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Customs Audit Manual By EXIT – Export & Import Training
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Index
Introduction. Page 2
The Customs Act. Page 6
Documents for the Customs Declaration Page 8
What do Customs look for in an Audit? Page 12
Setting up a Customs Friendly System. Page 19
Implementing the Customs system Page 22
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Introduction
The following information needs to be considered for preparing a company to be able
to handle the event of a real Customs audit which could have serious negative
consequences to any business involved in some way with the Export & Import Trade
industry.
We make go through our whole life without a car accident, but yet we drive with a
seatbelt in case we do have one. Without the seatbelt, even some non-serious
accident may leave us with a serious injury and a lifelong discomfort.
The people that are involved in the racing business prepare themselves very well for
an accident, because that is their line of business.
In the same way, we that are involved in some way with the international trade
industry, may be lucky enough not to be audited by Customs, but if Customs do
come and do an audit on us, how well will we do?
The main difference between our type of company and any other type of company is
that we deal with Customs, and if we intentionally want to do what is right but it is
found to be insufficient to the Act and Customs standards, then we are in trouble.
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Paying fines would be seen as throwing money away? All businesses are about the
MR’s, Maximising Revenues and Minimising Risks, there are always some people
appointed in a company to cover the MR’s.
One Customs fine could be more than a 1000 traffic fines. You will only have some
idea of what fines you could have had, when you look at the way you do things now
against the standard of this manual.
Any company that is involved in some way with international trade would need to
study the risks that they have with the Customs Act and their officers that carry out
the Customs duties.
From our experience, Customs are not as thorough as what they could be and we
may even unknowingly get away with infringements of the Act due to the lack of
knowledge of the Customs auditor at that time, but Customs are becoming wiser by
the day. This is good for the good companies and bad for the bad companies.
The biggest fine that we experienced with one of our clients in such an audit was 1.8
million Rand, which was reduced to 1.2 million after much negotiation with Customs.
Unfortunately we only got involved with training the staff after the fine was paid.
When Customs do an audit at a Company
When Customs do an audit on a company, they would look at the information they
got from their own computers, of all the activity against the company’s Customs
license number for the past 2 years. This would either be the trader’s licence number
or a Customs Clearing agent licence number.
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This Information that Customs would have would be printed in the date order of all
the Customs Bill of Entry numbers issued country wide from the various Customs
Offices against your company’s Customs license number (trader or agent).
When Customs are at your office and start requesting for records, the first thing that
they will do is call out a Bill of Entry (Customs Declaration) number.
Most companies at that point would look at each other and not know where to start,
as we file things in shipment files, of which the Customs Declaration is just one of
many documents.
If you look at the Bill of Entry number, it has a date built into it, but that still does not
help us who open up files according to shipping orders we give or get.
However to maintain your Customs license and a good relationship with Customs,
you will need to be able to draw the shipping documents on any shipment that
Customs may want to check on and when you are able to do that, what will Customs
be looking for?
The purpose of this manual and then audit is going to be twofold, one is to find any
mistakes that could be contravening the Customs Act and the other is to set up a
system as each shipment is completed, into a Customs favourable filing system.
If you have a Customs licence number (TIN), then you need to run your filing system
according to Customs requirements. When Customs ask for documents, you need to
get them fast to get Customs fast out of your place.
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So besides fixing the mistakes for them not to happen again, your company can
continue in the way you operate, but that each person working on these documents
just does something small at the end of each shipping file to be Customs Compliant.
Like clicking in your seatbelt in the beginning of a trip, is a small job that could save a
lot of possible negative consequences, so to, we that are involved in some way with
international trade, we do something at the end of the shipment to save a lot of
possible negative consequences with Customs.
You also don’t want Customs looking at the way you do your business by going
through all the unnecessary documents in your shipping files, so you will be creating
a “stand alone” Customs system that will not give away unnecessary and confidential
information of your business to Customs.
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The Customs Act
Let’s start with the wording in the Customs Act, by which Customs are (supposed to
be) guided to carry out the responsibilities.
