Overview of Trade Preference Management
In today’s global trade environment, managing costs and staying competitive is vital for businesses. Trade Preference Management is a powerful tool that helps companies save money by lowering import and export duties through Free Trade Agreements (FTAs). Let’s dive into what it is, how it works, and why it matters.
Why Trade Preference Matters
- For Imports: It reduces import costs by applying lower duties.
- For Exports: It makes products more competitive since customers pay less or no duties.
What is Trade Preference Management?
Trade Preference Management focuses on reducing trade barriers between countries. This process helps companies:
- Request Long-Term Vendor Declarations (LTVDs) to determine the origin of materials.
- Calculate the preferential origin of finished goods.
- Issue Certificates of Origin to customers for reduced or zero import duties.
Benefits of Using SAP GTS for Trade Preference
Centralized Management: Administrative units group plants, making the process smoother.Cost Savings: Reduced duties lower overall trade costs.Compliance: The system automatically tracks and manages changes in origin status.Flexibility: SAP GTS supports various regions and agreements, including NAFTA and the EU.
How does Trade Preference Work?
The system follows a clear process to ensure everything is organized and compliant:
Step 1: Requesting LTVDs
When goods are received or a purchase order is created, the system requests a declaration from the supplier about the origin of the products. This helps avoid repeated requests for the same materials.
What happens if a supplier doesn’t respond?
The system sends reminders (called dunning letters) to ensure compliance.
Step 2: Maintaining LTVDs
Once suppliers provide LTVDs, the information must be entered into the SAP GTS system. Even if the declaration says the product is non-preferential, it is still essential for accurate calculations.
Step 3: Aggregating LTVDs
Raw materials often come from multiple suppliers. The system combines data from all suppliers to create a complete picture of the material’s origin. In other words, when raw materials are sourced from multiple suppliers, their data is combined for accurate calculations.
Step 4: Determining Preference Status
The system calculates the preferential origin of a finished product. This involves applying rules of origin specific to trade agreements like NAFTA or EU FTAs.
Step 5: Evaluating Results
Once the preference status is determined, the results are used in sales documents to confirm eligibility for preferential treatment. The calculated status is used to determine eligibility for duty reductions.
The system evaluates whether the finished product qualifies for preferential status using rules of origin.
Step 6: Printing Certificates of Origin
If a product qualifies for preferential treatment, the system generates a Certificate of Origin. This document proves the product’s eligibility and is critical for international trade.
Step 7: Issuing LTVDs for Customer Purposes
LTVDs can also be issued annually for customer purposes. These certificates are monitored in the system to ensure accuracy.
Master Data in Trade Preference
Accurate master data is crucial for successful trade preference processing. Key elements include:
- Vendor and customer details.
- Product classification.
- Procurement indicators (produced in-house or externally sourced).
- Material prices and Bills of Material (BOM).
Understanding Rules of Origin
Every Free Trade Agreement has its own rules to determine if a product qualifies for preferential status. These rules typically evaluate:
- Tariff codes for the product.
- Originating value (value of materials sourced from the FTA region).
- Threshold values (e.g., materials from outside the region should not exceed 7% of total value).
Example: Under NAFTA, a product can qualify for preferential status if non-originating components account for less than 7% of its total value.
BOM (Bill of Material) Calculations
The BOM outlines the components that make up a product. To determine preference status, SAP GTS uses two methods:
- Top-Down Calculation
Starts from the finished product and evaluates the origin of its components. - Bottom-Up Calculation
Starts from the smallest components and works upward to determine the final product’s status.
Final Thoughts
Trade Preference Management is essential for businesses engaged in international trade. By understanding and leveraging FTAs, companies can unlock significant cost savings and competitive advantages. Tools like SAP GTS streamline this process, ensuring accuracy and compliance.
Ready to explore Trade Preference Management? Start by setting up your master data and understanding your regional trade agreements!