Logistics and 'tax suspended' goods

Logistics and 'tax suspended' goods

Third-party logistics (3PL) providers often provide specialised warehousing and distribution services for industries making goods that have particular storage or transport needs, such as refrigeration, bulk liquid handling, or for dangerous goods. However, one specialisation that is timely to discuss is that of bonded warehousing.

While bonded warehousing traditionally has been offered for imported goods with high tariffs, with import duties falling on so many goods, providers now are switching their focus to storing an increasing number of products that are subject to excise duties and other product taxes, and for which the owners are seeking to defer tax payments until they have buyers for their goods.

A bonded warehouse allows the operator to store both imported goods for which customs formalities have not been completed, as well as locally made products to be warehoused on a "tax suspended" basis until they enter the market. In some countries, providers may be able to "bond" the entire distribution channel, or move goods in a duty- and tax-suspended state to any number of bonded regional or locally situated warehouses that are very close to the final customer. This allows duty and tax payments to be deferred until the very last minute.

In order for a 3PL operator to receive these types of goods, it first needs to obtain the correct licensing from the relevant government authorities. This generally involves dealing with customs authorities if one wants to hold imported goods. To hold "tax suspended", locally manufactured goods, you might require a licence from either Customs or the domestic tax administration.

If the operation will be located in a free zone, then licensing may include a process with a board of investment, or a free-zone authority, which raises many interesting issues that merit a separate article later.

The process of obtaining a bond licence can often be arduous as warehouse applicants are required to meet certain standards related to their physical security, record-keeping and integrity over the entity and its employees. Once issued, these licences usually contain heavy conditions and will require the licensee to lodge a bank guarantee, have additional accounting, advise the relevant agency of any changes to operating procedures or to staff, and be subject to audit.

The main risk for the 3PL is the transfer of the duty and tax liabilities from the owner of the goods to the 3PL operation. It means that any accounting errors, mis-deliveries, incorrect orders or thefts -- anything that leads to "losses" of stock, in other words -- become the responsibility of the 3PL, which must settle unpaid duty and taxes with the relevant revenue agency. Likewise, heavy fines, or a loss of licence can occur if any conditions of those licences are breached, which adds to the overheads.

A benefit for the 3PL is that any value addition or any activity needed for the goods to comply with regulatory requirements can only be performed in bond, so the licensee has a monopoly and can charge additional fees for these activities. Examples could be filling 700ml bottles of whisky from a bulk container, placing a new label on a product, or creating a "promotional package" by attaching, say, a chocolate to a bottle of perfume.

Some of these operations will also be highly specialised and as such will have a captive market, such as a licensee running a bulk fuel terminal, or perhaps a warehouse that holds automobiles and where final touches such as music speakers or window tinting can be added.

The other noted activity that occurs in a bonded warehouse occurs when the duty and tax are accounted for and fiscal markings such as a tax stamp or a secure ink spray are added to a product. The intention is to indicate the duty and tax status, such as "tax paid", "for export" or "duty-free shop sale" and is a requirement in a growing number of countries; it is also common for fast-moving consumer goods such as alcohol, soft drinks and tobacco.

In fact, soon it will become mandatory for importers and manufacturers of tobacco products (and therefore their 3PLs) to be able to attach a "track and trace" strip for compliance purposes to every cigarette pack prior to it leaving the bond.

Finally, speaking of exports and duty-free shop sales, these will be exempt from duties and taxes. Consequently, to avoid having to pay these to the revenue authority and claim a refund at a later point, manufacturers and regional distributors will use bonded 3PLs to facilitate the duty- and tax-free export or re-export of products out of the country.

However, it is advised that 3PLs considering this offering should look at their local laws, which will set out the specific conditions to be met for licensing and for ongoing operations of a bond.


Rob Preece is course director of Excise Studies and the Southeast Asian representative for the Centre for Customs & Excise Studies at Charles Sturt University in Canberra, Australia. The Link is coordinated by Barry Elliott and Chris Catto-Smith as an interactive forum for industry professionals. We welcome all input, questions, feedback and news at: BJElliott@ABf1Consulting.com, cattoc@freshport.asia.

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