In Section 40 of the Customs Act describes when a Bill of Entry becomes invalid
after Customs have cleared a shipment.
Why is this allowed?
Customs don’t have the resources to check every single shipment, they could only
check a small percentage of shipments, and therefore this rule is written into the Act
so that the Customs officers will know that they have 2 years to check on the
declarations that they have released to you on any International Trade transaction.
Without this section of the Customs Act, Customs would be under a lot of pressure to
check carefully every Customs Declaration made and would have to employ a lot
more trained staff for this purpose, this way without section 40, if they missed
something, it would be your good luck and their bad luck.
If this was the case (no section 40), then a lot more people would be trying their luck
with Customs or bribing the officers to overlook something for now.
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With section 40, Customs feel a lot more at ease to release a shipment, as when
they do pick up something irregular, they can then inspect the previous shipments as
well, which will form a case against the trader and/or their agent.
When Customs do their audit on all these released shipments, what do they look at
in these documents in your file?
Customs position on documents is that should there not be sufficient proof that the
Customs Declaration was done correctly, then their cargo release to you (the one in
your file) becomes invalid.
Customs would then make a ruling on what the declaration should be and make the
company pass a VOC (Voucher of Correction) and pay a fine.
This means that in their audit , should Customs not be satisfied with what we have in
our records as to what we said on the Bill of Entry, Customs would make us redo
those Bills of Entry to what they say it should be and pay fines on these shipments.
The 3P’s
The 3 things that all Customs look at everywhere in the world is the Products,
Papers and Payments. On our delivery of the declaration, Customs are more
focused on the products as they can check the paperwork and the correct payments
at a later stage, even when the products are no longer available.
Even when Customs call for papers before their release, it mainly has to do with
products been supported by the correct papers.
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So the purpose of Customs systematically auditing companies after their release to
you is then to focus on the Paperwork and the right Payments made, the 2 P’s.
In Section 39 of the Customs Act covers the document requirements for the support
of a Bill of Entry. Exporter & Importer (or agents) to produce certain Documents.
39 (1) C.
The said person (trader/agent) shall further produce documents supporting the
Customs Declaration.
1) Carrier Documents.
2) Invoices / Copy of the confirmation of sale or other contract of purchase and sale.
3) Shippers statement of expenses.
4) Importer’s written clearing instructions.
5) Such other documents relating to such goods as Customs may require.
End of quoted from Customs Act.
So we need to make sure we all understand these 5 types of documents required in
a Customs Act.
Documents supporting the Customs Declaration
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1) Carrier Documents.
This is your receipt from the shipping company showing that they are taking or have
taken the cargo from one country to another. By sea it would be the Bill of Lading, by
air it would be the Airway Bill and by land it would be the Waybill.
2) Invoices / Copy of the confirmation of sale or other contract of purchase.
On exports, this is the supplier’s invoices from a company registered inside the
country of export to a company outside the country of export.
On imports, this is the supplier’s invoice made up by a company that is on the
outside the country of Import, to a company inside the country of Import.
The reason for such wording above is that there are traders that are not based inside
the country of export or import, but seen “high seas” traders but they still have to
make up an invoice.
Customs my also require any correspondence used to form the contract (not in
agent’s audit). This could be a Quote, Purchase Order and/or a Proforma Invoice.
3) Shippers statement of expenses (Imports).
This letter is done on the company’s letter head with the heading “Shippers
Statement of Expenses” and signed by an authorized person. This is a statement of
financial facts relating to a shipment of a Customs Declaration.
At times the invoice may not carry the same value point as the Customs Value point
for Tax Value purposes which is in Box 22 on the SAD500.
As an example, South Africa’s Customs Value tax point on imports is FOB.
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If the importer bought EXW, FCA or FAS, (Look at Box 20 on the SAD500) then
Customs want to see a “Shipper’s Statement of Expenses” showing the cost
between say EXW, the factory, and FOB, when cargo was place onto a carrier,
which then is added to the amount on the Commercial Invoice to make up the correct
Customs Tax Value (CTV) for calculating import taxes.
