Cablegate: Modernizing Thai Customs One Step at a Time

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SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: ECON ETRD KIPR PREL TH
SUBJECT: MODERNIZING THAI CUSTOMS ONE STEP AT A TIME

REF: A. BANGKOK 2678 (Prime Minister Meets AmCham)
B. BANGKOK 2387 (Proposed Excise Tax Changes)
C. BANGKOK 2320 (Ambassador Meets Pradit)
D. BANGKOK 2185 (Reforming Thai Customs)
E. BANGKOK 1684 (Deputy PM Korbsak on Customs)
F. BANGKOK 1574 (Finance Minister Discusses Customs)
G. BANGKOK 1305 (Deputy PM Suthep on Customs)

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1. (SBU) SUMMARY: The newly appointed Director General of the Thai
Customs Department, Dr. Somchai Sujjapongse, explained to us on
November 11 that the government would modernize and reform Customs
in three phases. The first would be a limited package to modify the
penalty structure and would also include intent as a factor for the
courts to consider, so that those who make innocent mistakes are not
lumped together with those who were trying to cheat the system. This
first package would be ready for Cabinet's approval in the coming
weeks. The second phase would look at more comprehensive reforms
including a ceiling on what individual officers can receive under
the reward-sharing system, as well as procedures to establish
advance binding rulings on valuation and classification. The third
phase, much more ambitious, would abolish the Customs officer
rewards system altogether.He repeated the word "abolish" two
separate times to make sure we understood. The new Director General
also responded positively to visiting USTR officials' requests to
consider strengthening Customs ability to interdict pirated goods
transiting Thailand and to engage with USTR in a DVC to review
international best practices. END SUMMARY.

2. (SBU) COMMENT: The Royal Thai Government has announced its
intention to transform the Customs Department from "a duty collector
to a trade facilitator." Modernizing an institution that has long
been regarded as little more than a money-making machine will be an
enormous task, but the Prime Minister and Finance Minister committed
to the Ambassador their intent to push forward the necessary
reforms. The government only signaled its willingness to take on
this issue in August, in response to U.S., Japanese, EU, Australian
and --importantly -- Thai Board of Trade complaints, and we believe
they are making progress, even if not on the original 60-day
timeline (reftels). We are in regular touch with the other
complainants to share information and consider joint efforts.

3. (SBU) COMMENT CONT'D: As Finance Minister Korn's pick for the DG
job, Somchai has said publicly that he did not pay for the position
and thus is not bound to supplement his salary while in it.
Nevertheless, whether the young DG will be able to make these
reforms happen still remains an open question. Even if he is able to
get them to the Cabinet within the next six months, as he indicated
to us is his goal, pushing the reforms through Parliament will take
longer and provide many more opportunities for opponents to knock
things off track, especially within Customs itself where many
porcelain rice bowls are at risk of being broken. Somchai, a civil
servant, has probably staked his career on this reform effort. If he
is successful, he has a good chance of moving up to Permanent
Secretary, the most senior civil service position in the Finance
Ministry. If the government does not last long enough to see the
reform effort through and new political masters are not so
committed, he will be left out on a thin limb. END COMMENT.

Somchai Takes the Reins at Customs
----------------------------------

4. (SBU) EconCouns and CommCouns led an Embassy team including
visitors from the Office of the U.S. Trade Representative in a
meeting with Dr. Somchai Sujjaponge, the newly appointed Director
General of the Customs Department, on November 11. Dr. Somchai
replaced Wisudhi Srisuphan, who retired on September 30 at the
mandatory retirement age of 60. In an unusual personnel shift,
Somchai, then the Director General of the Finance Ministry's brain
trust, the Fiscal Policy Office, was selected by Minister Korn
Chatikavanij to take on the reform project at the Customs
Department.

5. (SBU) Dr. Somchai, an Ohio State graduate, was quick to tell us
about his American connections. Not only did he receive his PhD in
Finance from Ohio State University, Somchai also participated in the
State Department's International Visitor Program in 1999. Somchai
told us he was "very privileged" to participate in an individual
program on banking and finance issues and still strongly believes in
the importance of the IVP program to strengthening relations between
the United States and Thailand.

BANGKOK 00002969 002.2 OF 004

One Step at a Time
------------------

6. (SBU) As part of our continuing efforts to raise the concerns of
American businesses with the Abhisit Administration, we called on
Somchai to inquire as to where the customs reforms currently stand.
We reiterated to him the U.S.'s longstanding concerns about customs
procedures in Thailand, whether the lack of transparency
(uncertainty about the duty rates that will be imposed and the
valuation method that will be used), arbitrary valuation methods, or
the onerous penalty regime. EconCouns detailed our amplified
engagement with the government on these issues in recent months --
including meetings the Ambassador had with the Prime Minister, the
Deputy Prime Minister, the Finance Minister, and the Deputy Finance
Minister (reftels).

7. (SBU) Since the Ambassador last met with Deputy Finance Minister
Pradit on September 8 (ref C), the Customs Department has continued
to mull over a set of reforms to address some of the most egregious
and longstanding complaints. Pradit had promised to propose these
reforms within sixty days of his August 19 announcement -- a
deadline that has now passed. In response to our inquiry, Somchai
explained that rather than attempt to reform the Customs Department
in one fell swoop, the government has decided to carry out the
reforms in three separate phases.

