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chapter 5 Central American Customs Union and Challenges for Tax and Customs Administration

Dominique Desruelle, and Alfred Schipke
Published Date:
November 2008
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Andrea Lemɠruber-Viol


In December 2007, the governments of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua signed the Framework Agreement for the Establishment of the Central American Customs Union (CACU). The agreement is an important step in the process toward regional integration, and is based on a broad sharing of experiences, negotiation, and joint work by officials from the five countries, together with representatives of Panama and the Dominican Republic. As international experience shows, the existing models of customs unions (CUs) are diverse; each type of union reflects the particular circumstances of the member countries. Thus, Central America is embarking on a gradual but dynamic process of deepening regional integration, with a view to achieving sustainable economic and social development.

Although the agreement establishes a legal framework for the customs union, there are many future challenges to consider and decisions to be made. Important issues that will determine the effectiveness of the region’s customs and tax administrations (CTAs) have yet to be settled.1 These include the following: the free circulation of goods and how to proceed regarding the control of sensitive goods; the operation of the internal customs posts (or the “centers of trade facilitation”); the administration and control of the free trade zones (where the so-called maquiladora companies are located); the fact that the signatories to the agreement can still conclude bilateral free trade agreements regarding non-CACU members, and how this may negatively affect customs administration; and the model for distributing the revenue collected through customs to the destination country.

To face these challenges, the Central American CTAs will require a well-defined strategic plan. Such a plan should address three main areas: (1) normative convergence, (2) institutional development, and (3) administrative and operational strengthening. The CTAs in particular need a modernization strategy because they are critical institutions that support the regional integration process from its beginning phases. The CTAs support a key objective of integration—trade facilitation. At the same time, they help protect the member countries against tax fraud and contraband, while generating revenue to finance the countries’ expenditures. Thus, their efficiency and effectiveness will determine the success of the integration process and its progression toward more advanced stages.

This chapter examines the process of establishing the CACU from the perspective of the CTAs and is organized as follows. It analyzes the process of regional integration and describes the main characteristics and the effects of integration on CTAs. It then identifies certain minimum requirements that the CTAs need to meet to support the integration process and discusses some international experiences regarding customs and tax arrangements in a customs union. The chapter also addresses key tax and customs principals in defining an appropriate model for the CACU and examines the modernization needs of the Central American CTAs.

The Regional Integration Process: Requirements and Implications for the CTAs

Regional integration is a gradual process that involves the deepening of both economic and institutional relations. For example, larger trade and financial flows are typically accompanied by effective information sharing between country authorities and unified procedural codes for facilitating and controlling those flows. Dorrucci and others (2004) demonstrate that the two processes are closely correlated and that institutional integration helps deepen economic integration.

As discussed in Chapter II, regional integration is, in practice, a continuum and allows for various arrangements to reflect the particular circumstances of each group of countries. Each stage of integration has direct implications for customs and tax administration.

  • Free Trade Area (FTA): tariffs and quotas are abolished for imports from area members, but national tariffs and quotas against nonmember countries are retained.
  • Customs Union (CU): an FTA with common tariffs and quotas for trade with nonmembers (known as the common external tariff—CET).
  • Common Market (CM): a CU with no nontariff barriers to trade or restrictions on the movement of capital and labor.
  • Economic and Monetary Union (EMU): A full economic union (which is also potentially a monetary union) would entail a significant degree of coordination of national policies and harmonization of relevant domestic laws to eliminate distortions.

The CTAs are affected by the integration process in quantitative terms (number of taxpayers, returns and tax transactions) and in qualitative terms (different business processes, management capacity, and organizational arrangements). Larger economic flows imply more service and enforcement activities (e.g., phone calls, Internet hits, customs clearances, transfer pricing operations). In order for the CTAs to handle a large volume of work in a cost-effective way, the CTAs will need to modernize their processes, including electronic filing, services and payment; risk analysis; and strategic management. They will also need to share information with their international counterparts, implement a series of tax treaties, and perform joint audits. Integration will also create new possibilities for fraud and evasion. This will require the CTAs to adapt and to respond quickly. An example is the VAT (value-added tax) carousel fraud that emerged in the European Union (EU) with the elimination of the intra-EU borders and led to subsequent changes in the administration of the intra-EU VAT.

To address these challenges, the CTAs will need to meet a series of requirements at the various stages of the integration process (Table 5.1). These are legal, institutional and operational requirements that typically consist of establishing standards for minimum or good practices in each area and implementing an effective tax and customs modernization strategy. A practical example is the European Union’s accession requirements.2 Minimum standards should be established for all core functions of a CTA, including human resources policies and infrastructure. The greater the effort to establish common institutional and administrative arrangements, the greater the advantages to be gained—but also the greater the requirements. Furthermore, different institutional arrangements are needed at different stages of the regional integration process. For instance, the CTAs support the initial stages of economic integration because tariff and trade policies are the first to change. Other institutions are developed at more advanced stages.

Table 5.1.Regional Integration Process: Main Requirements on CTAs
Level of

Objectives and

Institutional and

Legal Requirements

FTAElimination of internal tariffs.Establishment of treaties on information sharing among countries of the group.Certification of origin.
Elimination or reduction of trade restrictions (quantitative quotas).

Elimination or reduction of charges and measures having an equivalent effect to a customs duty.

Maintenance of national tariff and trade policies in respect of non-member countries.
Adoption or negotiation of treaties on double taxation.

Gradual convergence of various bilateral free trade treaties signed with nonmember countries.
Electronic information sharing.
CUElimination of internal tariffs.Adoption of a common customs code, regulations, and various manuals.High level of coordination of customs procedures.
Elimination of trade restrictions (quantitative quotas).Standardization or harmonization of materials related to customs transit, customs valuation, documentation, technical barriers (sanitary, etc.)Creation of compatible or unified information technology systems.
Elimination of charges and measures having an equivalent effect to a customs duty.Harmonization of trade regulations (certificates, labels, etc.), trade defense, public procurement system, etc.Mutual assistance programs (joint audits, coactive collection, presence of officials from other countries in customs, etc.)
Adoption of a common external tariff.

Adoption of common policy on trade with nonmember countries.
Code of conduct for customs officials.

Training school.
Strengthening of external customs posts.

Use of internal customs posts for specific controls and domestic taxes.