If the importer purchased, say CIF, then Customs want to see a “Shipper’s
Statement of Expenses” showing the cost between FOB and CIF, like the freight
and insurance at sea, which then is correctly subtracted from the amount on the
Commercial Invoice to make up a Customs Tax Value (CTV).
The Shipper’s Statement of Expenses should be dated on or before the date of the
Customs Bill of Entry.
This document needs to be in the file when Customs do an audit. Don’t hope that
you will get a Customs officer that does not know all that they need to know.
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4) Importer’s written clearing instructions.
When the importer is using a Customs Clearing agent, then the importer needs to
write a letter to the agent giving a statement of facts relating to the shipment
covering financial values and a description of the cargo with the Customs
Harmonized number.
Most agents have made up their own “form” to help the importer think of what they
need to tell the agent.
Customs do not allow the importer just to give a set of documents to the agent to
pass the Customs Declaration at their own discretion.
5) Such other documents relating to such goods as Customs may require.
Some of these documents are as follows.
Statuary Certificates of Origin that the importer must produce if they are claiming a
discount allowed of import duties due to country trade agreements.
Import permits required on certain types of cargo.
Health certificates on certain types of cargo.
Supplier’s literature, covering what the cargo is.
There are more such documents, but the above are the basics.
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What are Customs looking for in any Audit?
The easiest way to remember what Customs will look for (how they think) in the audit
is to think of the letter C, which is also used in the word Customs (Cargo Cops)
covering the 4 steps of any Export & Import Trade, this is the same in every country
and they are as follows.
1) The Contract Formation (only commercial invoice is checked in agent’s audit)
2) The Carrier Receipt
3) The Currency Payments (only checked in the trader’s audit)
4) The Customs Declaration
1) The Contract Formation
With trade it is not always convenient for traders to both sign one set of documents,
it is not always practical for a seller to wait for the buyer to sign the document and
send it back to the seller, and so what would Customs look for?
In law, this is called a Counterpart Contract, meaning that each party is holding a
part that makes up a contract. The seller has a document from the buyer and the
buyer has a document from the seller.
If you did not have the luxury of a sales contract it place, which is nowadays not
used much, due to the speed of change in exchange rate values; a Purchase Order
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backed by a Pro-forma Invoice is sufficient legal evidence that a contract was
formed.
The carrying out of the already formed contract would be the Commercial Invoice
which should have the name of the carrier on which the cargo was placed.
2) The Carrier Receipt
This is your receipt from the shipping company showing that they are taking (or have
taken) the cargo from one country to another. By sea it would be the Bill of Lading,
by air it would be the Airway Bill and by land it would be the Waybill. These Carriers
Receipts showing a place of receipt and a place of delivery, which should conform
with the invoice.
3) The Currency Payments
This is just the proof that you were paid the correct amount for exports (Invoice) and
did you pay the correct amount for imports (Invoice). Here Customs would be looking
for bank records on a shipment that they are auditing.
This is not checked at the Exporter or Importer’s agents Customs Audit, but only with
the International trader’s Customs audit.
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4) The Customs Declarations
Nowadays we have electronic Customs Releases, and no documents are submitted
to Customs, but Customs have 2 years to check on what they have released to you
on Export & Import Trade.
Although as a trader, you may have given all your documents to your Clearing &
Forwarding Company (which is in Box 14 on your SAD500), who do the Customs
Declaration with your Customs licence number, Customs still want to do some
checks afterwards in an audit with the trader or the Clearing Company.
Just keep in mind that at this stage, it is no longer the products that are audited, you
don’t have something to show to Customs, you only have documents that must be
produced at the time of the audit, not the next day, as that may give you time to
fabricate documents.
Before the electronic Customs Release was introduced, all the declarations to
Customs had a full set of documents in each file. This way Customs had to open
every file to “stamp” the Customs Declaration documents (SAD500).
