## Introduction — TNMEA2019001 ## Source details **Canonical URL:** [Introduction — TNMEA2019001](https://www.imf.org/-/media/files/publications/tnm/2019/tnmea2019001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tnm/2019/tnmea2019001.pdf.md) - [Structured JSON version](/-/media/files/publications/tnm/2019/tnmea2019001.pdf.json) --- ### Role and objectives of customs - Mission categories: collecting duties and taxes on international trade in goods; applying tariff and trade policies, including trade facilitation measures; collecting trade statistics; countering import/export of non-compliant, dangerous, and illicit products. - Objectives: mobilizing government revenue; contributing to the business climate; preserving citizens’ security and safety; producing economic and financial statistics; detecting illegal financial flows; contributing to regional integration. - Context: in low-income and fragile countries, taxes on international trade often account for around 40 percent of total tax revenue. - Definition: “Customs revenue” refers to customs duties and indirect taxes on import (value-added tax (VAT) and excise duties) collected by customs services; includes some other small levies on import and, in some countries, export taxes. ### Scope and timing of the note - Purpose: actions to increase customs revenues in low-income and fragile countries in the short term (about a year). - Focus: post-conflict or crisis situations and/or very low tax-to-GDP ratios where urgent government revenue is needed. - Structure: measures on assessment of the tax base (I. Valuation), control of goods under regular and special procedures (II and III), application of duty (IV. Exemptions), areas requiring special attention (V), medium-term actions and practices not recommended. - Basis: experience from FAD’s TA, notably missions to sub-Saharan African countries. --- ### I. Valuation of Goods — Issue, Actions, and Impacts - Global standard and primary method: - Governed by Article VII of the 1994 General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Implementation of this Article. - Primary method: transactional value (price paid or to be paid, adjusted by cost elements such as insurance and freight). - Alternate methods: Articles 3 to 7 when transaction value cannot be used. - Three main situations where transaction value cannot be applied (Box 1): 1. Transaction value fails one or more Article 1 conditions (e.g., related sellers/buyers). 2. Rejected following WTO Decision 6.1 procedures when customs has doubts after consultation. 3. No sale has occurred (e.g., leased goods, gifts, transfers between branches). - Challenges in low-income and fragile countries: - Declared transactional values often inaccurate; invoices not reliable. - Customs face large-scale control needs with limited resources and skills. - Common practices: ineffective verifications, acceptance of inaccurate declared values, use of administrative values contrary to the Agreement, negotiations, discretionary decisions. - Outcomes: undervaluation, reduced revenues, unfair treatment, economic distortions, governance issues. - Suggested short-term actions: - ACTION 1: collect and use comparative data for risk assessment. - Set up price data mechanisms; deem significant differences as risks; create a valuation support unit; collect prices via market surveys, online catalogs, foreign supplier queries, exchanges with foreign customs; automate matching with declarations; concentrate on high-value and high-risk goods. - ACTION 2: implement a WTO-compatible procedure to verify declared values when customs has reason to doubt accuracy. - Follow procedures agreed by WTO members (see Box 2); introduce initially in main offices; focus on high-value/high-risk goods. - ACTION 3: enforce progressive and proportionate penalties to improve compliance. - Differentiate unintentional errors, deliberate incorrect application, and fraud; heavier sanctions and license suspension/revocation for falsified documents/organized fraud. - Practices not recommended: - Pre-shipment inspection and destination inspection by private companies have limited effect for valuation; if used, should only support customs on request (e.g., price data), not issue binding valuation opinions. - WTO Trade Facilitation Agreement rejects pre-inspection for valuation and tariff classification. - Customs should compile both external data (for detection) and internal data (for alternate valuation methods). - Expected impact and cautions: - Impact assessment is difficult; mirror statistics can indicate valuation gaps but must be used cautiously. - Proper application of WTO rules can sometimes reduce declared values where overvaluation occurred. - Evidence exists of tax-motivated transfer pricing in trade in real goods. - Medium-term notes: - Customs should collect information to reject transaction value in cases 1) and 3) of Box 1, including data on relationships between importers and exporters, coordinated with the tax administration for transfer pricing controls. --- ### Strategic risk analysis and valuation - Mirror statistics can assess valuation/revenue gaps by sector and commodity type. - Valuation control should be integrated into broader customs control strategy: - Pre-clearance verifications: simple cases, informal sector or shadow economy importers. - Post-clearance audits: more complex valuation issues. - Cross-cutting coordination: consider coordinated tax policy/administration measures beyond customs