Integrated customs border posts.
CMFree circulation of persons (labor) and capital, in addition to the elimination of restrictions that prevent the circulation of goods and services.Elimination of internal customs and internal para-customs controls.High degree of cooperation and data sharing.
Unification of customs and trade policies and other legislation.Unification of customs procedures and documentation.Integrated planning and tasks (risk controls, integrated plan for combating fraud).
Harmonization of indirect taxation.Greater attention to integrated work on income tax: investment flow, royalties, transfer prices.
Harmonized tax concessions policy (duty-free areas, special arrangements, etc.).
EMUUnification of monetary policy and adoption of a single currency.Greater integration at the administrative, documentary, information sharing, and procedural levels.Integrated electronic systems (management, statistics, records, etc.) Integrated strategic planning.

Meeting many of these requirements calls for an intense process of political negotiation and institutional change, which presents considerable challenges especially for developing countries. For this reason, actual integration experiences usually fall somewhere between the abovementioned “full stages”; that is, the established requirements are partially met, or temporary exceptions are adopted. One example of this is the current arrangements that are legally defined as a CU (e.g., Mercosur and the South African Customs Union).3 However, these are in fact “incomplete CUs” whose processes are still partially met or under development. In some cases of integration, the law and regulations are far-reaching, but implementation falls short owing to a lack of information systems, unified procedures, or administrative capacity. At other times, although operational and institutional conditions are in place for increasing effectiveness, there is no legal basis on which to act. The next section highlights some of the requirements for tax and customs administrations that are associated with the establishment of FTAs and CUs. The experience of the Central American countries is then analyzed.

Free Trade Areas

The FTA eliminates intrazone tariffs and quota restrictions. However, each country maintains its national trade policy with respect to nonmember countries. Therefore, the basic task of the customs administration is to differentiate between intra- and extrazone goods, given that they will face different tariff levels and controls. Certifying the origin of goods4 becomes a critical requirement, as free circulation of goods applies only to goods that originate in the FTA. If the principle of free circulation of goods were to apply to goods not originating in the FTA, the differences in tariffs among the countries would lead to trade diversion. As a result, in an FTA, customs must perform the additional task of applying different tariffs and controls depending on whether goods are intra- or extrazone in origin. This often involves managing distinct rules of origin through the FTA’s protocol of origin.5 Furthermore, given that many trade arrangements between countries are in practice incomplete FTAs, customs often administers a list of intrazone sensitive goods to which the concept of free circulation does not apply and on which tariffs continue to be collected.6 Examples of these goods vary but typically include various agricultural products, oil, alcohol, and tobacco; and goods that can pose threats to local industries. In other cases, countries may maintain charges (e.g., fees, export or import licenses) and measures (e.g., sanitary, phytosanitary, and food standards, labeling requirements) that have the same effect as a customs duty. In these cases, the work of the customs administration becomes more complex because it has to administer the exceptions associated with the FTA while facilitating trade within the zone.

Domestic tax administrations are, at this stage, perhaps less affected than customs, but they must still make some important changes. These include increased information sharing and joint audits with customs, closer control of foreign trade and investment transactions (e.g., transfer pricing, thin capitalization, and the effects of customs fraud on income tax obligations), and information exchange with other administrations in the region.

Customs Union

One of the main characteristics of a Customs Union is the application of a common external tariff (CET) to trade from third countries. By applying a CET, countries in a CU subject extrazone goods to an identical tariff regardless of their point of entry into the zone. Therefore, after clearing customs at the external customs point (actual borders with the extrazone), all goods in the CU can circulate freely within the CU. At this stage, there is no need for controlling origin to differentiate intra- and extrazone goods, though the rules of origin remain applicable to trade with nonmembers (e.g., to apply antidumping policies). The application of similar controls and procedures at all external customs posts is an important requirement. This ensures harmonization of rules and procedures and helps avoid fraud schemes in customs posts that are weaker administratively. At this stage, coordination among different customs is critical, and minimum standards of procedures, risk control, and human resource policies (including a code of ethics) should be enforced. The trade-off between free trade and effective control may be addressed only by modern, integrated institutional and operational arrangements.

A CU does not automatically imply the elimination of internal customs controls among the CU’s member countries. Although this may be the case in “complete” CUs, in practice most CUs maintain customs controls within the zone to regulate sensitive goods (lists of exception and drugs, arms, and banned substances). Another reason for maintaining intrazone customs controls is to collect domestic taxes (VAT and excises). Incomplete CUs persist for a number of reasons: there are exceptions to the CET; there are quantitative quotas, charges, and measures that have the same effect than a customs duty; there are weaknesses in customs’ administrative capacity in some member countries (e.g., customs is unable to apply minimum standards and is vulnerable to fraud or corruption); information sharing is ineffective; or there is a lack of integrated rules and procedures. Figure 5.1 depicts the concepts of complete and incomplete customs unions. A complete CU is rated “level 1” for all relevant categories, and thus it is represented by the outer line of the polygon. The inner line represents a hypothetical case of an incomplete CU. For example, a CET less than 1 would denote that a CET is in force but there are exceptions in effect.7

Figure 5.1.Complete and Incomplete Customs Union (CU)

Source: IMF staff.

Other relevant issues for a CU are (1) the model for distributing customs revenue (e.g., revenue from applying the CET) among its member countries and (2) the collection of domestic taxes on consumption. Revenues from the CET that are collected at external customs may be deposited into a central fund to finance common expenditures (as is the case in the European Union) or may be distributed according to the final destination of goods. Moreover, such distribution may take place on the basis of economic and statistical criteria. Each model implies a different political commitment and different management methods. Likewise, a proper method for levying domestic consumption taxes (VAT and excise taxes) will need to be put in place, given that rates vary among country members. If internal customs posts are in place, adjustments and controls can be made at these borders. However, problems may emerge in the absence of internal customs posts. The application of different tax rates combined with the application of the destination principle may create opportunities for arbitrage and fraud. Therefore, an efficient risk control system and information sharing are necessary. As mentioned earlier, these are challenges even for the advanced European CTAs.

International Experiences in Establishing Customs Unions and the Role of the CTA

A comparative analysis of selected international experiences is helpful for guiding discussions on the CACU. Lessons learned from various international experiences show that (1) institutional building is critical to support the process; (2) internal customs controls are often in place for long periods; and (3) a coherent, integrated strategy to adopt certain legal and administrative standards is needed.

