Summary

Introduction

The Estimates of Appropriations forecast that during 2006/07 the New Zealand Customs Service (the Service) would collect $9,072 million in customs revenue. Of this, about 62% would come from Goods and Services Tax (GST) on imported goods, about 20% would come from customs duties on some imported goods, and about 18% would come from excise on other goods (called excisable goods) manufactured in New Zealand. This customs revenue would account for about 15% of the Government’s total forecast revenue for 2006/07.

We examined the Service’s arrangements for collecting customs revenue and analysed in detail the performance of its electronic system to record import, export, and excise transactions (CusMod).

We examined whether the Service:

• had suitable arrangements to collect customs revenue;
• accurately received entries, and calculated and collected the customs revenue; and
• adequately reported on its revenue-collecting performance in its annual report.

Customs revenue was collected within a voluntary compliance regime, which encouraged individuals and organisations to voluntarily comply with requirements.

Our findings and conclusions

The Service’s arrangements to collect customs revenue

Supporting voluntary compliance

We expected the Service’s arrangements for collecting customs revenue to support the voluntary compliance regime in place. We found that the arrangements were supportive and sound.

The Service’s education, intelligence, and audit teams had separate responsibilities, which included the capacity for each to review conclusions drawn by the others. The Service used multiple levels of risk assessment to target compliance activities, and new information was added to the Service’s knowledge about risks of non-compliance.

The Service entered information about imported and excisable goods into CusMod. It used the entries in CusMod to calculate the revenue due. The Service had credit and debt management schemes that collected the revenue due for 97% of the entries lodged in CusMod. The remaining revenue was collected in cash. The Service carefully assessed the risk of applicants before it admitted them to the schemes, and the schemes had powerful built-in incentives for participants to comply with their customs obligations.

Licensing the manufacturers of excisable goods

All manufacturers of excisable goods must be licensed. The licence includes the premises used to manufacture and store excisable goods. If the premises are not licensed, then excise duty will become due whenever goods are moved between manufacturing and storage areas. Customs revenue is lost if businesses are not licensed when they should be.

In our view, the Service had effective practices for ensuring that the manufacturers of excisable goods were aware that they needed to be licensed. The Service also carried out data-matching exercises to detect manufacturers who might be unlicensed.

The Service regularly audited whether manufacturers were complying with the conditions of their licences, and this provided assurance that the appropriate amount of revenue was being collected. This auditing was important because licences do not expire. Audits do not take place until after a manufacturer has been licensed for more than one year. To further promote compliance, the Service intended to schedule educational visits to manufacturers in the first year after they are granted a licence.

Valuing goods

The customs revenue due depends on the declared value of the goods concerned and related importing and insurance costs. If these costs are understated, then the customs revenue collected may be less than it should be. The Service took valuation risk seriously, and the risk ranked highly in the criteria used to select traders for audit. Only some valuations were checked when entries were lodged. This was consistent with, and appropriate for, a voluntary compliance regime.

In our view, the Service could do more to ensure that individuals importing goods (for example, through the Internet) are made aware that they ought to find out whether they need to lodge an entry.

Exchange rates

Exchange rates determine the value of goods that are declared to the Service in another currency. The value of the goods determines the customs duties (if any) and GST due.

The Service’s method for fixing and notifying exchange rates was efficient and had traders’ support. However, some limited analysis that we carried out suggested that the Service’s method may not be the most effective for determining exchange rates.

Working with other customs services

We expected the Service to have relationships with customs agencies in other countries to help it collect customs revenue due in New Zealand. The Service had formal arrangements with customs agencies in 10 countries to help each other prevent, identify, and investigate customs offences, prosecute offenders, and assess the amounts owing in customs duties and other taxes. It met regularly with agencies in other countries to strengthen its international relationships.

Receiving entries, and calculating and collecting customs revenue

We subjected relevant parts of CusMod and the Service’s financial management information system to scrutiny. The Service’s systems and procedures met nearly all of our expectations.

Overall, the systems for receiving entries from traders ensured that the entries were complete and accurate, and were sent by authorised traders. The Service kept a history of authorised changes to entries, and it had procedures to prevent and detect unauthorised changes. Only approved staff could change critical master fields in CusMod, and the procedures for changing these were thorough. The information from CusMod was correctly transferred to the financial management information system, which was used to invoice traders.

The Service’s documentation of its business rules for CusMod was out of date. Although this did not adversely affect the amount of revenue collected, in our view, the Service needs to correct this. The documentation may be relied on, for example, to configure any replacement of CusMod, which could cause problems with any new information system.

There were suitable disaster recovery plans for CusMod, although some of the documentation was out of date and incomplete.

Performance reporting

The data used to report on the performance measures in the Service’s accountability documents was accurate and complete. However, the Service’s performance measures did not cover the whole voluntary compliance process, and we could not use the performance measures to assess whether compliance was improving. The performance measures did not give assurance about whether all the revenue that could be collected was being collected and did not enable a reader to assess the Service’s effectiveness and efficiency.

During our audit, the Service had started to comprehensively review its output classes for reporting performance (including the performance measures).

Our recommendations

We recommend that the New Zealand Customs Service:

1. do more to raise awareness about customs obligations among individuals who import goods;
2. periodically review the effectiveness and efficiency of its method for setting the exchange rates used to determine the value of imported goods;
3. update its business rules for collecting revenue to ensure that the documents are complete and accurate, which includes clarifying the business rules for duty rate and import duty, confirming through testing that CusMod is performing as intended, and taking any remedial action necessary to ensure that customs revenue continues to be correctly calculated;
4. ensure that its disaster recovery plans and supporting documents accurately and completely reflect the current information technology infrastructure and the contact details for crucial people; and
5. enhance its performance reporting measures to illustrate the contribution of all of its activities – including education, intelligence, and audit – to the voluntary compliance regime.