valuation. --- ### Cargo control — Issues, Actions, and Expected Impact - Main issues in low-income and fragile countries: - Partially automated procedures, ineffective use of computer systems, procedures incompatible with computerization, officers not acting on incidents, managers not monitoring operations. - Ideal state: electronic, paperless cargo reporting and clearance with computerized data informing actions. - Short-term actions: - ACTION 1: require cargo manifests in electronic format only and ensure data integrity. - Receive manifests electronically in an international standard format, preferably directly from the shipping line; technical specs to prevent modification; amend manifests under customs control within a limited time span, e.g., 48 hours; review data quality and penalize non-compliance. - Note: the CUSCAR message (CUStoms CARgo report message) is an international EDIFACT message used to send a customs manifest to Customs. - ACTION 2: eliminate manual procedures associated with computerized procedures. - Remove bypasses like “direct removal”; ensure officers update IT systems rather than paper copies; ensure automatic discharge of electronic manifests by validation of electronic declarations. - ACTION 3: ensure customs personnel promptly process pending operations. - Heads should extract unresolved operations reports (unacquitted manifest lines, unfinished declarations) and instruct regularization (location of goods, auctions, duty collection, penalties, prosecutions). - ACTION 4: automate taxation rules in the “Integrated Tariff” tables of the customs IT system. - Keep rules up-to-date; link customs IT to taxpayer identification number (TIN) database; ideally interconnect customs and tax administration systems. - ACTION 5: implement measures for informal sector operators. - Require packing lists, extensive physical inspections, verify TIN accuracy; informal sector importers: operators not registered in the taxpayer register or registered but non-compliant; TIN may belong to a third party. - Expected impact: - Estimating revenue lost is difficult; in-depth review of unacquitted operations in the IT system is a starting point. - Regular system review by internal audit recommended. - Example: main port in an East African country had several hundred containers removed without declarations and payments. - Medium-term notes: - 1. Full automation so every step is acquitted automatically by the subsequent one. - 2. Paperless procedures so interventions are recorded and auditable. - 3. Robust protection of customs IT systems and data; establish internal and external audit programs. --- ### Special procedures — Issues, Actions, and Expected Impact - Issue: - Procedures (transit, bonded warehousing, temporary admission, Free Zones) suspend duty/tax until re-export or clearance, posing high diversion risk to domestic market. - Weak follow-up capacity in low-income and fragile countries leads to revenue losses. - Short-term actions: - ACTION 1: ensure physical security of transit cargo. - Seal containers from departure to arrival; limit authorizations to unload before reloading on non-sealable trucks; require secure locks and recommend container/trailer locks with tracking devices reporting opening attempts to customs command post; establish national center for real-time monitoring; require bond guarantees for transit operations and ensure realization of bonds. - ACTION 2: report undischarged transit operations daily and recover duties/taxes without delay. - Connect strategic border posts to customs IT; record number of days and itinerary to generate immediate reports; IT should automatically release notifications of payment; address notifications to the person responsible and separate recovery from fraud investigations. - ACTION 3: enforce rules on approval and duration of duty relief procedures. - Authorize bonded warehousing and temporary admission only with clear economic justification; control authorized operations/manipulations; align and enforce time limits (re-export, home consumption declaration, auction, taxation of overstayed goods). - ACTION 4: reconcile declarations and physical inventory regularly. - Require IT declarations, check inputs/outputs, periodic inventories, recover duty on deficits/excesses, sanction and cancel authorizations for fraud-involved traders. - ACTION 5: ensure physical security of Free Zones. - Require secure perimeters, remediate deficiencies, allow customs access to CCTV and FZ inventory control system where possible. - Expected impact: - Revenue impact depends on country-specific problem magnitude. - Signs of dysfunction: poorly monitored transit, high number of bonded warehouses relative to the economy (especially for heavily taxed goods such as alcohol and tobacco), indefinite temporary admissions. - Medium-term notes: - 1. Rely on electronic exchange of data between customs authorities; destination office should report completion to the original point of entry; border posts should note crossings—requires interconnection of national customs IT systems. - 2. Governments should retain customs control of Free Zones within the customs authority; FZ should be part of the customs territory with customs able to access FZ inventory control systems in real time under a predefined standard. - Additional point: - Control of special procedures for transformation of goods presents specific difficulties; training of officers in high-risk industrial processes is needed. --- ### IV Duty