Establishing a customs union implies costs arising from coordination efforts (meetings, joint audits, integrated information systems), training, infrastructure investment (e.g., customs ports, warehouses, scanners, computers), and other related costs. Partly because of these costs and challenges, there are actually few customs unions compared with other types of regional trade agreements.8

The most advanced integration experience is that of the European Union (Treaty of Rome, 1957). The Treaty established a customs union and a calendar for dismantling customs duties. However, because of restrictions stemming from the existence of internal customs and measures having the same effect as a customs duty (especially sanitary rules), the process of establishing a “complete” CU took almost 40 years. Until 1992 (Treaty of Maastricht), internal customs controls were in place throughout Europe. Goods had to be cleared at these posts even though customs duties were not paid.9 Since 1993, the European Union has been operating without internal customs controls. Goods imported from outside the zone are cleared at external customs in the first port of entry in the Union. The tariffs collected on these goods flow into a common fund that is part of the EU general budget. The elimination of internal customs controls has led to a VAT regime in which there is no border charge for intra-Community transactions. Instead, the payment of VAT is deferred until the tax is declared in the next VAT return. Goods subject to special taxes circulate under special relief arrangements. Box 5.1 summarizes the major steps in the European integration process.

The operation of the EU model is based on a series of minimum requirements that were developed over the years. A solid institutional base was established early, with strong legislative and technical capacity at all levels. Examples of this capacity include strong administrative cooperation among the CTAs in the EU, automatic information sharing, integrated information technology (IT) systems (e.g., the VIES system that enables members countries to share VAT-related information), risk systems and fraud prevention, standardized sanitary and other para-customs controls, full harmonization of the CET and the trade policy relating to nonmember countries; unified customs procedures (European Customs Code), and considerably improved external customs facilities. Despite this progress, fraudulent schemes have presented serious problems in the European Union. VAT carousel fraud alone has involved losses of about 10 percent of net VAT revenue in some countries and has resulted in proposals for a radical change in the way the VAT is levied and collected on cross-border transactions within the EU.10

Other existing customs unions are examples of “incomplete” arrangements. These include the South African Customs Union (SACU),11 the Gulf Cooperation Council (GCC),12 and the Southern Common Market (Mercosur).13 Each of these arrangements follows a different integration model that is suited to the specific economic circumstances of the member countries and reflects their political commitments.14

Box 5.1.Evolution and Construction of the European Union

(1) Treaty of Rome (1957): created the European Economic Community as a customs union and set a transition period. The major changes introduced as a result are as follows:

  • Elimination of customs duties on imports: 12-year calendar for full elimination, but fully implemented in 1968, a year and a half before the deadline set.
  • Elimination of levies having an equivalent effect as customs duties: no fixed calendar.
  • Establishment of the common external tariff: 12-year transition period, also entered into force in 1968, a year and a half before the deadline set. Frequently amended over time; in 1987, it became the Harmonized Commodity Description and Coding System.
  • Elimination of quantitative restrictions on imports and exports: prohibited since the Treaty of Rome was signed and actually implemented during the transition period.
  • Elimination of measures having an equivalent effect to a customs duty: also prohibited by the Treaty of Rome, though they remained in existence until the creation of the Common Market in 1992. The elimination was not achieved because of the continued existence of internal customs controls, the lack of harmonization of national policies on sanitary, veterinary, and quality controls, approvals, etc.; and the need to carry out tax audits in customs.
  • Implementation of a common trade policy: also with a 12-year transition period, during which time policies were to be coordinated for the establishment of a common policy at the end of the period. The policy is now basically harmonized with regard to changes in tariffs, the signing of tariff and trade agreements, trade liberalization policies, export policies, and trade protection measures (antidumping and antisubsidy duties).
  • Harmonization of legal framework: even in 1968, when the CET was implemented, the customs legislation was a long way from being harmonized, and then a series of regulations was adopted over time but encountered restrictions (even attempts at cancellation). The Customs Code was approved in 1992, unifying various regulations on customs matters, and entered into force in 1994.

(2) Maastricht Treaty (1992): legal basis for the creation of the European Union as a Common Market and actual establishment of the free circulation of goods. (The free circulation of services, persons, and capital was added later.)

  • Elimination of physical borders in the zone: internal customs facilities and intra-Community customs documents eliminated.
  • Elimination of technical barriers and measures with an equivalent effect, following the establishment of harmonized minimum standards and recognition by all the countries of the internal standards of each country.
  • Elimination of fiscal borders: implies the adoption of a new approach to the collection of indirect taxes. This occurs through the transitional arrangements, whereby payment of the VAT and excise taxes on intra-Community trade is taxed in the country of destination.
  • Formation of the monetary union: the process began in 1999 with a transition period for the adaptation of economic and monetary policies, and the euro was introduced in 2002 for a group of countries.
Source: IDB and AECI (2006).
  • The SACU is the oldest customs union, dating to 1910. However, throughout its existence, it has been marked by economic and political asymmetries and weak administrative capacity (Kirk and Stern, 2003). The 2002 agreement created a new model for the distribution of customs and excise taxes.15 In this model, customs duties are distributed based on the share of each country in intrazone imports, while revenue from excise taxes is distributed on the basis of the share of each country in regional GDP. However, a common problem has been having access to reliable statistical information for supporting the revenue-sharing mechanisms.
  • The GCC was established in 1981. The process of establishing a customs union started in 2003 as part of the plan to issue a common currency and set up a common market in 2010. Internal border controls are mainly administrative controls that are in place to monitor the intraregional commercial flow of alcohol and arms. These controls are scheduled to be eliminated by 2012.16 During the transition period, tariffs are collected at the first point of entry into the GCC,17 and the distribution of this revenue is based on the final destination of the goods. There are plans to introduce a common fund for tariffs, but such a fund does not yet exist.
  • Mercosur was created by the Treaty of Asunción (1991). After a four-year transition phase, it was established in 1995 as an incomplete customs union, with free circulation of goods for about 80 percent of intraregional trade. Currently, lists of exceptions still apply to sensitive goods. A CET is applied, although there are exceptions for a fixed number of goods by country. These lists are reviewed by member countries every 6 months. Mercosur continues to have internal customs controls and verification of origin. There is no common distribution fund, and in some cases there is still double collection of the CET (e.g., at the external and internal borders). Even though Mercosur has a common customs code, it has not been ratified by all member countries. This is a goal to be achieved in 2008. There are still large asymmetries among the member countries in customs’ capacity, which pose risks regarding the elimination of internal customs posts.

Key Tax and Customs Principles in Defining an Appropriate Model for the CACU

The signing of the Framework Agreement for Establishing the CACU, in December 2007, demonstrated the political will to create an effective trade arrangement in the region. The framework agreement defined the most important characteristics of the CACU: elimination of quantitative restrictions and charges having an equivalent effect as a customs duty, adoption of common legal and normative standards, maintenance of internal customs posts, transfer of taxes collected at the border to the countries of destination (i.e., no establishment of a common fund), and strengthening of the existing institutional framework without creating a supranational body. Box 5.2 summarizes the major elements of the 2007 framework agreement.