Customs then had all the supporting documents at the “finger tips”, if they wanted to
check anything before they “stamped” the SAD500.
Now customs are only receiving what is like a big email from the trader or their agent
and now Customs are “electronically” stamping only the SAD500 without seen any of
the documents.
This means now more than ever before, Customs would want to do audits on Export
& Import Trades. Since the electronic Customs Release, Customs now have a bigger
need to do such audits on past shipments.
The main Boxes Customs look at on the Export SAD500
BOX 2
Is this still the correct physical address of the exporter, they place where the exporter
keeps all their shipping documents, their export office of trade.
Box 6
Is the total amount that is in Box 6 the same amount of packages as what is on the
commercial invoice? Often when we are exporting container loads, we put in the
number of containers use into Box 6; this is a mistake as the container belongs to
the shipping line.
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The only time that this is allowed with Customs is when shipping out in bulk, but then
we will have a code one in Box 19. For any other code used, from 2 and up, we are
not allowed to enter the amount of the shipping lines containers.
In short, Customs want to see that the total number of packages given on the
commercial invoice is the same as the total in Box 6.
Often how Customs pick up this mistake is when we are putting the total number of
packages into Box 31 that is reserved for the description only.
Box 8
Is the name of the Buyer on the commercial invoice the same name as here in box
8? If it is not so, then what is the reason that it is different. This is specially looked at
with road cross border trade.
Box 18
Is the carrier’s details the same as what is here and what is on the carrier receipt on
the file? If it is not so, then why, this is specially looked at with the road cross border
trade.
The carrier that is taking the cargo out of the country is also making a declaration to
Customs called a “manifest”, giving details of the cargo receipts that they gave out
on picking up this cargo.
The manifest and the carrier’s receipt should confirm with what is in box 18.
Box 20
Although this box is not covered in the Customs SAD500 manual given out by
SARS, we have had clients that have got fines for not putting in the details, and if
you know Customs, it does not help having a heated debate with them.
The box should have the Incoterms code with the handover address from the seller
to the buyer. This is most often not the same address as what is in box 2 or box 8.
Box 22
If the value in Box 28 was smaller than the value in Box 22, then are there any
charges on the Clearing and Forwarding Company’s account for any amounts
outside the country of exports.
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If the value in Box 28 was bigger than the value in Box 22, then are there any
charges on the Clearing and Forwarding Company’s account that are more than the
difference between the Box 28 and Box 22.
Box 28
Is the currency used in Box 28 the same currency used on the commercial invoice?
This is a common mistake when a Rand value is used in Box 28 and a foreign
currency is use on the commercial invoice.
Box 31D
Is the description on the commercial invoice the same as what is here in 31D?
The main Boxes Customs look at on the Import SAD500
Box 6
Is the total amount that is in Box 6 that same amount of packages as what is on the
commercial invoice? Often when we are importing container loads, we put in the
number of containers use into Box 6; this is a mistake as the container belongs to
the shipping line and not to the importer.
The only time that this is allowed with customs is when importing in bulk, but then we
will have a code one in Box 19. For any other code used, from 2 and up, we are not
allowed to enter the amount of shipping lines containers.
In short, Customs want to see that the total number of packages given on the
commercial invoice is the same as the total in Box 6.
Often how Customs pick up this mistake is when we are putting the total number of
packages into Box 31 that is reserved for the description only.
Box 8
Is the name of the Buyer on the commercial invoice the same name as here in box
8? If it is not so, then what is the reason that it is different. This is specially looked at
with road cross border trade.
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Is this still the same physical address as to what is on the importer’s Customs
licence?
Box 18
Is the carrier’s details the same as what is here and what is on the carrier receipt in
the file? If it is not so, then why, this is specially looked at with the road cross border
trade.
The carrier that is brining the cargo into of the country is also making a declaration to
Customs called a “manifest”, giving details of the cargo receipts that they gave out
on picking up this cargo. Sometimes the carrier issues the receipt as place and date
of issue and not as the date loaded, this is picked up by customs from the manifest.
