US embassy cable - 04BOGOTA4534

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 004534 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 04/29/2014 
TAGS: ECON, ETRD, CO, FTA 
SUBJECT: ANDEAN FTA ANALYSIS: CUSTOMS ISSUES IN COLOMBIA 
 
 
Classified By: DCM Milton Drucker for reasons 1.5 (b and d) 
 
1. (C) SUMMARY: Despite previous reforms to Colombia's 
customs administration, more modernization is needed to fully 
support trade under an FTA. The customs bureaucracy itself 
hampers trade, lacking specialized staff and equipment, and 
suffering from high management turnover. Pilferage in customs 
warehouses and truck robberies are frequent, and shipments 
may be detained indefinitely or refused entry for minor 
infractions. In FTA talks, Colombia may request assistance to 
modernize laboratories, train experts, and develop online 
systems. This would promote transparency and efficiency, and 
improve oversight, control and customer service. This is the 
third of a series of sector briefs developed in preparation 
for the Andean FTA.  The summaries are based on in-depth 
studies which are available from USAID Bogota.  END SUMMARY. 
 
Background 
 
2. (C) Despite two 1990's reforms to Colombia's customs 
administration that reduced costs, improved consistency and 
addressed contraband and money laundering, more modernization 
is needed to fully support trade under an FTA. Customs policy 
and operations are managed by DIAN, the country's tax 
collection agency.  DIAN lacks specialized technical 
divisions to conduct origin, valuation and classification of 
merchandise, and require better-trained staff and specialized 
equipment.  High turnover of management -nearly 100 percent 
annually for non-political posts- adds to DIAN's 
institutional instability. 
 
3. (C) The DIAN bureaucracy itself forms a barrier to trade 
for both local and foreign companies.  Pilferage in customs 
warehouses and truck robberies are frequent.  Shipments may 
be detained indefinitely or refused entry for improper tariff 
classification, incorrect address, or typing errors.  Minor 
infractions are subject to stiff penalties. 
 
Issue:  Rules of Origin 
 
4. (C) Certificates of origin demonstrate that products 
qualify for preferential treatment under the FTA. Though the 
Trade Ministry determines the origin of goods, issues 
certificates and rules on the validity of foreign 
certificates, it lacks the specialized personnel and funds to 
provide adequate and effective control.  Certificate formats 
and origin verification procedures are not standardized. 
Ideally, origin verification should be a post-import 
procedure, with inspections used only when fraud is 
suspected. Certificates should be issued at the customers' 
request, and shipments should be released without necessarily 
requiring certificate presentation.  Private exporters should 
provide importers with standardized information on rules of 
origin; under the current system the GOC certifies origin of 
goods on behalf of Colombian exporters. 
 
Issue: Valuation and Reference Prices 
 
5. (C) DIAN's valuation of goods is partially compliant with 
the WTO customs code.  Currently DIAN requires an Andean 
Valuation Statement for each import.  For greater efficiency, 
this should be required only in specific instances like for 
post-import controls and visits. 
 
6. (SBU) Colombia used minimum prices of reference to 
determine the customs value of merchandise until disallowed 
by the WTO in April 2003.  However the GOC replaced them with 
"estimated prices," which are ranges of maximum and minimum 
prices used to control prices of imported goods. Currently 
these apply to tires, certain textiles and apparel products, 
shoes, and some electric products.  The GOC also applies a 
price-band for agricultural products, as well as reference 
prices for other sensitive products including paper, liquor, 
iron and steel products. DIAN may confiscate and charge a 
surtax on goods whose declared price is below the reference 
price, a practice inconsistent with the WTO. 
 
Issue:  Classification 
 
7. (SBU) The Brussels Convention on Classification of Customs 
Goods and Tariffs established three criteria for 
classification of merchandise that were also adopted by the 
WTO and the GOC based upon the definition of the product, its 
cost and its place of origin. Unfortunately, the DIAN lacks 
the specialized personnel and up-to-date laboratories needed 
to adequately classify merchandise. 
 
Issue:   Inspections, Sanctions and Control 
 
8. (U) Customs officials inspect merchandise to verify the 
importer's declaration.  Trained inspectors perform random 
post-clearance investigations to detect fraud, foreign 
exchange irregularities, and tax evasion.  Major brokers have 
a customs office in their own bonded warehouses where 
merchandise is cleared before delivery to the customer. 
 
9. (SBU) Some 231 actions or omissions may result in fines 
and suspension or cancellation of shipments.  Just 25 percent 
of sanctions are made on substantive grounds, while most are 
due to faulty import declarations or delays in payment of 
accrued tariffs.  Evidence provided directly to DIAN from 
foreign authorities is invalid in Colombian courts if not 
collected via the MFA, thus slowing the legal settlement of 
cases. 
 