Despite the framework agreement, there are still a number of decisions to be made and challenges to be addressed to design an appropriate CU model for the region. Generally speaking, such decisions involve the administration of a number of exceptions (e.g., sensitive goods, the CET, and the numerous tax exemption regimes—zonas francas); implementation, coordination, and control issues; and institutional capacity building. Specific issues to be dealt with include the following:

  • The free circulation of goods. Regarding intrazone commerce, a high portion of goods originating in Central America already circulate without tariff and nontariff restrictions. However, decisions are still pending for the so-called “Annex A Goods,” which consist of a series of products facing restrictions: sugar (all five members); ground coffee—unroasted coffee (all five members); roasted coffee (between Costa Rica and all others); oil products (between Honduras and El Salvador); ethyl alcohol (between Honduras and El Salvador and between Costa Rica and El Salvador); and alcoholic beverages (between Honduras and El Salvador). As mentioned before, “incomplete” CUs often operate with lists of sensitive goods for some time. This should therefore be seen as part of the gradual convergence process in Central America, but should be addressed sooner rather than later. For the time being, additional customs controls will be needed to certify the origin and classification of goods and to discourage fraudulent transactions associated with traders who are trying to take advantage of these restrictions.
  • The maintenance of internal customs posts. In the current economic and institutional context of the CACU, maintaining customs posts at the internal borders is a well-founded decision. For the foreseeable future, customs controls at the internal borders will be needed to monitor the goods on the exception lists, to collect domestic taxes on consumption, and to control prohibited goods (drugs and arms). The Central American countries are still in the process of developing a reliable VAT collection and enforcement mechanism, and evasion in the region is high.18 Thus, the absence of border controls could lead to increased VAT fraud and losses in VAT revenue. That said, there is much to be done to ensure that customs controls are effective, while not losing sight of trade facilitation, which is a challenge to any modern customs authority.19 In this regard, the Central American authorities intend to transform the internal customs border posts into “centers of trade facilitation,” while still leaving them to perform a revenue collection function. Thus, the presence of internal customs controls can be seen as a necessary phase to achieve a CACU that controls fraud, protects its citizens, and facilitates formal transactions. Along these lines, progress is being made in the establishment of joint internal customs border posts between a number of Central American countries, as indicated in Box 5.3.
  • The free economic zones. The Central American countries are competing to attract foreign investment by providing investors with a series of tax exemptions and benefits. This policy has led to the proliferation of free economic zones, where the so-called maquiladoras are located (see Table 5.2).20 This is a sensitive issue, given that the maquiladoras are not subject to the regular tax and tariff regime (application of the CET, payment of VAT, etc.) and create distortions in the investment flow inside the CACU. A particularly important issue is to define the borders between this in-bond regime and the rest of the economy. In other words, because the goods produced in the free economic zone are not subject to the CET and VAT, they should not be brought into the domestic market free of tariffs and domestic taxes. In some cases, duty-free allowances can be granted for limited amounts of goods purchased from these in-bond enterprises by individuals or by tourists entering the customs territory, provided (in the case of the latter) that the goods are for final consumption. However, a current problem, which could be aggravated in the CACU, is an increase in the incidence of fraud in connection with these regimes. Work is under way to compile an inventory of existing tax exemptions and incentives. However, the Central American CTAs still lack information, the capacity, and resources to effectively control the free economic zones and other preferential regimes that abound in the region (e.g., tax incentives for the tourism sector). For instance, despite the importance of tax benefits in the region, tax expenditure budgets are not estimated and monitored regularly.
  • Bilateral free trade agreements and the common external tariff. The framework agreement states that the CACU should promote the gradual convergence of the different trade agreements currently in place. Despite this general goal, the agreement does not prevent each member country to negotiate free trade agreements unilaterally with nonmember countries. This clearly is a problem for the CACU.21 This practice is not common in customs unions—such as the European Union—or even in “incomplete” ones—such as Mer-cosur. The most pressing problem associated with the unilateral negotiation of trade agreements by CU member countries with third partners is the impossibility of maintaining a CET, and the requirement for increased customs control. This policy may result in divergent tariffs among countries, various exemption periods, and different coverage of goods. In turn, this will lead to trade diversion, administrative complexity, and opportunities for fraud. For example, the free trade treaties that the Central American countries signed with the United States (Central American Free Trade Agreement–Dominican Republic, or CAFTA-DR) have become especially important, because the United States is the most important trading partner in the region. However, as a result of the CAFTA-DR, the external tariff went from being 95.7 percent harmonized (see Table 5.3), to an estimated 66.7 percent harmonized in the first year of the agreement. These tariff positions are expected to converge to a 99.1 percent harmonization within 15 years. Given that the Central American tariff levels are relatively low (the average nominal tariff was 5.4 percent in 2005 (Fuentes, 2007), there are few incentives for trade diversion. However, the proliferation of bilateral agreements hurts the CACU and could delay its full implementation. Furthermore, this problem adds significant complexity to customs control because customs officers must apply tariff classifications and certify the origin of goods under multiple treaties.
  • The distribution of customs revenue. The framework agreement establishes that taxes levied on international trade should respect the destination principle, and that the member countries should agree on collection mechanisms. In contrast to the European Union, the CACU does not establish a fund for financing a common budget. Against this background, the most important issue is to determine how resources will, in practice, be distributed. There are questions regarding the transfer of revenue collections: (1) periodicity (e.g., weekly or monthly), (2) form (e.g., using intermediary bank accounts of the country of entry and subsequently transferring the funds to the destination country, or having taxpayers pay directly to an account of the destination country),22 and (3) control (how to ensure that the correct value of revenue is properly accounted and transferred to the destination country).23 These questions are similar to those that some federations are facing regarding their internal revenue sharing formulas and systems, with cases in which some government levels may be collecting on behalf of others (e.g., Quebec–Canada). As these experiences show, it is critical to set up a reliable mechanism that is automated, transparent, and subject to external audit. Clearly, an effective online and integrated IT system that can support sound management of a revenue-sharing or revenue-distribution system is key in this regard.
  • The institutional model and capacity building. As discussed before, economic and institutional integrations are mutually supportive. Currently, Central America has a regional institutional framework that was defined by the Guatemala Protocol (1993). The framework agreement establishes that the member countries will adapt the current institutional base as needed, but in a cost-effective way. Thus, the CACU will apparently not rely on a complex, costly supranational structure. If this is so, the CACU will depend on stronger, better coordinated national institutions, including the CTAs. The CTAs in the region still fall short of some international best practices and will require continuous modernization over the next years. A CTA’s institutional development goes hand-in-hand with a degree of autonomy. This means that these organizations need to be protected from political influence regarding their technical decisions, be managed with a strategic direction and evaluated through performance indicators, have a stable and professional workforce, and be capable of executing an adequate budget. Without strengthening these institutions, it will be difficult to build the required network of coordination and information exchanges that is vital for the region. Therefore, the effective establishment of the CACU will require an enormous effort of institutional strengthening and capacity building. To face these challenges, a road map should be drawn up for Central American CTAs based on a careful assessment of these institutions’ current status, including their strengths and weaknesses. The next section discusses this issue.