Exemption — Issue, Actions, and Expected Impact - Issue: - Proliferation of import duty and tax exemptions common in low-income and fragile countries. - Consequences: unequal duty burden, major drain on government revenue, negative impact on competitiveness and fairness. - Administrative process: laws/agreements grant exemptions; traders request authorization; declarations accompanied by authorization certificate; verification and release without payment or with reduced taxation; conditions enforced after release. - Weaknesses: imprecise definitions of exempted goods/beneficiaries/conditions; insufficient customs control exploited by non-compliant traders. - Short-term actions: - ACTION 1: define exemption rights with precision and publish them. - Precisely define beneficiaries, commodity characteristics, and post-release obligations; draft secondary legislation/regulations; set annual quotas for certain exemptions; authorize Minister/Director General to adopt directives; publish schemes, regulations, and directives in gazettes. - ACTION 2: assign numerical identification to exemption criteria. - Integrate codes in customs IT for automated processing; identify exempted commodities by HS codes; define beneficiary categories with objective/verifiable criteria (e.g., “government-approved non-governmental organizations”); customs access to TINs and require TINs in applications and declarations. - ACTION 3: monitor importers’ obligations after release. - Conduct desk reviews and field audits; revise Customs code to allow premises visits and stock reconciliations. - ACTION 4: report revenue foregone and administrative challenges to authorities and suggest improvements. - Minister of Finance should know revenue cost by scheme, sector, beneficiary; customs should produce accurate comprehensive reports including irregularities and proposals. - Expected impact: - Policy decisions are most effective to reduce foregone revenue; administrative measures can have significant impact. - Observed magnitudes: - In sub-Saharan African countries, revenue foregone from exemptions can account for about a third of potential revenue collectible by customs. - In the Caribbean this often exceeds 20 percent of potential customs revenue. - Notes: a proportion corresponds to uncollected VAT; risk of diversion of VAT-exempt goods remains important. - Evidence of abuse: limited audit coverage, observed results, and anecdotal evidence (unauthorized transfers of exemption authorizations, sudden increases in imports). - Medium-term notes: - 1. Use an IT module to process exemption authorizations interfacing with customs clearance IT. - 2. Revise Customs Codes to classify exemption schemes as a type of special relief procedure with specific post-release obligations. - 3. Exclude persons/entities involved in customs fraud from exemptions. - 4. Implement a tax expenditure exercise: identify exemptions, determine baselines, estimate costs, produce annual report to Parliament and publish benefits and costs. - 5. Subject the exemptions regime to annual audit by a national body and publish outcomes. - 6. Consider zero or very low tariff rate for capital and intermediate goods to reduce pressure for exemptions (effective for input-only goods; complex when goods can be inputs or consumption goods). --- ### V Other Areas Requiring Particular Attention - A. Classification of Goods in the Tariff Nomenclature - Background: goods classified under the Harmonized System (HS); many commodities require HS rule application. - Weakness: verification often assigned to untrained local staff; lack of specialists and risk assessment. - Short-term actions: develop advanced tariff classification rulings; encourage trader requests for rulings; proactively publish administrative tariff classification decisions; central specialists review classifications; local staff check conformity with central rulings. - B. Country of Origin - Background: control of origin important where preferential origin grants lower duty rates; capacity to detect origin fraud limited. - Short-term actions: set up national team to study origin trends/variations; train field officers to detect false preferential origin documents; coordinate verification requests to export countries; instruct officers to check origin indicators during examinations. - C. Collection Enforcement - Background: enforcement has revenue and deterrence effects only if evaded duties and penalties are fully recovered; customs’ recovery capacity is generally low; rules for handling customs debts after or outside clearance are often vague. - Short-term actions: revise regulations to establish notification/recording/payment procedures for customs debts after or outside clearance; automate rules in IT; simple cases handled by customs offices; complex/high-risk by specialized enforcement collection unit (possibly outside customs). - D. Integrity - Background: strong perception of corruption in customs due to officers’ power over valuable commodities; contributing factors include ambiguous laws, inadequate management control, insufficient audits, conflicts of interest, very low salaries. - Long-term pro-integrity elements: education campaigns, systems audit programs, conflict-of-interest declarations, sound HR strategy, reasonable pay scales, regular asset declarations. - Short-term actions: managers/supervisors to conduct ongoing checks and internal inspections and report periodically in writing; establish a dedicated and, if possible, independent