The customs authorities around Asia are at different levels of sophistication but they are all learning fast. In general they are suspicious of foreign or multinational operators. They often believe that such companies are sophisticated planners that are “out to cheat”. The recent debate around the morality of paying taxes has fuelled such views.
This combined with increased revenue pressures has led to customs authorities being increasingly proactive on challenges, audits and investigations. In addition, they are learning from working with customs authorities in other countries, meetings at the WCO, and working with tax authorities on joint audits. Consequently, customs audits focus increasingly on ‘advanced’ issues, such as license structures, transfer pricing, complicated classification and export controls.
It is important to distinguish between routine queries, audits and investigations. Routine queries occur on a day-to day basis and are usually insignificant and for clarification purposes only. If they are not properly dealt with, or suggest underlying problems, an audit may result. Audits could also be themselves routine in nature and occur at regular intervals. Audits tend to be administered similarly in most countries. Generally, there is some prior notice provided of the forthcoming audit. Customs officers have the authority to interview personnel and remove documentation and/or information. Often the goal of an audit is to verify previously declared information and recover any underpaid duties.
Investigations are more serious and impactful. They occur with little or no notice given. They are often the result of a whistle blower or disgruntled (ex-)employee, or an issue uncovered during a routine query or an audit. They may involve special agencies other than Customs, such as the Anti-Smuggling Bureau in China or the Department of Special Investigations in Thailand. They can be criminal in tone and impact, and are usually intent on finding fraud or misrepresentations.
Penalties for errors uncovered during an audit can range from nominal amounts to criminal penalties (including prison terms) for intentional non-compliance, as well as the revocation of trade facilitation schemes and increased inspections. It is therefore essential to be well prepared for an audit through regular self-assessments, which in turn will reduce the likelihood or impact of any investigation. Awareness of your rights and obligations, as well as avenues for negotiation, arbitration and appeal are also instrumental in successful management of customs audits and disputes.
How can WMS help?
WMS can provide the following solutions to help to manage customs audits and disputes, whether or not related to an investigation:
- Perform regular "mock audits" or similar self-assessments to improve the preparation and readiness for a real audit;
- Design and implement processes and procedures for customs and trade compliance management that help avert issues being uncovered during an audit or investigation;
- Assistance in communications and negotiations with customs during an audit or dispute;
- Strategy development based on our pragmatic experience in dealing with customs audits and investigations;
- Manage the impact on daily operations by leveraging our long-term built relationship with customs authorities;
- Training of employees to deal with interviews by customs authorities.
Audit assessment on dutiability of royalties
A manufacturer of agriculture vehicles was audited by the Audit Department of Customs in China and was challenged on the dutiability of royalty fees paid under a License Agreement. The case was transferred to the Anti-Smuggling Bureau (ASB) as a non-compliance case before WMS was involved.
How WMS helped
We conducted an analysis of the License Agreement to assess the arguments for and against the dutiable nature of the royalty fees in question from a China customs valuation perspective. We also provided support in the communication with Customs to facilitate the negotiation.
Our independent technical assessment resulted in a detailed opinion on the likelihood to reduce / exempt the penalty and mitigate the risk of enterprise classification downgrading. We established a strategy for negotiation with Customs and set up an appropriate channel to facilitate communications. We also advised on best practice to re-structure the royalty arrangement for reducing customs liabilities (including contract clause, foreign exchange payment, etc.)
Benefit to the client
- No penalty was imposed by Customs.
- The relationship and trust between our client and Customs actually improved, and the client's enterprise classification was not downgraded.
- Future duty liabilities were reduced through appropriate re-structuring of the license agreement.
The audit that never happened
A manufacturer of fast moving consumer goods was advised of an impending audit in a country not to be named. Our experience was that the authorities were expecting the importer to contact them and offer a facilitation payment to avert the audit.
How WMS helped
We were asked by the regional headquarters of the company, which was subject to the US FCPA hence not in a position to entertain the concept of facilitation payments, as to how to manage the process.
We carried out an immediate mock audit and put in place corrective actions to rectify any areas of non-compliance. We also put in place procedures to avoid recurrence of such non-compliance. At the same time we advised on ongoing communication with the authorities assuring them of the company’s readiness and cooperation with the audit proceedings.
Despite regular reminders by the authorities that the audit was coming closer and closer, when the day arrived no auditors turned up.
Benefit to the client
- Rectification of non-compliance issues;
- Better processes and procedures for future management of customs and trade compliance;
- Protection of FCPA compliance;
- Avoidance of regular audit notifications aiming for quick "revenue generation".