Box 5.2.Main Features of the Framework Agreement for Establishing the Central American Customs Union

General: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua reaffirmed their intention to establish a customs union in their territory. The union will be based on the principles of currently available integration tools, and on Article XXIV of the GATT (General Agreement on Tariffs and Trade), which is part of the WTO (World Trade Organization) agreement.

Phases for the development of the customs union: the customs union will be established in a gradual and progressive way. It will be developed in three main phases: (1) promotion of free circulation of goods and trade facilitation, (2) modernization and convergence of the legal framework, and (3) institutional development.

Customs control: the internal customs posts will continue to operate and promote coordinated efforts to facilitate trade and collect revenue.

Quantitative restrictions and charges having equivalent effect to a customs duty: barriers such as permits, licenses, quotas, or other equivalent measures that hinder trade among member countries will not be allowed in the union.

Sanitary and veterinary standards and nontariff barriers: member countries will develop a common system of sanitary and veterinary standards as well as a common definition of nontariff barriers.

Modernization and convergence of the legal framework: the main objectives of this phase will be to (1) reach full harmonization regarding the common external tariff (CET), (2) establish external customs points as entry points for goods coming from countries outside the customs union, (3) harmonize the regional legal framework related to all areas covered by the agreement, taking into consideration previous commitments in terms of international trade, and (4) promote the gradual convergence of the different free trade agreements signed by each member country.

Tariff regime: the union will have a unique tariff system regarding the Harmonized System (HS)1 code, description of goods, and tariffs; the member countries will also establish the necessary mechanisms to administer the tariff regime once it is fully harmonized.

Procedures and requirements: the member countries will coordinate their customs services with a view to applying the same procedures, forms, requirements, and deadlines; they will also apply common information technology systems and similar guidelines for staff conduct, taking into consideration international best practices in terms of customs administration. The member countries will also harmonize the other requirements and services not related to customs (e.g., sanitary requirements, veterinary requirements, quality control).

Origin of goods: the Council of Ministers of the Economy and Trade (COMIECO) will take the necessary actions to ensure convergence of the different rules of origin applied by the member countries.

Tax regime: member countries will apply the principle of destination to international trade operations. The member countries will also agree on the mechanisms for collecting taxes on international and intraregional trade.

Institutional development: the objective of this phase is to establish the principles for the institutional strengthening required for the adequate operation and consolidation of the customs union.

Structural and investment fund: the member countries will establish an international structural and investment fund targeted to contribute to their sustainable development.


The Harmonized Commodity Description and Coding System (HS) of tariff nomenclature is an internationally standardized system of names and numbers for classifying traded products that was developed and is maintained by the World Customs Organization.

Box 5.3.Joint Customs Posts Currently in Operation in Central America

The Central American countries started a pilot project of joint operations in some internal and external customs. This project is important as a way of sharing experiences, adopting harmonized procedures, and facilitating trade. In fact, despite the existence of a Unified Manual of Customs Procedures (signed by Guatemala, Honduras, El Salvador, and Nicaragua), customs operations and procedures in the region are far from harmonized, and there are inconsistencies even within countries. The absence of a stable, professional customs career system in some countries has hindered human resource development and the creation of a corps of customs officers who can interpret and apply customs norms consistently. Therefore, the pilot project is a good opportunity to identify differences in the application of standards and practices, and to narrow these gaps.

There are four joint internal customs border posts in operation: El Amatillo, El Salvador (El Salvador-Honduras); El Poy, El Salvador (El Salvador–Honduras); Las Chinamas, El Salvador (Guatemala–El Salvador); and El Guasaule, Honduras (Nicaragua–Honduras).

Regarding the external customs, eight joint customs (mainly ports) are in operation: Puerto de Acajutla (El Salvador–Guatemala); Puerto Cutuco (El Salvador–Guatemala); Tecún Uman (El Salvador–Guatemala); Puerto Quetzal (El Salvador–Guatemala); Puerto Santo Tomás de Castilla (El Salvador–Guatemala); Puerto Barrios (El Salvador–Guatemala); Puerto Cortés (El Salvador–Honduras); and Peñas Blancas (Nicaragua–El Salvador–Guatemala).

Table 5.2.Central America: Statistics on Free Economic Zones
Number of FirmsTotal EmploymentMain SectorsZone Exports as % of Total Exports
Costa Rica19636,000Machinery; textile; pharmaceutical; plastic; rubber52
El Salvador20076,134Clothing; tuna fishing; machinery; medical products; paper62
Guatemala24172,000Industrial, commercial and services; textilesN/A
Honduras204353,624Textile; footware; services; electronic; equipment assembly; food processing60
Nicaragua110340,000Textiles; food; telecommunications; food processing; electronics; chemicals; tobacco; packaging80
Table 5.3.Common External Tariff
Tariff PositionsQuantityPercent
Harmonized positions610895.7
Nonharmonized positions2754.3
of which:
Agricultural products17764.4
Industrial goods9835.6
of which:
Textiles and clothes31.1
Source: SIECA (2008).
Source: SIECA (2008).

Requirements for Modernizing the Tax and Customs Administrations

The Central American CTAs have already met major milestones in the ongoing process of regional integration. Positive achievements include the implementation of a series of regional commercial norms (i.e., the Central American protocol of origin); customs transit; a common customs code (CAUCA) and its regulations (RECAUCA); and some unified tax documents (the single tax invoice—FAUCA). Some of these instruments need to be revised and adapted under the CACU framework. Even though their application is not always consistent, these experiences are a baseline from which to start. Other welcome initiatives are the joint customs posts (referred to in Box 5.3) and the Central American Tax and Customs Training School. Many CTAs have implemented modernization plans and are moving in the right direction.

