The Core Issues in Customs
There are two significant aspects of customs. The first is the actual customs duties themselves. They are paid by the importer. The duties are set out in the tariff for each specific category of goods. The cost of transport and insurance to the border is added to get the customs value. Duty is applied if applicable to the value at the specified rate. VAT then applies in the country of import on the customs value plus the customs duty itself.
The other significant aspect of customs duties is the cost of compliance. There is an administrative cost in making customs returns by way of export in Ireland and by way of import in Ireland in the United Kingdom vice versa. This can either be directly incurred by traders or passed back to traders expressly or rolled into the costs of logistics.
The Kyoto Convention was developed by the World Customs Organisation to harmonise customs procedures and practices worldwide. The initial Kyoto Convention was signed in 1973 and the revised Convention came into force in 2006. The Convention has provided a high degree of uniformity and standardisation of customs worldwide.
The Convention sets out basic rules internationally for clearance of goods, duties and taxes, guarantees, controls information technology, dissemination of information, decision and appeal. There are detailed annexes dealing with specific customs procedures. Countries who accede to the Convention agree to be bound by the standards.
The adoption of international standards in the area of customs has led to simplification and harmonisation. The World Customs Organisation has developed standards relating to key matters such as model data harmonisation of customs procedures and standards in relation to facilitation is the context of safety and security.
The World Customs Organisation works with the World Trade Organisation to remove remaining barriers by simplifying and harmonising customs processes and procedures. These relate both to the collection of duties and also to the wider function of customs in monitoring and enforcing trade policies and regulations such as those in relation to health safety and welfare the protection of intellectual property, heritage and the environment.
The World Customs Organisation has been active in developing the notion of a single window for trade purposes. The purpose is to ensure that importers and exporters deal with a single body only instead of a range of government departments such as those dealing with food safety, product safety, intellectual property the environment and immigration.
The modern trend facilitated by electronic customs systems has been to take customs clearance and enforcement away from the ports to the freight forwarder, other customs agents or traders who make the returns. As with taxation generally, a much greater emphasis is now laid on the customs audit process. This requires that traders and agents have the necessary systems to identify and demonstrate compliance with all of their obligations. Customs authorities must have visibility on the entire transaction in the business and must have an audit trail and systems to show compliance.
Customs processes formerly took place at the end of the movement when goods arrived at the port of entry. In most cases the bulk of the process now takes place at the beginning of the import or export movement. Where the agent is trusted either in practice or by reason of a formal status which it has achieved the number of random interventions and checks will be less.
Some agents enjoy formal simplifications allowing them to undertake very simplified declarations to the customs authority while undertaking the principal elements of the customs declarations by records in their own books which are filed with customs authorities periodically.
IT and Automation
The customs process is now fully computerised and involves one or a number of linked communications of a full set of data with the required information to both HMRC in the UK on the entry side and Revenue in Ireland on the exit side (and vice versa).
Basically, custom controls are about risk assessment by the revenue authorities. The essence of the process is that both revenue authorities undertake a computer-based risk assessment of the data and give traders either green routing, orange routing involving a document check or red routing involving a goods check. This may happen on the outward (export) and/ or the inward (import) side, although checks are far more likely on the import side.
In practice, almost all returns are made electronically. The electronic return is almost instant and a SAD issue upfront. The final acceptance of the SAD and the actual clearance is not be given until slightly before the goods arrive.
Importer of Record and Responsibility
Liability for customs duties will lie with the importer of record. Therefore, even if other parties are responsible and have caused particular liabilities the declarant /importer takes full obligations and liability to the revenue authorities for the tax and compliance obligations due.
When a customs return is made the importer of record makes a range of assertions in relation to the good’s classifications origins status and value. There may be complex licensing requirements and conditions in relation to certain types of goods, which the importer or exporter may certify in return online.
Customs processes commonly involve suspension of duties on a range of conditions which must continue to remain applicable. The importer of record remains liable for the truth accuracy and correct applicability of all matters in the declarations, whether made by the trader or an agent.
Any intentional or reckless misstatement in a customs return can have serious criminal consequences as well as administrative penalties and civil liability for the customs due. As a tax return, such a statement to a government authority is akin to fraud and is treated as such and carries the risk of a fine or even imprisonment in more serious cases.
As in all other areas law and tax, ignorance of the rules even if they are obscure and difficult to interpret is no excuse. If customs obligations have not been undertaken there are risks of administrative and criminal penalties and sanctions. If there are underpayments of duty, then in normal course the full arrears of the duty together with interest and possibly penalties may be immediately due. As with other taxes the Revenue / HMRA take a graduated approach to penalties depending on the degree of cooperation, whether the mistake is innocent careless or reckless whether the matter has been disclosed prompted or unprompted.
