requirements. The final column shows the total compliance costs per consignment, these may be highlighted as follows.

In 1997–98 the UN Economic and Social Commission for Asia and the Pacific (ESCAP) funded a project to compare Cambodia’s trade documents with the 1981 UN Layout Key for Trade Documents. The project team recommended a number of changes to Cambodia’s trade documents.

However, the Certificate of Processing and Certificate of Quantity could be combined into a single site inspection form. Any inspections that take place could be recorded in different sections of the single form by the relevant agency. Furthermore, one general form could be used to replace the Temporary Export Authorization (TEA), Export License (EL), Certificate of Origin (CO) and Commercial Invoice (CI)– the current forms being used are virtually identical. A final stamp could indicate a change in the status of the document from being temporary to being a final proof of origin.

The RGC should accept copies of supporting documents rather than the original document. Although the government is concerned about fraudulent applications, in practice at least one agency, CED, accepts copies of supporting documents.

	Certificate of processing	Temporary Export Authorization	Certificate of quantity	Export declaration	Export Licence	Certificate of Origin & commercial invoice	Total per consignment
Purpose	Verify production	Verify production	Verify loading Qty and price	Record exports	Market access to EU	CI for US, CO for other GSP
Agency	MIME	TP Dept, MOC	Camcontrol / Customs	Customs	FT Department, MOC	TP Department, MOC	3 Ministries 5 Departments
Inspection	Inspect factory	Inspect factory	Joint visit of factory	Joint review of seals at port	NA		Maximum of 4 inspections
Time to Issue (days)	3	1-2	3	2	2		Minimum of 2 weeks
Formal cost $ per consignment	20	Included in EL and CO/CI cost	0.1% FOB	4	4=EL, 30=CI/CO, 50=CO(formA) 0.10–1.28 per doz pieces EU/US		for example $138 or $858¹
Informal cost $	20-30		?	?	10-14	90-120²	$110-150
No of Copies	1 original ? 3 copies ?	1 original 3 copies	1 original ? 3 copies ?	3 original	3 original 5 copies	1 original 8 copies	10 original 22 copies
Authorised	Minister of MIME	Director TPD	Director of Camcontrol	Royal Delegate	Under Secretary of State
Supporting documents	Application letter Invoice Packing list Contract Pdn report	Application form Draft CO/ I, EL CP Invoice Packing list Contract Receipt of fee	None	TEA or EL Invoice Packing list	TEA, Certificate of Quantity Bill of Lading Export Declaration Certificates of Origin of ASEAN sourced raw materials		6 main documents, 5 supporting documents. Application letter

1) Based on two consignments of 500 and 5 000 dozen pieces valued at $30 000 destined for the EU and subject to the minimum visa fee per dozen pieces of 10 cents. One of GMAC’s questions to MOC states that 200 dozen pieces could be produced in one day. The other formal and informal fees for the $30 000 and the $300 000 consignments are equivalent to tariffs of 0.8% and 0.3% respectively.

2) Additional $100 if only 2 or 3 CI applications. These amounts are doubled for urgent cases. (Source GMAC Q&A December 2000)

Source: Prakas 1437 1999, ESCAP 1998, Conversation with CED, FTD and TPD officials, GMAC 2001UN ESCAP Alignment of Trade Documents