Part 2: Arrangements to collect customs revenue

New Zealand Customs Service: Collecting customs revenue.

In this Part, we discuss whether the Service had suitable:

  • arrangements for supporting voluntary compliance;
  • practices for licensing the manufacturers of excisable goods;
  • practices for verifying the declared values for imported goods;
  • methods for determining and notifying changes to exchange rates; and
  • arrangements with other customs agencies to collect customs revenue.

Supporting voluntary compliance

The Act imposes penalties for wrong entries from the date the entry was lodged (or should have been lodged). Under various legislation, the Service has between four and seven years to discover and collect any unpaid customs revenue. Administrative penalties can apply. The Service can also prosecute, seize and sell goods to recover customs revenue, and petition the Courts to put companies into liquidation. Importers (and buyers) are liable for complying with the Act, even if customs brokers make errors on entries. In combination, these are powerful incentives for compliance.

We expected:

  • the Service’s arrangements to support its strategy of voluntary compliance;
  • suitable relationships to exist between its education, intelligence, and audit teams;
  • the Service to use risk assessment to target its compliance activities;
  • the Service to have suitable procedures for issuing and checking compliance with customs-controlled area (CCA) licences; and
  • the Service’s credit and debt management arrangements to promote effective and efficient revenue collection.

Our findings

Education, intelligence, audit, and risk management

The education, intelligence, and audit activities were mainly the responsibility of Client Services, Intelligence, Planning & Co-ordination (Intel), and Trade Assurance respectively (see Figure 1).

An important part of a voluntary compliance regime is providing comprehensive information to traders and individuals so they know what to do to comply. The Service used various information channels to do this, including fact sheets, its website, a National Call Centre, a weekly electronic newsletter (Customs Release), and a monthly printed magazine (Contraband). The Service also had memoranda of understanding with industry partners to manage risks to customs revenue.

There was no scheduled programme for educating trade sectors, traders, or individuals to systematically address risks of non-compliance. However, the Service did regularly provide information through the information channels listed above and occasionally conducted education projects. For example, it had visited businesses that have repeatedly had to pay administrative penalties.

The Service told us that by 2007/08 it intended to schedule educational visits during the first year in which a licensee holds a CCA licence. This would encourage the licensee to comply with the CCA licence before they become subject to audit.

The Service had documented its logic for Trade Assurance’s yearly audit programme. The documentation set out the roles and responsibilities for identifying and selecting trade sectors and traders for audit, conducting audits, carrying out post-audit analysis, and communication. At each step, responsibility was allocated to Intel or Trade Assurance or to both jointly.

Throughout the process, the team responsible produced information reports that recorded the results of analysis or audits. The reports might recommend that another team carry out certain intelligence, enforcement, or educational activities. The Service used the same process for selecting excise and other types of audits.

Risk profiling of traders considered information sourced from Client Services, Intel, and Trade Assurance. There were several levels of risk assessment, so both national and local knowledge was considered.

The Service scheduled audits of selected high- to medium-risk trade sectors and traders. Reactive audits (based on new information becoming available during the year) and random audits of other trade sectors and traders also occurred.

There was a separation of responsibility between Client Services, Intel, and Trade Assurance. This enabled each to provide information for the others to use and, to some extent, to review the conclusions each had drawn. The arrangements avoided a single part of the organisation being responsible for all three activities – education, intelligence, and audit. The arrangements also allowed each team to bring new information into the education-intelligence-audit loop. For example:

  • Intel was responsible for deciding (with others) the high-risk trade sectors and traders, which met the good practice goal of independent risk assessment. Trade Assurance contributed another level of risk assessment and performed the audits. It reported the audit results and recommendations for action to Intel and Client Services for them to act on.
  • Client Services issued CCA licences, which included providing a risk assessment of applicants to Intel. Trade Assurance audited the compliance of CCA licensees with their licence conditions. It reported the audit results and recommendations for action to Intel and Client Services for them to act on.
  • If Client Services amended, suspended, or revoked CCA licences, it had to provide relevant information to Intel. Calls to the National Call Centre that caused concern about potential non-compliance might lead to reports to Intel or to a referral to Trade Assurance for possible audit.

Trade Assurance’s audit policies did not include recent changes to the Service’s organisation structure or to the Service’s documentation of its logic for the audit programme. Although these should, in our view, be up to date, they did encapsulate the essence of the audit programme’s risk-based approach.

Customs-controlled area licences and temporary import agreements

The Service granted CCA licences to owners, occupiers, or persons in charge, subject to certain conditions. A procedure statement formed part of the CCA licence. It prescribed the records that CCA licensees must keep, which includes a requirement that licensees tell the Service of changes to aspects of the business that were detailed in the licence (for example, changes to the size and location of manufacturing and storage premises). The Service could revoke or amend CCA licences and impose fines on conviction for not complying with the licence.