Was the correct date used to calculate the exchange rate which is indicated on the
carrier’s manifest? Sometimes the carrier’s receipt is dated differently to the
manifest.
The manifest and the carrier’s receipt should confirm with what is in box 18.
Box 20
Although this box is not covered in the Customs manual given out by SARS, we
have had clients that have got fines for not putting in the details, and if you know
Customs, it does not help having a heated debate with them.
The box should have the Incoterms code with the handover address from the seller
to the buyer. This is most often not the same address as what is in box 2 or box 8.
Box 22
If the value on the commercial invoice was smaller than the value in Box 22, then are
there any charges on the Clearing and Forwarding Company’s account showing this
as chargers inside the country of exports with the same amount, was there an
undervalue declared here?
In this case, has the importer made up a “Shipper’s Statement of Expenses” adding
those charges correctly for the value that was declared in Box 22, was there an
under value declared here.?
If the value on the commercial invoice is that same as Box 22, then are there any
charges on the Clearing and Forwarding Company’s account for any amounts inside
the country of exports, if so then why?
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If it was found that there are charges on the Clearing and Forwarding Company’s
account for charges inside the country of exports, why was there not a “Shipper’s
Statement of Expenses” covering those charges to make the value higher for the
correct FOB value for razing import taxes and VAT.
Box 31D
Is the description on the commercial invoice the same as what is here in 31D
Box 42
When more than one type of product is imported, then the SAD501 is used. Was the
correct FOB values used in all the Box 42’s in relation to the commercial invoice?
Was one line with no or lesser import duties shown as a bigger amount while another
line with a higher import duty shown as a lesser amount?
Box 43
If the code “N” was declared, then does that fall outside the definition for “R”, is there
a relationship between the seller and buyer according to Customs definition.
Games is a serious business and business is a serious game,
one is measured in points and the other is measured in profits.
Quote by Joseph Cubby
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Setting up a Customs favourable System
If you want to do as little as possible and do have confidence that all the documents
are in the file then at least record all the Customs Bill of Entry numbers in such a way
that you could have them saved in date order.
Then link that information to your existing filling information system. This way, if
Customs want information to a declaration done by your company, your list of Bill of
Entry numbers would guide you to your own filing system.
This way you would need to be confident that all your staff are doing everything right
and they do have all the documents on file that Customs may want to see in an
audit. Not have to go and ask someone to email you a missing document.
From our experience, no one is perfect and people don’t do everything that you
expect as a manager but only things that you inspect. So if the staff knows that
someone is going to go through their files to prepare for the possibility of a Customs
audit, then they would put in much more effort to keep some standard.
The staff could be required to keep the various documents that Customs may require
at the top of the file for easy retrieval in the event of the need of removing the right
documents for auditing purposes or scanning into a Customs electronic filing system,
or placing it into a separate hard copy Customs filling system.
A filing system needs to be created as each shipment is completed. This is for what
we want Customs to see in an audit, they don’t need to know your full business. You
don’t want a corrupt Customs officer selling information to your competitors as they
have a right to make copies of anything they want.
To recap what the Customs officers are trained to look for are as follows.
1) Contract Formation (Agent only needs commercial invoice in their audit)
2) Carrier Receipt
3) Currency Payments (only done in the trader’s audit)
4) Customs Declaration
The most efficient way is to set up a scanning system that each person then just
scans in the relevant documents that Customs may need in an audit, saved in Bill of
Entry date order.
If you are not going to use the scanning method to make an electronic record then
just make copies of the documents needed by Customs and make a separate
Customs “stand alone” file, which is placed in Bill of Entry date order.
This way you can then keep Customs from going into your files randomly when you
are taking too long to find the information they are looking for.
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Setting up the record or hard copy record.
Start with the date of the of the SAD500 number which is the MRN number. The first
3 letters are the Customs office code, which you can skip and is followed by the
date.
MRN number for Johannesburg would be, JHB201311220001234
So the first 8 numerals after the Customs office code is what we are going to work
with in setting up this Customs License Record (CLR).