Issue:  Foreign Trade Procedures and Management 
 
10. (U) DIAN requires nearly all importations to be 
undertaken through customs brokers, with exceptions for 
large-scale importers, tourists and a few others. This 
requirement was imposed to improve control mechanisms, and 
despite the higher initial transaction costs to users, the 
system has helped to professionalize foreign trade management 
processes. 
 
11. (SBU) Colombian customs offices lack a central electronic 
system to manage all import, export and transit regimes. 
Offices in Cartagena, Buenaventura, Medellin and Bogota use 
obsolete systems that are not compatible and cannot track 
temporary imports.  Smaller border offices like Leticia 
perform procedures manually, causing delays and inefficiency. 
 
 
Issue:  Legal Compliance with International Regimes 
 
12. (SBU) Colombian Law 6 of 1971 and Law 7 of 1991 regulate 
customs procedures and foreign trade. These laws need to be 
updated to reflect WTO customs valuation procedures and the 
simplification of customs regimes established by the Kyoto 
agreement.  Colombia belongs to the WTO agreement on customs 
valuation, to the Brussels World Customs Organization, and to 
the Kyoto agreement. 
 
Issue:  Special Regimes 
 
13. (C) The oversight procedures and systems in place to 
operate Colombia's special regimes are woefully deficient. 
The Vallejo Plan is a tariff and VAT-free special regime that 
encourages import of raw materials, intermediate and capital 
goods and spare parts to produce goods and services for 
export.  Free Zones are tariff and VAT-free areas that 
encourage economic development.  In practice, however, it is 
extremely difficult to track and verify the final destination 
of goods covered by the regimes to guarantee that benefits 
are warranted.  Thus producers may avoid tariffs and the VAT 
undeservedly, regardless of the final destination of the 
goods in question.  The Trade Ministry and DIAN should 
improve their coordination, as well as training in legal and 
procedural norms.  Training is needed to better control the 
entry and exit of goods in special regime zones and to verify 
the eligibility of production and assembly operations located 
in the zones. 
 
14. (C) Getting to the Table:  What GOC Needs to Do 
 
A. Colombia needs to implement an intensive training program 
to improve compliance with WTO valuation guidelines. Training 
should include instruction on approved valuation 
methodologies and practical exposure to WTO compliance 
systems used in the region. 
 
B. The valuation rules defined by DIAN should be publicized 
to educate and update users. 
 
C. Colombia needs to demonstrate that its rules of origin are 
transparent, do not distort international trade, and are 
managed impartially and consistently. 
 
D. DIAN needs to improve its institutional stability, 
possibly restructuring the DIAN over the long-term.  Turnover 
of management must be addressed. 
 
E. DIAN technical divisions should be beefed up with adequate 
equipment, modern laboratories and specialized personnel to 
investigate and sanction violations to the rules of origin, 
valuation, and classification of merchandise. 
 
F. Although customs intermediary companies must comply with 
DIAN's regulations, they should be monitored more closely to 
insure quality of procedures and to clamp down on 
unauthorized brokers. Integrated customs and sanctioning 
regimes would improve efficiency. 
15. (C) Overall GOC Position on Customs 
 
A. Colombia may request assistance to modernize customs 
laboratories, training in rules of origin as well as in 
valuation, classification, and development of integrated 
online information and customs transactions systems.  These 
would promote transparency and efficiency in valuation, 
classification, rules of origin, as well as oversight, 
control and customer service. 
 
B. In NAFTA and other international trade agreements, rules 
of origin are based on "substantial transformation" and 
require aggregate value tests.  These require a country to 
track a broad range of products, which is costly and requires 
specialized skills.  In an FTA, Colombia may press instead 
for rules of origin similar to those applied under the Andean 
Community Agreement.  These are based on more generic 
criteria related to the value of inputs from non-member 
countries as a percentage of the value of the final product, 
as well as changes in product classification in relation to 
imported inputs.  Colombia may argue that the cost of 
aggregate value tests could be higher than the gains from 
tariff reductions for specific products. 
 
C. Colombia may press for auto-certification by producers 
instead of Trade Ministry certification, as in the Chile FTA. 
The Ministry would instead police certificate validity. 
16. (C) GOC Negotiating Strategy for Customs 
 
A. The GOC understands that customs modernization is key to a 
successful FTA.  They will point to modernization efforts and 
may request U.S. technical assistance. 
WOOD