body to promptly follow up on bribery/corruption/abuse allegations. --- ### VI Conclusion — Implementation and Complementary Measures - Key requirements: correct and complete application of measures, strong commitment from authorities and Customs management, coherent action plan, monitoring of implementation. - Role of technical assistance: critical, substantial, adjusted to local absorption capacities, and effectively coordinated among donors. - Resource and legal implications: some measures require additional resources and limited legal changes. - Examples of targeted initiatives: national customs valuation services in Mauritania and Burkina Faso; strengthened customs transit monitoring in Benin and East Africa; clear frameworks for customs clearance procedures. - Complementary needs: improvements in IT, human resources management, performance monitoring, and professional ethics to improve administration efficiency and increase revenue collections. --- ### Acronyms and Abbreviations - FAD — Fiscal Affairs Department - FZ — Free Zone - HS — Harmonized System - IMF — International Monetary Fund - IT — Information Technology - TA — Technical Assistance - TIN — Taxpayer Identification Number - VAT — Value-Added Tax - WTO — World Trade Organization - WCO — World Customs Organization *TNM/19/01 International Monetary Fund Fiscal Affairs Department* ### Introduction ### Introduction ### Role and objectives of customs - The mission of customs authorities broadly falls into four categories: collecting duties and taxes on international trade in goods; applying tariff and trade policies, including trade facilitation measures; collecting trade statistics; and countering the import and export of non-compliant, dangerous, and illicit products. - Objectives pursued through customs activities include: mobilizing government revenue; contributing to the business climate; preserving citizens’ security and safety; producing economic and financial statistics; detecting illegal financial flows; and contributing to regional integration. - In low-income and fragile countries, taxes on international trade still account for a large share (often around 40 percent) of total tax revenue. - “Customs revenue” in this note refers to customs duties and indirect taxes on import (value-added tax (VAT) and excise duties) collected by customs services; some other small levies on import and, in some countries, taxes on export, are also relevant. ### Customs processes and controls - Standard sequence: goods arriving or leaving are presented and recorded; a customs procedure is requested by the declarant (import for consumption, temporary import, export, etc.); customs verifies declarations and inspects goods if necessary; correct duties and taxes (mainly customs duties, VAT, and excise duties) are collected based on value and/or quantity, nature, and sometimes country of origin. - Post-clearance checks: desk reviews or on-site audits to recover duties and taxes evaded at declaration time. - Monitoring after release is required for certain procedures (e.g., transit). Mobile preventive services operate at borders and around ports to direct goods to clearance offices and combat smuggling. Investigation units tackle fraud and trafficking across the customs territory and prosecute serious offences. - Customs administration globally has been shaped by treaties and conventions that harmonize customs operations towards common standards, including the Harmonized System—1988; the WTO Agreement on Customs Value—1994; the Arusha Declaration—2003; the Revised Kyoto Convention—2006; the WCO Framework of Standards to Secure and Facilitate Global Trade (SAFE)—2006; and the WTO Bali Trade Facilitation Agreement—2013. ### Purpose, scope, and timing of the note - This note examines actions that can increase customs revenues in low-income and fragile countries in the short term (about a year). - Focus countries include those in post-conflict or crisis situations and/or with very low tax-to-GDP ratios where urgent government revenue is critically needed for social and development expenditures and continuity of basic state functions. - Suggested measures relate to the assessment of the tax base (Section I. Valuation), control of goods under regular and special procedures (Sections II and III), and the application of duty (Section IV. Exemptions). Section V discusses areas requiring special attention. The note highlights further medium-term actions and identifies practices not recommended. ### Key contextual point - The suggested actions are based on the experience acquired through FAD’s TA, particularly findings and recommendations of TA missions to sub-Saharan African countries. --- ### I. Valuation of Goods — The Issue - Global standard: Article VII of the 1994 General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Implementation of this Article (referred to as “the Agreement”). - Primary method: the transactional value (the price paid or to be paid for the good, adjusted by cost elements such as insurance and freight). - Alternate valuation methods described in Articles 3 to 7 of the Agreement apply when the transaction value cannot be used. - Three main situations where the transaction value cannot be applied (Box 1). Box 1 — Situations Where the Transaction Value Cannot be Applied for Customs Valuation of Imports - There are three main situations where the transaction value cannot be applied, and alternate valuation methods are used instead: 1. The transaction value is rejected on the basis of failing one or more of the conditions of Article 1 of the Agreement (e.g., those applicable to related sellers and buyers). 