Nevertheless, the CTAs still face significant shortcomings in terms of institutional development, managerial capacity, and human and material resources (Box 5.4). These shortcomings can be observed across the region, although there are development gaps and asymmetries within countries, as well. Such asymmetries represent a particular challenge for establishing the CACU. This is because less developed institutions are the “weak spots” that hinder full information exchange and have less strict controls over corruption. A “complete” CU can hardly be achieved while such problems persist.

The CTAs in the region face high levels of informality and evasion. The size of the informal economy in the Central American countries is estimated to be an average of 43 percent of GDP (Schneider, 2003)24—slightly higher than the average of 41 percent for 17 Latin American countries. Some estimates of VAT evasion (based on the findings of IMF technical assistance missions) point to figures above 30 percent for some countries. Along the same lines, VAT productivity (i.e., the amount of VAT revenue collected as a proportion of gross domestic product (GDP) per point of the VAT rate) is still low in some countries, particularly in Guatemala and Nicaragua (see Table 5.4). Even though the figures in the table refer to 2002/2003, they are still a good indication, given that productivity does not change rapidly. The productivity is also affected by the high level of exceptions granted in some VAT legislation. The productivity figures also highlight regional asymmetries.

Table 5.4.Comparative Data on Tax Burden, Size of the Informal Economy, and VAT Productivity(In percent)
Tax BurdenInformal EconomyVAT (GDP)

Costa Rica14.0 (2006)26.20.58 (2003)
El Salvador13.3 (2006)n.a.0.47 (2003)
Guatemala12.0 (2006)51.50.39 (2002)
Honduras15.3 (2006)49.60.50 (2003)
Nicaragua117.5 (2006)45.20.18 (2003)
Sources: Tax burden and value-added tax (VAT) productivity: IMF staff; informal economy: Schneider (2003).

The Nicaraguan GDP methodology could lead to underestimation.

Sources: Tax burden and value-added tax (VAT) productivity: IMF staff; informal economy: Schneider (2003).

The Nicaraguan GDP methodology could lead to underestimation.

Box 5.4.Assessing Central America’s Customs and Tax Administrations

Central American Customs and Tax Administrations (CTAs) have recently implemented a series of modernization projects and have experienced significant improvement, although asymmetries exist among them regarding performance and effectiveness. Overall, the region has adopted comprehensive modernizing strategies and antievasion laws; many of them supported by the IMF and other technical assistance agencies (e.g., Inter-American Development Bank, Inter-American Center of Tax Administrations (CIAT), U.S. Treasury, and World Bank). Some countries have integrated customs and domestic tax administrations (Guatemala and Honduras); in others, two separate institutions perform such tasks (Costa Rica, El Salvador, and Nicaragua). A detailed assessment of these institutions’ performance, a careful identification of gaps in relation to international good practices, and a strategy for institutional strengthening are critical steps on the way forward. Some relevant areas to address and evaluate are as follows:

Institutional framework and management capacity. In general terms, the Central American CTAs have room to improve their institutional development. Poor and unstable management, lack of legal powers, and political interference in operational activities are still a concern in some countries. Achieving greater autonomy and flexibility in terms of personnel management and budget is crucial for some countries in the region (Honduras, Nicaragua). All countries have progressed toward adopting strategic plans and some have quite sophisticated systems of performance indicators (Costa Rica, Guatemala).

Human resources. In general, CTAs in the region still lack a legally established professional career system (Honduras, Nicaragua), transparent personnel evaluation and promotion systems, and public exams or other objective methods of hiring. These requirements are basic standards for CTAs to perform their activities as a state institution effectively; technical personnel should not be subject to the vagaries of the political cycles. Training is an area in which all the CTAs have progressed, and Honduras now has a regional training school for tax and customs officials.

Information technology. There has been significant improvement in this area. Most of the countries have established reliable electronic filing and payment systems (Nicaragua is still in process of implementing the system for all types of taxpayers). Nevertheless, there is a need to enhance the IT platform and develop new systems to replace obsolete ones (Honduras, Nicaragua). Customs IT systems differ among countries, and compatibility with a view to exchanging information is a concern. Some countries use systems that they have developed in-house (Costa Rica, Guatemala). Others use a standard customs software ASYCUDA (El Salvador, Honduras, Nicaragua—although in different versions), which may not provide the necessary flexibility and tools.

Core operations. All countries have worked to update their taxpayer registers, but inconsistencies still persist. Audit is clearly a function to be strengthened, given that much of the work done consists of low value-added checks rather than specialized and targeted audit activities (El Salvador, Honduras, Nicaragua). Another challenge in the region is to grant greater arrears collection powers to the CTAs (such as seizure of assets and collection from third parties). Customs should advance more rapidly to apply an effective risk management system, in order to facilitate trade while applying effective controls. Some of the countries in the region (Honduras) still perform a high level of physical verification, whereby goods pass through the red channel instead of the more selective yellow or green (no inspection) channels; or do not have all three standard channels (Guatemala).

Tax revenue performance has improved recently in Central American countries, reflecting the effect of modernization programs in the CTAs and legal changes that have been introduced recently. Nevertheless, the region remains characterized by a relatively low tax burden.

Therefore, a comprehensive strategic plan for modernizing the CTAs in the region is key for implementing the CACU. This plan should cover the various institutions involved in the process, and attention should be given to coordination efforts between the CU member countries. Implementation will need to be gradual, progressive, and consistent with the local administrative capacity, given that some countries lack sufficient professional resources. At a strategic level, the CTAs should review the minimum requirements for an FTA and a CU (based on those specified in Table 5.1). They should start developing a plan to close the gaps between the current situation and international good practices.

An exercise similar to the European Union’s Fiscal Blueprints (Box 5.5) is thus recommendable for the Central American countries. Such an exercise would help evaluate the CTAs’ institutional and operational capacity.

An assessment along the lines of the EU’s Fiscal Blueprints would provide valuable information for designing a proper strategic plan for the integration process. In the meantime, based on the basic requirements for a customs union that are listed in Table 5.1, one can identify some key steps that the Central American countries need to take to progress towards the establishment of the CACU. These are identified below.

Normative and Institutional Convergence

  • Seek rapid ratification of the framework agreement in each member country, and of the other regulations needed to govern its implementation.
  • Define the institutional arrangements for the administration of the CACU (with key attention to CTAs’ needs in terms of infrastructure platform, human resources development, and political independence).
  • Establish the rules of operation of the Structural and Investment Fund (which could support some necessary investments on the CTAs).