Some customs issues are complex, and the error will not be evident until the matter comes to light and is challenged by revenue authorities. In some cases, for example. complex issues of interpretation can arise in the context of classification and the application of the tariff, origin and valuation can arise.
Logistics department function
Customs risk is central to logistics. The logistics department personnel should have visibility on the movement of goods and the documentation supporting that movement. The documentation in electronic form must support the underlying movement of the goods in order to secure the correct customs and VAT treatment. Security policies and procedures may be required to ensure that what is declared as moving in fact moves and that there is no possibility of third-party intervention or fraud.
The choice of routing might lead to higher risks of customs controls and interventions. Goods must usually move directly from state A to state B in order to obtain the benefit of liberalising conditions in a trade agreement. It is not enough that a trader is state A sells to a trader in state B where the goods move from state C to state B.
It is critical that goods are properly monitored and reported at that point of leaving and reception. Otherwise the discrepancy may lead to incorrect customs declarations. Accurate stock records are essential for many purposes and are critical and a legal requirement if the business needs and holds certain customs simplifications such as for inward and outward processing
Third party logistics providers and agents may vary in their competence and integrity. Even if the carrier’s agents or logistics providers have good compliance record and risks management systems, they may subcontract to others over whom they have limited control and who may not have the same standards
In customs matters, reliability on documents (albeit in electronic form) is almost total. There must not be any disconnect between the documents and the underlying goods and goods movements. Discrepancies may lead to breach of obligations and penalties.
Systems are essential to ensure the risks of non-compliance are minimised or eliminated. Should be possible to audit systems to ensure their accuracy and reliability.
The failure to comply with customs obligation carries a number of significant business risks. Delays at customs can lead to project or production interruption. This can incur liability by way of penalties liability for damages and loss of business. It can lead to lost sales disruption of projects and damaged reputation.
A retrospective recalculation of customs duties together with interest and penalties in the event of a customs audit can lead to immediate significant liabilities. Liabilities may be due to misclassification of the goods, failing to apply or declare applicable conditions or the wrong conditions or incorrect valuations. The liabilities may be catastrophic in some cases where they have continued for a period and might threaten the viability of the business.
The responsibility for the accuracy and completeness of customs returns and for holding all necessary documentation and proving compliance in the event of an audit rests with the exporter or importer concerned.
Invariably customs agents, freight forwarders and logistics providers do not take responsibility for the accuracy of customs returns. They act on the basis of documentation furnished. As they have no visibility or limited visibility in relation to the underlying goods and movement in many if not most cases. they will not take responsibility to the revenue authorities. Terms and conditions with such agents may excuse their liability or limit it severely.
Understanding the applicable international commerce terms (INCOTERMS) and the respective responsibilities under the sale contract of the importer and exporter under them is critical. They will allocate as between exporter and importer their respective responsibility for matters such as place of delivery, carriage insurance and payment of duty.
The advent of information technology has changed customs procedures fundamentally. Traders, agents, port operators and logistics providers may enter data directly into the revenue’s computer systems using direct trader input. Worldwide customs IT systems now have the capacity to
- process declarations and clear goods
- allow simplified initial clearance with reduced information
- assess and collect revenue
- undertake risk assessment
- manage the trader’s account
- control the valuation of the goods
- control movements of goods
- support audits
- gather statistics
- collect information for risk assessment by other governmental departments
The IT system must be capable of managing customs obligations. The product file must have the correct tariff code as well as other compliance obligations that might apply to it. They must be capable of generating the data required in order to show customs compliance in the event of an audit.
Larger organisations may have formal customs policies, procedures and controls. They should be audited internally from time to time. Small-scale organisations should review their procedures and controls, to ensure their ability to deal with obligations and the implications for the business. There should be well trained and knowledgeable staff who have access to proper systems and data.
Customs use experience and data from returns to undertake risk analysis profiling with a view to targeted enforcement. The full visibility and declarations also shipping manifests security declarations and the results of previous audits. This enables customs authorities to profile unusual activity. This leads in turn to systematic interventions in addition to random interventions by way of policing checking and enforcement.
Customs will have significant insight into particular industries including the nature of the goods concerned, pricing, valuation origin and destination the nature of the goods, routing mode of transport operators involved and the risk of loss to revenue
Risk profiling is supplemented by random checks against data and returns made. When non-compliance is discovered authorities may revise their risk profiles accordingly.