2. The transaction value has been rejected following application of the procedures of WTO Decision 6.1, namely customs had doubts regarding the truth or accuracy of the declared value, which were conveyed to the importer, and customs’ doubts remained after consultation was undertaken (see Box 2 below). 3. No sale has occurred (e.g., leased goods, gifts, goods transferred between branches, etc.). - Source: WCO Guide to Customs Valuation and Transfer Pricing, June 2015. Additional points on the issue - Implementation of WTO rules is challenging in low-income and fragile countries: declared transactional values are often inaccurate and many invoices presented are not reliable. - Customs must undertake large-scale control with limited resources and skills; ineffective verifications, acceptance of inaccurate declared values, use of administrative values in contradiction with the Agreement, negotiations, and discretionary decisions are common. - Outcomes include undervaluation of goods, reduced revenues, unfair treatment of importers, economic distortions, and governance issues. - Note: References to the WTO rules are applicable to WTO members. Paragraph 2 of Annex III of the Agreement provides that developing country WTO members may make a reservation to retain an already-existing system of officially established values on a limited and transitional basis under terms agreed by the Committee on Customs Valuation. ### I. Valuation of Goods — Suggested Short-Term Actions - ACTION 1. Customs should collect and use comparative data to detect significant differences between declared values and average commodity prices as part of risk assessment. - Set up an effective mechanism to collect prices of commodities commonly observed on the international market. - Declarations with significant differences from indicative prices should be deemed a risk and trigger verification. - Assign a well-managed and motivated team with intelligence training (a “valuation support unit” at customs headquarters) to gather price data and maintain an updated database. - Price data collection methods: market surveys, online catalogs, queries to foreign suppliers, exchanges with foreign customs administrations, and other techniques. - Automate the internal procedure to match and compare collected data with incoming declarations as soon as possible; concentrate first on high-value and high-risk goods. - ACTION 2. Implement an effective, transparent, and WTO-compatible procedure to verify declared values when customs has reason to doubt accuracy or veracity. - Observing a significant variation (Action 1) requires a check following the procedure agreed upon by WTO members (see Box 2). - Introduce the procedure initially in main customs offices and focus on high-value and high-risk goods due to resource and capacity limits. - ACTION 3. Enforce a scheme of progressive and proportionate penalties to raise compliance over time. - The objective is to improve traders’ compliance, not repeatedly raise values to attract revenue. - Develop a clear sanctions policy that differentiates between unintentional errors, deliberate incorrect application of valuation rules, and fraud, and between first and repeat offenders. - Heavier sanctions, including prosecution, for traders using falsified documents or organized fraud schemes; suspend or revoke licenses of clearing agents participating in such schemes. Box 2 — WTO Ministerial Decision 6 1 Regarding Cases Where Customs Administrations Have Reason to Doubt the Truth or Accuracy of the Declared Value (Extract) - When a declaration has been presented and where the customs administration has reason to doubt the truth or accuracy of the particulars of documents produced in support of this declaration, the customs administration may ask the importer to provide further explanation, including documents or other evidence, that the declared value represents the total amount actually paid or payable for the imported goods, adjusted in accordance with the provisions of Article 8. - If, after receiving further information, or in the absence of a response, the customs administration still has reasonable doubts about the truth or accuracy of the declared value, it may, bearing in mind the provisions of Article 11, be deemed that the customs value of the imported goods cannot be determined under the provisions of Article 1.* - Before taking a final decision, the customs administration shall communicate to the importer, in writing if requested, its grounds for doubting the truth or accuracy of the particulars or documents produced and the importer shall be given a reasonable opportunity to respond. - When a final decision is made, the customs administration shall communicate to the importer in writing its decision and the grounds therefor. - It is entirely appropriate in applying the Agreement for one Member to assist another Member on mutually agreed terms. - * In that case, the customs value is determined through another authorized valuation method. These alternative methods must be used in the order prescribed by the Agreement. ### I. Valuation of Goods — Practices Not Recommended - Pre-shipment inspection and destination inspection (private companies pre-inspecting consignments in the country of export) have had limited effect on improving valuation control and raising compliance, for