Box 5.5.The EU Fiscal Blueprints: Setting a Benchmark for Customs and Tax Administrations

The fiscal blueprints (FB) exercise is an interesting example of benchmarking that the Central American CTAs could follow as a preparatory step toward strengthening the region’s institutions and preparing them for implementing the CACU. “The fiscal blueprints are practical guidelines laying down clear criteria based on EU best practice, against which a tax or fiscal administration is able to measure its own operational capacity. They can be used to analyze gaps between the existing situation in individual countries and the blueprint standards and thus provide a basis for plans to undertake fiscal reforms.” The EU defines two main purposes of the fiscal blueprints: (1) to provide a set of best practices and recommendations for tax administrations and (2) to serve as a tool for the tax administration to provide a speedy and clear identification of its strengths and weaknesses.

The FBs were developed in 1999, during a period of EU expansion, “to serve as a tool for the candidate countries for accession to the EU to enhance their administrative capacity in adopting, applying and enforcing the Community legislation in preparation for membership.” This exercise was carried out in cooperation with the Intra-European Organization of Tax Administration (IOTA).

The current version of the Fiscal Blueprints (2007) has fourteen chapters, each specifying an overall aim, strategic objectives and key indicators:

1) Framework, structure and basis: Overall framework of a tax administration; structure and organization; tax legislation.

2) Human and behavioral issues: Ethics; human resources management.

3) Systems and functioning: Revenue collection and enforcement; tax audit; administrative cooperation and mutual assistance; fraud and tax avoidance.

4) Taxpayer services: Taxpayer rights and obligations; systems for taxpayers’ management; voluntary compliance.

5) Support: Information technology; communications.

Source: EU Fiscal Blueprints (2007).
  • Review and harmonize the CET, taking into account the need to review bilateral trade agreements and formulate a clear policy in this area.
  • Work toward the gradual convergence of the various free trade treaties, in particular the bilateral agreements signed by each of the countries with non-member countries.
  • Review and approve the new version of the common customs code (CAUCA IV) and the relevant regulations (RECAUCA), in accordance with the standards in each country and with the framework agreement.
  • Review and harmonize the regional regulations in the areas covered by the framework agreement, especially specific rules of origin, customs transit, sanitary and phytosanitary measures, security measures, technical barriers to trade, trade defense, trade in services and investments, rules of public procurement, intellectual property, competition policy, and public procurement.
  • Analyze and review documents and agreements related to the coordination of domestic taxes (a key aspect is convergence with respect to exemptions and incentives).
  • Adopt the Agreement on Good Investment Practices, with a view to adopting a common policy on tax concessions for free trade zones in the region and to establishing a “level playing field” for the countries competing for foreign investment.
  • Implement the agreements on information sharing and agreements on mutual assistance and technical cooperation; start building knowledge on advanced issues, such as transfer pricing rules, thin capitalization, and treaties to avoid double taxation (these issues have started to be addressed in some meetings of the regional ministers of finance).
  • Strengthen the Central American Customs and Tax Training School.

Administrative and Operational Requirements

  • Establish good practices and identify minimum standards for the CTAs in the region.
  • Define and implement IT systems with minimum functionalities, flexible responses, and high communicability (in particular, attention should be given at the outset to the operating status of the customs systems: unified customs information system, electronic sharing of customs data forms, the electronic transmission of international transit declarations, etc.).
  • Strengthen external customs posts.
  • Harmonize procedures and risk analysis criteria for customs control, with clear channel selectivity and also separation of the prior, immediate, and ex post audits.
  • Streamline and clean up the taxpayer registers, managing reliable data information that will be the crucial backbone of all exchanged information in the region.
  • Expand e-filling and e-payment for all types of taxpayers throughout the region.
  • Strengthen taxpayer services, including online help (websites and e-mails), giving attention to providing clear and targeted information for economic operators doing business in the CACU area.
  • Start a coordinated program of tax education to reach taxpayers in the region, focusing on the CACU requirements and encouraging better compliance in the whole region.
  • Apply massive controls and cross-checking methods to all taxpayers, but focus audit efforts (external audits) on targeted, high-value cases (selected through risk analysis).
  • Strengthen key areas in the fight against smuggling and fraud: customs and domestic tax intelligence, audit, and control; and increase cooperation among such areas.


The signing of the framework agreement to establish the CACU poses great challenges for the Central American countries and their CTAs. At their current level, the Central American CTAs have clear needs for improvement when compared with international models of good practices. A further challenge not to be underestimated is implementing a customs union in a region characterized by a large informal economy, high levels of evasion and fraud, and relatively low levels of revenue collection.

Effective implementation of the CACU will require considerable efforts among the Central American countries at the strategic, institutional, and operational levels. This should be based on an agreed-upon and well-defined strategic plan for the future development of the CACU. Such a plan should specify clear strategic guidelines, related operational activities, funding and resource allocation for each activity, the responsible institutions for each activity, sequencing of the activities and the linkages among them, realistic targets, performance indicators, and deadlines.

In light of these challenges, a gradual approach to establishing the CACU is appropriate. However, efforts should be made in order to minimize the transitory phase and to reach the full benefits of a complete customs union. This effort should begin with the establishment of an effective free trade area in the region, while standards are prepared and institutions are strengthened to pave the way for the customs union. The basic goals in the process can be described as follows:

  • Creation of a single customs territory, in the form of an FTA with free circulation of goods, which will require harmonizing technical restrictions.
  • Temporary provision for sensitive goods or sectors, along with a clear definition of the role of internal customs posts.
  • Gradual convergence of the free trade agreements signed by each country with nonmember countries, especially with respect to the level of tariffs, convergence deadlines, rules of origin, and the volume of goods involved.
  • Establishment of a CET that is eroded as little as possible by discrepancies, asymmetries, and bilateral free trade treaties.
  • Definition of a regional trade policy.
  • Institutional capacity building to support the entire process, based on staff training, integrated IT systems, risk analysis, harmonized procedures, and the achievement of minimum standards in all key areas.

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The term CTA refers to both customs and domestic tax administrations; these activities may be carried out by two separate institutions or by one integrated administration.


These include, for example, adapting national VAT laws to be aligned with the European Union’s VAT 6th Directive, the completion of Fiscal Blueprints, and a number of other requirements. Box 5 provides more information on the EU’s Fiscal Blueprints.


The legal definition of an FTA and a CU is given by Article XXIV of the General Agreement on Tariffs and Trade (GATT).


