House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Immigration and Border Protection the Honourable Scott Morrison MP)

Attachment: regulatory burden and cost offset estimate

1. The entry into force of KAFTA is expected to result in a small reduction in ongoing business compliance costs for Australian exporters to Korea. The reduction arises from the possibility that some businesses that previously sought and obtained non-preferential certificates of origin (COOs) may now be able to self-certify the origin of their goods.

2. There is a significant level of uncertainty regarding the number and composition of COOs issued in respect of Australian exports into Korea. Accordingly, the estimates of the compliance costs under the status quo - as well as the likely incremental changes - are largely assumption driven and should be interpreted as such. However, based on the available data, it is possible to gain an appreciation of the order of magnitude of these changes.

Certificates of Origin

3. COOs are issued by industry groups such as the Australian Chamber of Commerce and Industry and the Australian Industry Group.

4. Preferential certificates account for around 10 per cent of all certificates issued. Preferential certificates are generally issued in respect of countries with whom Australia has an FTA, but which do not allow for self-declaration.

5. Korea is Australia's third largest export destination, with the share of Australian exports going to Korea rising to eight per cent in 2012-13.

7. However, under the status-quo, it is expected that demand for Australian exports would be relatively less relative to Korea's other trading partners, and that figure could be expected to decline over time.

Direct Costs

8. Where businesses seek third-party certification from industry groups, the cost of each certificate varies from between $20-70 at an average of $33.

9. The cost of a certificate depends on the level of complexity - relatively simple or 'wholly obtained' goods (such as primary products, agricultural exports or resources) attract lower fees than complex or composite manufactured goods (which may require more complex cost of manufacture calculations).

10. It is estimated that around 70 per cent of Australian goods exported to Korea are 'wholly obtained' goods. A representative cost for the certification of Australian exports to Korea in general would therefore be towards the lower end of the $20-70 range.

Administrative costs

11. The ongoing administrative costs incurred by a business in preparing the documentation to obtain a COO are likely to be relatively low. As noted above, the bulk of Australian exports to Korea are 'wholly obtained' goods. Further, while new businesses may expend considerable time applying for certification for their initial consignment, as a matter of practice this information is re-submitted for subsequent certifications. In addition, much of the information required would be collected for other purposes. The administrative time burden for each application is therefore estimated to be modest.

12. Similarly, the records related to certificate of origin are required to be kept for five years for most foreign customs agencies. However, businesses are required under Australian Tax Law to retain these records for seven years. The incremental compliance burden associated with record keeping for COOs is therefore assessed as nil.

Incremental reduction in number of certificates under KAFTA

13. COOs are required for Australian exports to Korea for a range of purposes in addition to tariff compliance. For example, overseas customs agencies may require COOs for the purpose of calculating import quotas. Alternatively, foreign banks may require COOs in order to provide letters of credit.

14. Therefore, it is possible that of the total number of Australian COOs currently issued in respect of Korea, some of these will no longer be required as a result of the KAFTA. However, each business will have to consider for themselves, as a commercial decision, whether the benefits of obtaining a COO is outweighed by the costs (administrative and otherwise).

15. It is therefore assumed that there will be a modest reduction in the number of COOs issued in respect of Australian exports to Korea as a result of the KAFTA. To the extent that this reduction occurs, those businesses will save the direct costs of certification by industry bodies; together with the administrative costs.