After CCA licensees had been licensed for a year, they became subject to regular audit by Trade Assurance. The audit cycle used by Trade Assurance took into account the assessed risk for each CCA licensee.

A fact sheet about CCA licences and excise gave answers to many commonly asked questions and referred readers to the nearest of the Service’s offices, the Service’s website, or the National Call Centre for further information. The Service had not published a fact sheet explaining procedure statements, but we were told that one was planned.

The Service kept CCA licensees up to date with relevant issues through Customs Release and Contraband. These publications were used to raise CCA licensees’ awareness of their obligations.

The Service issued temporary import agreements to traders who imported items for later export (for example, boat builders who import parts to build a boat and sell the completed boat overseas). The Service checked compliance with the temporary import agreements every six months.

Credit and debt management

Ninety-nine percent of entries into CusMod were sent electronically to the Service. In combination with the policies, procedures, and judgement exercised by the Service’s staff, this enabled effective control over the quality of entries (see Part 3).

The Service had direct debit payment schemes for traders: the Customs Deferred Payment Scheme and the Broker Deferred Credit Facility Scheme. The Service did a thorough risk assessment before it allowed applicants into the schemes.

Seventy-five percent of entries lodged with the Service were paid through the Customs Deferred Payment Scheme and 22% through the Broker Deferred Credit Facility Scheme. The remaining payments (3%) were paid in cash.

Participation in the schemes allowed goods to be released promptly. Being excluded could adversely affect cash flow. Participants could be ejected from the schemes if they failed to comply with the schemes’ requirements, which include having enough funds available to pay. Ejected participants could not re-enter until they could prove their ability to comply.

The Service had documented processes to decide when it would pursue understated and undeclared customs revenue, including through legal action.

Our conclusions

The Service’s powers under legislation provided strong incentives for compliance. These powers were supported by credit and debt management schemes that promoted effective and efficient revenue collection. The payment schemes’ controls significantly reduced the risk of the Service not collecting customs revenue.

In our view, there were suitable relationships between the Service’s education, intelligence, and audit teams, and there was a well-documented risk assessment process for targeting intelligence and audit activities.

CCA licences and temporary import agreements were effective mechanisms for promoting compliance. In our view, the Service’s plan to conduct educational visits to CCA licensees (in the period before they are subject to be audited) will help to promote compliance and enable the Service to systematically respond to common problems identified during the visits.

Licensing manufacturers of excisable goods

The Act requires all manufacturers of excisable goods to be licensed. The licences cover the premises used to manufacture and store excisable goods. If the premises are not appropriately licensed, then excise duty will be due whenever goods are moved between manufacturing and storage areas.

Customs revenue can be lost if manufacturers of excisable goods are not licensed (or the CCA licence is not amended as required). The liability to pay excise duty remains whether the manufacturer is licensed or not. There are so few manufacturers of petroleum and tobacco and related products that the risk of unlicensed manufacturers is restricted to the alcohol industry.

We expected the Service to have effective practices for ensuring that manufacturers of excisable goods are aware of the requirement to be licensed and for detecting unlicensed manufacturers of goods.

Our findings

Information to applicants and CCA licensees

The Service had several methods for providing information to unlicensed and licensed manufacturers of excisable goods (see paragraphs 2.16-2.17). New Zealand Winegrowers1 told us that the Service’s regional audit staff were well regarded by small- to medium-sized winemaker businesses.

The website gave more details about the types of products that attract excise duty and listed the excise duty rates. The fact sheet included an application form for a CCA licence. During the application process, the Service’s staff are required to visit and inspect the relevant premises.

As well as the Service’s information, New Zealand Winegrowers published, with a law firm, a guide about its members’ legal obligations, including excise.

Detecting unlicensed manufacturers

New entrants to the wine industry often relied on contracted winemakers to produce their wine. The contracted winemakers were experienced and had an important role in encouraging new entrants to contact the Service about their potential tax obligations.

The Service periodically matched its own information about an industry with published industry information. For example, it matched industry statistics for grapes grown and wine produced in a particular region. Any unexplained differences could result in companies being risk-assessed for potential audit. Because the Service generally has four years to detect unpaid customs revenue (or up to seven years in some circumstances), the data-matching exercises needed to be performed only every three to four years. Industry stakeholders performed their own data-matching exercises and told us that they had found no unexplained differences.

The Service’s policies and procedures for licensing manufacturers of excisable goods

The Service was preparing national procedures, which were being piloted in the Nelson-Marlborough region. Meanwhile, each region had its own procedures for issuing and updating CCA licences and procedure statements. A document, Excise for Beginners, provided staff with guidance while the national policies and procedures were being prepared.