Rules of origin certification are complex in their general application. According to the Kyoto Agreement, goods deemed to have originated from a country are those that have been completely obtained in that country and, in the event that other countries also participated in the productive process, in the country where the final substantial transformation took place. In practice, this certification is applied on the basis of three criteria: whether there was a change in the tariff classification, what type of transformation occurred (e.g., origin is not conferred by operations such as canning, packing, or labeling), and the value added in the country (in general, materials not originating in the FTA should not exceed 40 percent of the final value of the product). Protocols of origin contain definitions of the original product and the rules of accumulation, transportation, re-inclusion or exemption, certificate of origin, methods of customs cooperation, and ex post checking of documents of origin, as well as other data.


There are rules of nonpreferential origin—which each country determines unilaterally—and rules of preferential origin—which are defined in the context of an FTA. The IDB’s and AECI’s Guide to Good Practices on Aspects of Customs Management in the Processes of Territorial Integration, 2006 (Guía de Buenas Prácticas Sobre Aspectos de la Gestión Aduanera en los Procesos de Integración Territorial) points out that preferential rules of origin are normally much stricter than nonpreferential rules and need to be defined precisely. This is because goods that are subject to non-preferential rules are afforded advantageous terms of trade. The members of the World Trade Organization (WTO) are required by the GATT to notify the WTO of their preferential and nonpreferential rules of origin.


Even in more advanced arrangements, a list of sensitive goods still applies for public policy reasons, such as health or public safety (e.g., flora and fauna under threat of extinction or deemed special, psychotropic and other products banned because of public health considerations, specific national defense and army equipment, and cultural goods or goods that are part of the protected public wealth).


The notion of an “incomplete CU” should be seen as a didactic and pragmatic way of representing a process in transition. In practice, many CU arrangements live with transitory phases and while they are more advanced than FTAs, they do not comply with all the legal requirements for a CU. Countries should recognize the need to move as fast as possible and minimize the length of the transitory phase. They should avoid embarking on a process of deferring the economic benefits of a union, while living with the administrative complications of the transitory phase. In this sense, the notion of the “incomplete CU” is meant to help countries recognize that they are still within a transitory or incomplete phase, despite calling themselves a member of a legal CU in most cases.


The lack of political will to transfer competency to supranational or regional institutions is another reason for the small number of customs unions. Fuentes (2007, p. 3) mentions that FTAs represent 84 percent of the official regional agreements, whereas CUs and preferential regimes account for 8 percent each. Plummer (2006, p. 933) points out that “in Asia and North America there are no customs unions; in Europe there is essentially one (EU); in Latin America there is also one (Mercosur); there are only a few others scattered over Africa and the Middle East but none of the latter are customs unions in the ‘pure sense’ operating with a fully implemented, genuine CET, with a complete ‘free-circulation’ philosophy and where internal borders have been eliminated.”


The main controls performed in customs were as follows: collection of VAT and special taxes, compilation of statistics on intra-Community trade, and application of technical barriers (e.g., health and veterinary certificates, approvals).


Carousel fraud has resulted in significant revenue losses because of nonpayment by defaulting traders of VAT that has been fully deducted by—or refunded to—another trader. To combat intra-Community VAT fraud, several EU member states have proposed fundamentally changing the VAT system. One option that is being considered is to apply the requirement to pay VAT for intra-Community transactions using the reverse charge mechanism. Under the reverse charge procedure, the purchaser of the goods, rather than the seller, is liable to account for the VAT on the sale. The supplier does not charge VAT, but specifies on the VAT invoice that the reverse charge applies. Provided that the purchaser correctly accounts for the VAT under the reverse charge procedure, the purchaser retains the right to claim an input tax credit for excess VAT paid on purchases.


The SACU includes Botswana, Lesotho, Namibia, South Africa, and Swaziland.


The GCC includes Bahrain, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.


The member countries of Mercosur are Argentina, Brazil, Paraguay, and Uruguay.


Other CU examples are the East African Community (EAC), the EU-Turkey Customs Union, the EU-San Marino Customs Union, the Economic and Monetary Community of Central Africa, the West African Economic and Monetary Union (WAEMU), the Southern Africa Development Community (SADC), and the Common Market for Eastern and Southern Africa (COMESA).


Kirk and Stern (2003) state that the inclusion of excise taxes in the Community distribution fund has been an uncommon characteristic of SACU since 1969, because excise taxes are basically domestic taxes.


An important element that sets the GCC apart from other customs unions is the fact that the Gulf states have not introduced a VAT, although its introduction is planned. Work is under way on the design of a VAT that does not lend itself to the types of intra-Community VAT fraud that have been experienced in the European Union.


The first point of entry into the GCC for most extraregional trade is the port of Dubai, where most of the tariffs are collected for the other countries of the region. Dubai is the principal importer in the region and could be considered the most efficient. For example, customs clearance in Saudi Arabia takes 16 days, whereas the average time needed for customs clearance in the port of Dubai is 3 days.


The next section includes a brief discussion of informality and evasion in the region.


Many tools can help achieve an efficient, effective customs administration: risk management for channel selectivity, automated and integrated systems, electronic filing and payments, joint border controls, unified or harmonized documentation, information sharing, special expedited procedures for reliable taxpayers (authorized economic operators), ex post auditing, and others.


These are in-bond, export-led industries fueled by foreign investment and technology. They import machinery and inputs duty-free and re-export final products after relatively simple assembly and transformation.


Several active trade agreements operate under different arrangements, partners, timing, and coverage. The countries that have agreements in place are Mexico (Mexico and Costa Rica; Mexico and Nicaragua; Mexico and El Salvador–Guatemala–Honduras); the Dominican Republic and Central America; Panama and El Salvador (free trade agreement); Panama and Costa Rica–Guatemala–Honduras–Nicaragua (preferential agreement); Chile and Central America (currently in place with Costa Rica and El Salvador); Canada and Central America (currently in place with Costa Rica); United States and Central America (Central American Free Trade Agreement–Dominican Republic, CAFTA-DR; pending approval for Costa Rica); CARICOM and Costa Rica; Taiwan Province of China and Guatemala; Taiwan Province of China and Nicaragua (pending congressional approval); Taiwan Province of China and El Salvador–Honduras (pending congressional approval); and Colombia and Guatemala–El Salvador–Honduras (in negotiation) (SIECA, 2008).


It is strongly recommended that all collection take place through the banks; that is, that customs posts do not receive cash payments, for obvious reasons of control and security.


Some countries allow officials from other countries to work in their customs offices to help clear goods destined for their country.


There is no estimate for El Salvador.

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