Trade Compliance Versus Tax Compliance

Companies understand the importance of adhering to tax requirements. However, they often offer less support for trade compliance efforts. In this QAD Precision Report, we argue that both tax and trade compliance departments play a similarly important role in reducing corporate risk, eliminating violations and ensuring the correct monies are paid to the government. 

The phrase “the more things change, the more they stay the same” is often attributed to Jean-Baptiste Alphonse Karr, a French journalist and novelist. This statement certainly applies to many of the challenges seen by today’s corporate trade compliance professionals. In the context of this phrase, “change” refers to the ongoing additions, deletions, modifications and amendments to domestic and global trade laws and regulations, while the non-changing element represents the limited support many corporate trade compliance departments receive despite the complex and risk-associated duties they perform. 

This aspect of corporate behavior is often exasperating and captivating at the same time. If you’re a trade compliance professional working with a company that offers plenty of support to address trade compliance requirements, consider yourself fortunate. For those of you in the unenviable and more common situation of limited global trade resources, I may have a credible justification to help acquire the support you’ve been seeking. 

Trade Compliance and Tax Departments Have Similar Missions

First, try comparing your organization’s tax department and trade compliance department based on a few characteristics. For starters, the key mission of tax and trade compliance professionals are incredibly similar — both focus on the accurate calculation and payment of taxes, or duties, to the federal government. A quick query on the internet produced a number of published mission statements for corporate tax departments, as per the one below. In this case, I’ve simply replaced references to  “tax” with  “trade” or “trade compliance.”  In doing so, you can see how the following mission statement actually supports a common objective:

• “The mission of the Trade Compliance Department is to provide a current centralized knowledge base of federal, state and international trade law and to develop appropriate policies and procedures for those aspects of the law which impact the company. The Trade Compliance staff endeavors to create and maintain a working relationship with the diverse business units, educating and informing them as to the trade compliance aspects of their current and future transactions. We work to ensure that the company’s trade compliance policy and procedures are adhered to and meet trade compliance requirements in a timely manner.” 

In the United States, both tax and trade operations are overseen by the federal government and penalties can be imposed for noncompliance violations. In addition, both operations have similar categories of culpability in terms of negligence and fraud. Though, some experts cite that import and export fines can be up to eight times higher than tax penalties. With these similarities in terms of operations and corporate risk, is it logical to expect that enterprises should support both operations equally in terms of staffing and budget? For many trade professionals, we know that this is not the case today. 

Trade Compliance Departments Often Lack Access to the C-Suite 

Corporate tax departments have evolved over the years to the point where they are typically a separate department, headed by an executive with a strong tax background. This person often reports to the chief financial officer or may, in some cases, report directly to the CEO. Accordingly, tax professionals have achieved an organizational status that provides direct access to the “C-suite” on topics that include tax regulations, tax compliance risks, staffing needs and other areas. 

In contrast, trade compliance activities are often  found organized under a variety of operations, such as  transportation and logistics, supply chain, legal, finance and other areas of a business. In some cases, trade compliance duties might even be secondary to other job responsibilities.  Additionally, trade compliance typically lacks visibility with the executive staff and is one of those areas of business where “no news is good news.” You simply need to stay off the corporate radar by avoiding severe fines and supply chain delays that impact the customer experience. Does this sound familiar to the global trade professionals?

The Financial Costs of Non-Compliance

A final step for comparing tax activities with trade compliance should include an estimated cost figure highlighting the potential risk that trade noncompliance represents. Following is some advice from Adrienne Braumiller, partner at Braumiller Law Group: 

• “A safe rule-of-thumb for benchmarking Import exposure is to calculate 20 percent of your company’s total annual Entered Value, as based on Customs’ Negligence penalties. A company’s potential Export exposure, however, is more difficult to informally calculate as Export penalties are ‘per violation,’ which means that a single shipment can have multiple violations. It also depends on the type of violation (i.e., Export Administration Regulations, Office of Foreign Assets Control, International Traffic in Arms Regulations). While in many cases the civil penalties for OFAC and EAR violations are the same — up to $250,000 per violation or two times the amount of the transaction, whichever is greater — penalties for certain OFAC violations can be much lower.”

In addition, try to think of the last time a problem with tax resulted in an international order being “stuck in Customs”. And then there are both direct and indirect costs to consider, such as those associated with penalties and fines, as well as reputational damage, supply chain delays, loss of business, audit activities and other factors. Tax departments rarely need to explain

the importance their department brings to an organization -- let alone having to estimate the cost of non-compliance to justify tax activities. The same should be true for global trade management efforts. Hopefully, the approach above will provide you with a compelling case to influence management towards getting you the resources you need.

If you would like to speak to QAD to discuss how our global trade and transportation management solutions can support your organization, please contact us.

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Further Reading

IF YOUR TRADING PARTNERS ARE CRIMINALS, SO ARE YOU 

3 MINUTE EXPLAINER: WHY YOU SHOULD AUTOMATE TRADE COMPLIANCE

IMPORT MANAGEMENT: THE IMPORTANCE OF CORRECT CLASSIFICATION