Our conclusions

In our view, the information available about excise was accessible and supported by industry actions to promote compliance. The Service’s data-matching exercises were effective in helping to identify unlicensed manufacturers and detect unpaid excise.

In our view, the Service’s regular cycle of audits to check compliance with CCA licences was essential, given that the licences did not expire. The audits may not have led to more revenue collection, but they did provide assurance about the integrity of the systems used to collect the revenue.

We support the Service’s project to produce nationally consistent procedures for issuing excise licences.

Valuing goods

The Act requires traders and individuals to specify the value of imported goods when lodging an entry with the Service. The value of the goods is the starting point for calculating customs revenue. If the value is understated, then the revenue calculated may be less than it should be. There is no charge where customs revenue on any one import is less than $50.

There are various methods for deciding the value of goods, but the main one is the transaction value. The Act gives alternative methods when the transaction value cannot be used. Figure 4 describes how customs revenue is calculated.

Figure 4
Valuing imported goods

The main method for valuing imported goods is by adding customs duties and GST to the price paid for the goods and other relevant costs.

1. The importer declares the customs value of the goods, which is usually the price paid or payable for goods when sold for export to New Zealand. The importer includes any other relevant costs, such as royalties and commissions, to get the customs value. If the goods were bought in another currency, the value is converted into New Zealand dollars.
2. The importer adds the costs of insuring and transporting the goods to the total arrived at in Step 1.
3. Customs duties (if any) are calculated on the total arrived at in Step 2.
4. GST is calculated on the total arrived at in Step 3.
5. The total of Steps 3 and 4 is the total customs revenue to be collected by the Service.

Source: Office of the Auditor-General.

We expected the Service to ensure that it verified the values for imported goods consistently.

Our findings

Checking valuations before goods are cleared

The Service did not check valuations when entries were lodged except in two situations. The first situation was when an automatic warning was generated and sent to a customs officer for goods with unexpected values higher than a certain threshold. The customs officer was not required to act on the warning, but the Service told us that it intended to make action compulsory by 2007/08. The warning fed into the intelligence cycle and might result in Trade Assurance conducting an audit.

The second situation was that CusMod could be set up, where the intelligence existed, to notify a customs officer when certain entries were made by certain traders. In these situations, the goods might be held until they were inspected. If the Service was inspecting goods for other reasons, such as to detect goods that breached intellectual property rights or safety and security requirements, then it might consider valuation issues at the same time.

Checking valuations after goods are cleared

Audits were the main method for verifying valuations. Trade Assurance usually performed these after goods were cleared.

The Service gave high priority to valuation risks in assigning its audit resource. Valuation risk included all aspects of valuating goods on import (and export). It included risks relating to the classification and description of goods. It was one of the risk categories used to select trade sectors and traders for audit. Audits were tailored to the risks common to each trade sector.2 However, the aim of all audits considering valuation risk was to ensure the integrity of the entry by detecting overpayments or underpayments of customs revenue.

Telling trade sectors about valuation of goods

Valuation issues can be complex, and it is important there is clear guidance for traders and individuals about the correct method for valuing goods. However, most entries are lodged through customs brokers.

When contacted by importers (or potential importers), the Service had information packs available containing the relevant fact sheets and forms, an outline of the Service’s requirements, and the National Call Centre’s telephone number.

Importers could seek a pre-importation ruling from the Service about goods they may import. Rulings gave importers certainty about how goods would be treated before they made a commitment to import them and only applied to the trader and goods covered by the ruling.

The Service’s staff at the International Mail Centre were responsible for identifying potential customs revenue non-compliance, and the Service had a method for prioritising which parcels and mail it would screen and inspect. If goods were inspected and found not to have had an entry lodged when one should have been, the Service would hold the goods, contact the importer, and release the goods only after the importer had paid the applicable duties and GST.

Individuals importing goods (for example, through the Internet) may not be aware that they need to find out about the need to lodge an entry with the Service. Although information was available on the Service’s website, many people may be unaware of their customs obligations. It is the importers’ and not the exporters’ responsibility to comply with the Act by lodging any necessary entries.

The Service’s policies and procedures

The Service had a Valuation of Goods Policy, which gave staff information about valuation methods. It cross-referenced other policy documents that gave more detail about how staff should apply various valuation methods. There was a separate policy for Processing Accompanied Goods, which applied to goods brought in by passengers arriving at New Zealand airports and seaports.

Our conclusions

The Service took valuation risk seriously. Checking only some valuations when entries were lodged was consistent with a voluntary compliance regime. The Service had systems that suitably addressed valuation risks for trade sectors and traders. However, in our view, the Service could do more to raise awareness about customs obligations among individuals who are importing goods.