Phase One: "The Most Demanding Issues"
--------------------------------------

8. (SBU) Director General Somchai and Deputy Finance Minister Pradit
have finalized an initial set of amendments to the existing Customs
law to propose to Cabinet in order to fast track some of "the most
demanding issues," Somchai told us. In this first phase of reform,
the amendments would focus on providing flexibility to judges when
issuing penalties in customs appeal cases. One amendment will change
the appeal penalty to "up to four times" the duty-paid value from
the existing mandatory four times the value. If the company accepts
the initial fine and does not appeal to the Court system, the
penalty will continue to be two times the duty (not the value).
Somchai also explained that these amendments will revise the
imprisonment provision from "not exceeding ten years" to "from six
months to ten years."

9. (SBU) Somchai proposed a new section on "tax avoidance" that
distinguishes between fraudulent, criminal intent and inadvertent
errors. The existing system penalizes importers "regardless of
intent," but he explained that the amendments would add new language
to allow Customs officials and the courts (if under appeal) to
review whether the importer made an error or if the importer's
intent was to cheat on taxes owed.

Phase 2: More Comprehensive Reforms
-----------------------------------

10. (SBU) A committee within the Customs Department is currently
reviewing the full Customs Act and proposing more comprehensive
reforms to the overall system. This committee is largely composed of
Customs Department lawyers, but representatives from several Thai
business associations are also participating in this process.
Somchai promised that the work of this committee, what he called
phase two, would be complete within the next six months.

11. (SBU) Somchai stated that this second phase would include
reforms to the Customs rewards-sharing system and the establishment
of advance binding rulings for valuation and classification
decisions. The government will place a cap of 4 million baht
(approximately USD 122,000) on the amount of the reward that can be
shared with Customs officials. Under the existing system, Customs
officials share up to 55 percent of the penalty amount, which is
then divided between the officers in the unit involved in assessment
of the penalty along with the rest of the chain of command, up to
and including the Director General. This practice would continue
under the revised system but the total reward would be capped at 4
million baht. If the total penalty amount exceeds 4 million baht,
the remainder would be placed into a "central fund" that can be used
for capacity building at Customs, the procurement of needed
equipment, or other areas that Customs identifies.

12. (SBU) In a later meeting, Somchai also proposed including a

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180-day limit on the Customs appeals process. Customs decisions are
currently appealed within Customs' own institutional structures to
an appeals committee, chaired by the Customs Director General
himself. A company is unable to appeal a decision to an independent
court until the internal Customs appeals process is finalized. Given
the hefty penalties that can be applied during an appeal (four times
the invoice value), companies have typically chosen to settle their
cases directly with Customs, rather than embark on an uncertain
appeal. Somchai, recognizing that this is of major concern to the
business community, proposed limiting the internal appeals process
to 180 days, after which the company could choose to pursue a court
case even if the Customs officials had not finished the internal
appeal.

Phase 3: Abolishing the Rewards System?
---------------------------------------

13. (SBU) Somchai clearly stated that he hoped to "abolish the
rewards-sharing system" entirely. A revision to do just that would
undoubtedly face significant opposition within the Customs
Department, as the rewards have been enjoyed by customs officials
for many years, but Somchai reiterated to us his intent to do so.

14. (SBU) When we inquired about the timeline for the reforms,
Somchai said he hoped the first and second phases would be completed
within six months, but the third phase would be handled "in the
future." (COMMENT: The proposal to abolish the rewards-sharing
system is a major development. In previous conversations on this
issue, government officials said the rewards system was simply "too
sensitive" to discuss or even consider reforming. Somchai's plan to
cap the officers' rewards, as well as his intent to abolish the
system entirely in the future, reflects Prime Minister Abhisit's and
Finance Minister Korn's desire to truly modernize the system,
despite the entrenched interests within the Customs Department. END
COMMENT.)

Status of Specific Cases
------------------------

15. (SBU) We also raised specific ongoing customs disputes of
several American companies with the Director General, reiterating
our concern about the treatment these companies continue to receive
from the Customs Department (reftel C). The Ambassador previously
sought the Finance Minsiter's and Deputy Finance Minister's
assistance to settle these disputes, but most remained unresolved.
Somchai responded that Deputy Finance Minister Pradit had called him
prior to our meeting to stress that the Customs Department must
handle these cases transparently and fairly -- and resolve them as
soon as possible. Somchai added that the Amway case had been
particularly difficult but said that he will "try his best to
resolve the case quickly." With regards to the return of cash
guarantees to the alcohol beverage industry, Deputy Director General
Chaweewan Kongcharoenkitkul expressed her hope that the USD 800,000
currently being held could be returned to the companies by the end
of the year. She indicated that her division was awaiting further
documents from industry, but she agreed to follow up with us.

Strong Intellectual Property Enforcement
----------------------------------------

16. (SBU) Rachel Bae, Director for Intellectual Property and
Innovation at USTR, commended the Customs Department as one of the
strongest intellectual property enforcement agencies in the Thai
government. However, since the government was in the process of
amending the Customs Act, she encouraged Somchai to consider
including a provision to give ex officio authority to Customs
officials to interdict shipments transiting Thailand's ports. Ms.
Bae explained that the USG remains concerned about infringing
exports from other countries that could be transshipped through
Thailand. An amendment that empowers Customs officers to inspect and
seize these infringing goods would improve overall Customs
enforcement of intellectual property rights. Somchai said he would
review the matter carefully and report back at a later date.

USTR Proposes Digital Video Conference
--------------------------------------

17. (SBU) Brian Klein, Director for Southeast Asia at USTR, noted
that the USG stands ready to assist as Thailand reviews its customs
law. He explained that USTR had previously proposed a digital video

BANGKOK 00002969 004.2 OF 004

conference to discuss the details of the proposed amendments, as
well as to exchange customs best practices. The DVC would ideally
include multiple agencies on both sides, including Customs,
Commerce, and Foreign Affairs. The Director General said he would be
glad to participate and immediately designated one of his staff
members to help coordinate the details with USTR.

JOHN

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