Following list of documents is what is required in the Customs Audit.
CD : Customs Declaration SAD500/01and letters.
CR : Carrier’s Receipt (Bill of Lading / Airway bill)
CP : Currency Payment (bank record of payment) (not for agents)
CF : Contract Formation (Commercial invoice & Purchase order)
Because there could be more than one document in each of the 4 steps above, what
we have found working efficiently are as follows.
After the date, add the code (one of the 4) (agents only have 3) for the type of
document, followed by the numbering of the documents of the one type of
documents.
When Customs request the documents for a particular shipment, then you just print
out everything relating to that date, which would then automatically give Customs all
the documents they need.
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This way you won’t be looking for files and then look for documents in those files.
Your system would be very efficient and impress Customs. Customs don’t like to
hang around efficient companies, it is boring for them, and Customs would rather go
intimidate other inferior companies.
With a proper setup for a Customs audit, they would be in and out your company and
may never return to your company because you are so efficient.
Only about 1% of Companies would pass a Customs Audit.
Following is an example of scanning the documents into a system. The example
date we are using is the year 2013, the month of November, dated 22nd.
Customs Declaration (CD)
20131122CD1
20131122CD2
20131122CD3
20131122CD4
20131122CD5
This is showing you that you have 5 documents under the Customs Declaration. This
could be SAD500, SAD501, SAD507, Shippers Statement of Expenses and Agents
Clearing Instruction.
Carrier’s Receipt (CR)
20131122CR1
This is showing you that you have only one document under Carrier Receipt.
Currency Payments (CP) (not for agents)
20131122CP1
20131122CP2
This is showing you that you have two documents under Currency Payments.
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Contract Formation (CF)
20131122CF1
20131122CF2
20131122CF3
This is showing you that you have three documents under Contract Formation. This
could be a Commercial Invoice, a Purchase Order and a Quote.
From this format you see that it is very simple to set up and just requires a little
discipline to maintain, that would save you a lot of trouble during a real Customs
Audit.
Implementing the System
The best way to implement this is to start on a future set date after all the staff are
briefed on how this is to be done and why this it is to be done.
Should it happen that you get a Customs Audit before you have built a 2 year record
in this format, it would then be easy enough to find the papers in the older files as the
staff would be familiar with what Customs need.
Many companies (traders & Agents) get at least one Customs audit and then run
around not really understanding what Customs are looking for and they way they
think. How can you know is Customs is just abusing your company if you don’t know
what they are meant to look for?
This is because Customs sometimes just ask for a particular shipment file, and the
staff doesn’t know what Customs are checking for in those files, sometimes Customs
don’t even know themselves all what they should be looking for.
We suggest they your company appoints one or two staff members as a Customs
Compliance officer to do random checks on your system, maybe once every 6
months. This could be an internal appointment or an external contractor.
The Customs Compliance officer would take at least one completed shipping file
from each department and check that the documents were scanned correctly into
you system or if you had a manual system, that the correct documents were copied
for your Customs Files.
An old saying is “People often don’t do all the things you expect but they often do all
the things we inspect”, that is just the way busy people are. We don’t want that
inspector to be a Customs officer; it is much safer to have your own person (staff or
contractor) keeping you Customs compliant.
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A final note is Customs would ask for the totals of shipments over the period that
they are auditing as to how many shipments were done each by land, sea and air.
If you follow this simple system diligently, then you will never need to fear the day a
group of Customs offices walk into your company.
The worst day is when Customs do come do an audit and you have done nothing to
prepare for it. Then we get the “call”, but at a much high fee because of all the work.
A mistake or bad luck is caused by an insufficient system that only takes one person
or event to reveal the weak spot (quote by Joseph Cubby).
It is better to call us before you get your notice of audit from Customs.
Thanking you for the opportunity for us to serve you company.
Jim Merrington
EXIT – Export & Import Training
083 738 6867
www.exit.bz
A successful person is an average person that at
some point became and stayed focused.
Quote By Joseph Cubby