Customs Trade Law Academy Interview: Part 4 of 4
e-Origin is driving a R&D project mixing digital technology and legal framework in customs clearance related to e-commerce. The research is led by the Customs Trade Law Academy (CTLA) at the University of Liège, which has set up an educational course at HEC-Executive Education for professionals.
In this interview, CTLA give their vision about fraudulent e-commerce flows and what are the best practices to collecte evidence for customs. The CTLA members interviewed were:
- Karin Walravens, Project Leader, Customs & Trade Law Academy
- Raphaël Van De Sande, researcher at the University of Liège within the framework of the e-Origin project, lecturer at HEC – masters specializing in tax law, trainer at HEC Executive Education within the framework of the fundamentals of customs and excise legislation training, member of the CTLA steering committee
Do you think that there is really a will to fraud in these e-commerce flows or rather mechanisms that are improperly applied?
IDMS H7 and the implementation of IOSS are designed to prevent from fraud if they are properly applied, don't you think?
It seems quite clear that there is a willingness to fraud from some actors to evade taxes and import duties. If these were just mechanisms it would not work so long, time would have allowed them to be corrected and adapted, but instead we notice a shift in flows to Eastern European countries when controls are intensified in Belgium. These frauds are highly detrimental to the market, as they create unfair competition with those who pay import duties and taxes in due form, whether it is online market or physical market.
We are in a situation where fraudulent exporters are trying to be below the tax thresholds. Before July 2021, the 22 EUR threshold was pushing fraudsters to systematically declare their products below this value to avoid VAT.
With the H7 regime, other fraud mechanisms are emerging, such as the increase of C2C packages (gifts with 45 EUR exemption), B2B flows declared as B2C to access the simplified H7 declaration, IOSS numbers are used fraudulently, etc.
Marketplaces hold an IOSS number (but not only them), as do some others online sellers. Despite the involvement of marketplaces and their influence on these international transactions, they are not held responsible for the imports in terms of customs! You will not find any legal implication of these online sales platforms in their general terms and conditions for example. The marketplaces transfer these obligations to the online sellers, buyers and carriers. As a result, the logistic actors have the control of the flows until the delivery to the customers. In this supply chain there are a lot of intermediaries such as parcels aggregators.
In such a context, it is easy to understand that the mission of Customs Brokers to enforce tax compliance is complicated to implement, with the absence of risk management tools and the lack of transparency and commitment of key players such as Marketplaces. If marketplaces were required to share information on goods (technical and commercial data) and transactions, the customs brokers would be able to verify that the information coming from his principal customer is align and compliant.
Can you tell us about the methods and evidence that need to be collected to be compliant with customs? Is it so complicated to get them in e-commerce?
It is quite complicated to collect proofs expected by the customs in e-commerce, especially if it is a customs movement made several years ago.
If the goods are still present, the customs will probably carry out a physical check to verify the adequacy between the declarative data and the physical reality of the parcel. In this case, the evidence is directly available in the package, which usually contains the technical specifications and commercial documents. If this is not the case, these documents will be requested.
If the goods have been released, customs will focus on the transactions and the people connected with them. In this case, it may be the invoices, but also the proof of establishment of a company in Europe Union, the actual delivery of the goods to the importer, etc.
In fact, the customs have a wide power of investigation to ensure the regularity of the shipment.
The problem in e-commerce is that these evidences are not easy to obtain for the customs representative. Indeed, he usually does not have the URL of sale on the marketplace, nor the proof of payment and sometimes not even the invoice (B2C, C2C).
This information is essential to prove the accuracy of a declaration, but is not legally binding (legal dataset per regime – Annex B of the Delegated Regulation) for those actors who have it and could share it with Customs Brokers when an inspection happen. And if the commercial relationship has ended, there is little chance that the broker will get answers from his former customer.
If we take the example of IOSS, the customs borker does not have access to the database to check that the number IOSS indicated by his customer corresponds to the elements of a real e-commerce transaction.
For B2B (FBA), there are of course problems with the classification of goods, but an inspection of the products or on data will help to find the right HS Code.
The problems are often related to the proof of the customs value of the goods (or intrinsic value for B2C). Specifically, if Customs authorities has a reasonable doubt on the declared value, the invoice may be rejected. It is then up to the Customs Brokers to collect data related to the transaction to provide acceptable evidence to Customs officers.
Other methods of valuing the goods should be used in case of doubt on first presented document. For example, by collecting evidence on identical declarations with the same trade flow, the same technical characteristic of the product in an acceptable time frame. If it is not possible to find the identical product, the same exercise can be done with similar products. All the methods of customs evaluation can be declined up to the reasonable means to justify the customs value. If no answers are found, the last resort will be to use the reasonable means method, based for example on the EU statistical values, but this method has many biases. For example, a luxury watch will be worth 1000 times more than any other low value watch and yet will be valued according to the average of shipments over a given period.
Do we know the rate of non-compliance, not to say fraud, when customs targets e-commerce flows?
We do not have official figures, which are held by the customs authorities only, but we know that the rate of non-compliance is very high.
Of course, it can also be a non-conformity on the non-tax side (counterfeits, CE mark, etc.). Customs has a double strategy: targeted controls by risk analysis and random detection controls 24hrs at Liege airport. The penalties applied are increasingly high, this is why there is an interest in creating its own internal control process for customs brokers.
What is striking is that compliance problems can be spotted quite easily when we analyze e-commerce data files. For example, the tariff classification and the description of the goods do not match. Or the weights are significantly different. This means that data mining is crucial for the management of massive data flows, both for customs authorities and for customs brokers.
The e-Origin risk analysis tool is able to identify the majority of these “obvious” anomalies, as Customs certainly does. By correcting the declarative data before sending declaration, it avoids a large part of the administrative fines or minor irregularities found, which represent a significant cost and workload for the actors involved.
The e-Origin risk analysis also provides an analysis report on fraud risks that are more complicated or even impossible to detect by human checking or by simply crossing data. The e-Origin risk analysis also provides an analysis report on fraud risks that are more complicated or even impossible to detect by human checking or by simply crossing data. For example, this imply to check and to confirm the declared value of goods, to analyze flows by comparing current data with historical data, to check various EU and private databases to verify the accuracy of tariff classification, etc.