Recommendation 1
We recommend that the New Zealand Customs Service do more to raise awareness about customs obligations among individuals who import goods.

Exchange rates

The exchange rate applied to goods is the rate in use on the date an entry is lodged with the Service. Exchange rates decide the value of goods that are declared to the Service in another currency. The method for setting the exchange rate can influence the amount of revenue due.

The Customs and Excise Regulations 1996 require the Comptroller to notify determinations of the fair rate of exchange in a Service publication. We expected the method for notifying the fair rate of exchange to be effective and efficient.

Our findings

The Service had a four-week cycle for adjusting, notifying, and applying new exchange rates for 31 currencies. It published Exchange Rates Notices in Customs Release. To manage any volatility in exchange rates occurring after new rates are notified, the Service looked for significant rate movements during the period between when the rates were notified and when they came into force. Where a change was significant, the Service adjusted the rate. There was no documented threshold for deciding whether a change was significant – for example, 3% above or below the new rate.

The Service introduced the current method more than 20 years ago, after consulting with importers. As the price payable for imported goods had usually been determined well before importation, the method allowed importers to factor customs duties and GST into prices and accounting projections. The Service found the method administratively simple and, because of this, held the view that it promoted compliance and trade. From time to time, the Service consulted interested parties about the method, but because traders supported the current method no changes had been made.

The Service had not compared its method with alternatives. Therefore, we were unable to form a view about whether it is the most effective and efficient method.

We performed some limited analysis comparing the revenue that could have been collected for one major currency in one year if the Service had used the Reserve Bank of New Zealand’s rate instead of the rate it currently uses. While our analysis was very limited and we couldn’t draw any conclusions about whether the Service was under- or over-collecting revenue, our analysis indicated that the Service should periodically compare its method with alternatives. In addition, the Service had not tested the effect on customs revenue of altering the frequency of exchange rate changes or of quoting exchange rates to four decimal places, as is usual, rather than two.

Any review of alternative methods for setting the exchange rate or for altering the frequency of exchange rate changes also needs to consider any potentially adverse effects on compliance and administrative costs to the Service and to traders.

Our conclusions

The current method for determining exchange rates was effective and efficient, but because the Service had not compared its method with alternatives we were not able to assess whether improvements could be made.

Recommendation 2
We recommend that the New Zealand Customs Service periodically review the effectiveness and efficiency of its method for setting the exchange rates used to determine the value of imported goods.

Working with other customs services

Because customs duties and GST become due when entries are lodged with the Service, overseas customs services do not have day-to-day involvement in collecting customs revenue. Nevertheless, co-operation between customs services has obvious benefits. It protects countries’ economic, fiscal, and commercial interests, and ensures correct and efficient customs revenue collection.

A co-operative arrangement is a document signed by the chief executives of two customs services. The details of the co-operative arrangements vary, but they usually include agreement to help each other:

…(within their capacity and legislation):

  • prevent, identify, investigate, suppress, and prosecute customs offences in their respective jurisdictions; and
  • assess customs duties and other taxes.3

We expected the Service to have relationships with other customs services to help it collect customs revenue due in New Zealand.

Our findings

The Service communicated with other countries about individual imports (or exports) as needed. It had co-operative arrangements with customs agencies in 10 countries that were significant trade partners. Free trade agreements included rules for the signatories covering customs procedures and related matters such as verifying the origin of goods. Under both co-operative arrangements and free trade agreements, customs agencies may also make formal requests for “mutual assistance”. This could involve, for example, inspecting goods on another country’s behalf.

The Service shared and received information through various bulletins and committees, including the relevant World Customs Organization (WCO) regional intelligence liaison office, the WCO Enforcements Committee, and the WCO committee for the Global Information Intelligence Strategy. The Service had annual Heads of Intelligence meetings with customs agencies from the United States of America, United Kingdom, Canada, and Australia. It had more frequent meetings with Australia, and the Comptroller visited HM Revenue and Customs (in the United Kingdom) each year. The Service had occasional meetings with other customs services, which were held in New Zealand or overseas.

Our conclusions

The Service had made suitable arrangements to protect customs revenue by agreeing co-operative arrangements with overseas customs agencies, through committee memberships, and by participating in international meetings.

1: New Zealand Winegrowers is an industry group that aims to represent, promote, and research the national and international interests of the domestic wine industry.

2: Examples of common risks are:

  • An importer bringing in parts may have paid for an item in instalments, yet declare only the value of the last instalment on the entry.
  • Cloth made here may be sent overseas to be made into clothing before the completed garment is imported into New Zealand.
  • Importers may declare the value of the work in manufacturing the garments, but omit the value of the cloth.

3: From the Service’s template for co-operative arrangements, which is based on the World Customs Organization’s template.

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