conceptual and practical reasons. - If private services are used, they should support customs by providing additional information on request (e.g., price data) rather than issuing binding valuation opinions. - The WTO Trade Facilitation Agreement rejects the use of pre-inspection for valuation and tariff classification purposes. - For effectiveness and WTO compliance, customs should compile both external and internal data: - External data is critical for Action 1 (detection of possible irregularities or fraud). - Internal data is necessary for Action 2 (application of alternate valuation methods), requiring recent and thoroughly verified imports of identical or similar goods. - Common weaknesses of pre-shipment inspection noted: duplicated and uncoordinated processes; opinions provided that customs does not use; questionable recommended values; poor oversight by customs management; absence of reconciliation between customs’ and the company’s data; and flawed contract design. ### I. Valuation of Goods — Expected Impact - Assessing the impact of import valuation noncompliance is difficult because each transaction presents a unique valuation case for customs. - Recent studies have used mirror statistics (export data to one country compared to recorded imports of that country) to detect valuation gaps by sector or good type; mirror statistics must be used with caution due to asymmetries that can arise for reasons other than misdeclaration. - Confirming or discarding misdeclaration requires careful analysis of administrative practices and/or audit, but mirror statistics can provide useful insights where data is scarce. - Proper application of WTO rules may sometimes result in reduced values where imports were overvalued by declarants or via administrative values set by customs. - Importers may declare a customs value higher than the transaction value to increase charges to reduce domestic taxes or to illegally export foreign exchange. Recent studies provide evidence of tax-motivated transfer pricing taking place in trade in real goods. ### I. Valuation of Goods — Notes for Further Medium-Term Actions - Next steps should include: 1. Customs should collect further information to be able to reject the transaction value in cases 1) and 3) described in Box 1, particularly to determine if companies’ relationships have influenced the price of the goods and whether this could lead to rejection of the transaction value. - Customs should collect information on existing relationships between importers in the country and exporters abroad. - This should be done in collaboration with the tax administration as the information will also be useful to control the tax implications of transfer pricing. *Technical Notes and Manuals 19/01 | 2019 — Introduction (selected sections)* ### 2. Customs should use data for strategic risk analysis regarding valuation. In this regard, ### 2. Customs should use data for strategic risk analysis regarding valuation. In this regard, ### Strategic risk analysis and valuation - Mirror statistics can be used to carry out assessments of valuation/revenue gaps by sector and by type of commodities. - Valuation control should fit into the broader customs control strategy, which should differentiate actions before and after customs clearance. - Verifications before clearance should concentrate on simple cases and importers from the informal sector or the shadow economy. - More complex valuation issues should be dealt with through post-clearance audits. - Cross-cutting coordination: authorities should consider coordinated tax policy or administration measures in other areas than customs valuation when addressing valuation risks. ### Cargo control — The issue - Cargo control in entry/exit points is generally far from optimal in low-income and fragile countries because of: - procedures only partially automated, - ineffective use of existing computer systems, - procedures incompatible with computerization, - customs officers not taking appropriate action on incidents and infractions, - customs managers not monitoring operations. - Ideal state: cargo reporting and clearance procedures should be electronic and paperless, with computerized data routinely used to inform customs actions. ### Cargo control — Suggested short-term actions - ACTION 1. Require cargo manifests in electronic format only and ensure the integrity of the data. - Receive manifests electronically, presented in an international standard format, preferably directly from the shipping line and if not from the shipping line’s agent. - Technical specifications should ensure manifests cannot be modified. - If differences arise between the manifest and goods unloaded, amend the manifest under customs control within a limited time span, e.g., 48 hours. - Customs should review manifest data quality and impose penalties for non-compliance. - Note: The CUSCAR message (CUStoms CARgo report message) is an international EDIFACT message used to send a customs manifest to Customs. - ACTION 2. Eliminate manual procedures associated with existing computerized procedures. - Remove bypasses such as “direct removal” that reintroduce paper procedures and lead to late or missing electronic entry, insufficient verification, post-release payment without security, and build-up of arrears. - Prevent officers from recording interventions only in paper copies instead of updating the IT system. - Ensure electronic manifests are automatically discharged by validation of electronic declarations. - No non-automated intermediate steps should disrupt automated processes (e.g., container freight stations left out of the customs IT system). - ACTION 3. Ensure customs personnel promptly process pending operations in accordance with agreed procedures. - Heads of units should extract reports of unresolved operations including unacquitted manifest lines and unfinished declarations and instruct staff to regularize operations (location of goods, auctions, collection of duties, enforcement of penalties, search and prosecution). - ACTION 4. Automate all taxation rules in the “Integrated Tariff” tables of the customs IT system. - Ensure all rules are in the system module and kept up-to-date according to a verified protocol. - Customs IT should have access to an updated taxpayer identification number (TIN) database maintained by the tax administration; ideally systems/databases of customs and tax administrations should be linked for automated verification of TIN validity. - ACTION 5. Implement specific measures to control transactions of informal sector operators. - Require mandatory presentation of packing lists, carry out extensive physical inspections of such consignments, and verify accuracy of TINs indicated in customs declarations. - Informal sector importers: operators not registered in the taxpayer register, or registered but not complying with filing/payment obligations; TIN in declaration may be that of a third party. ### Cargo control — Expected impact - Estimating revenue lost from failures in cargo reporting and clearance is difficult; normal processing may hide serious issues. - An in-depth review of unacquitted operations in the IT system may be a starting point to assess problem magnitude and determine priority remedial actions. - Preferably, a regular system review by the internal audit office should be undertaken. - Example: in the main port of an East African country, several hundred containers had been removed without customs declarations and payments. ### Cargo control — Notes for further medium-term actions - 1. Full automation of customs procedures so every step is acquitted automatically by the subsequent one. - 2. Implementation of paperless procedures so customs officers’ interventions are recorded in the system and can be monitored and audited. - 3. Robust protection of the customs IT systems and data against intrusion and manipulation; establish internal and external audit programs to address this risk. ### Special procedures — The issue - Internationally available procedures (transit, bonded warehousing, temporary admission, Free Zones) suspend duty and tax until re-export or clearance. - High risk of diversion of goods to the domestic market without payment of duty and taxes. - Low-income and fragile countries often face weak follow-up capacity to monitor post-release operations, leading to revenue losses. ### Special procedures — Suggested short-term actions - ACTION 1. Ensure physical security of transit cargo. - Transport goods in sealed containers from departure to arrival without opening during the journey. - Limit authorizations for unloading containerized goods declared for transit before reloading on trucks that cannot be sealed. - Require containers and closed trailers to be securely locked; recommended technological solution: container/trailer locks with a tracking device that reports opening attempts to a customs command post. - Establish a national center for real-time monitoring of transit cargo and a customs mobile team to intervene on-site when incidents are reported. - Require a bond guarantee for all transit operations and ensure customs can realize bonds issued by banks and insurance companies. - ACTION 2. Report undischarged transit operations daily and recover duty and taxes due without delay. - Connect a small number of strategic border posts to the customs IT system to enable monitoring of transit operations. - Record the number of days granted to cross the country and the itinerary in the IT system so the system can generate immediate reports of undischarged operations. - The customs IT system should automatically release notifications of payment of duty related to undischarged operations. - Address notifications of payment of duty to the person responsible for the transit operation and separate recovery actions from fraud investigations. - ACTION 3. Enforce rules applicable to the approval and duration of duty relief procedures. - Authorize bonded warehousing and temporary admission only when applicants demonstrate clear economic/business justification; specify and control list of authorized operations and manipulations; align time limits to international standards and enforce them (re-export, declaration for home consumption, auction or taxation of overstayed goods). - ACTION 4. Reconcile customs declaration data and physical inventory reports regularly. - Require declarations in the customs IT system, effective checks of inputs/outputs, periodic comprehensive inventories, action to recover duty on deficits/excesses, and sanctions including cancellation of authorizations for traders involved in fraud. - ACTION 5. Ensure physical security of Free Zones. - Require FZ operators to maintain secure perimeters, remedy security deficiencies promptly, and allow customs access to CCTV and the FZ’s inventory control system where possible. ### Special procedures — Expected impact - Revenue impact depends on country-specific magnitude of problems. - Poorly monitored transit procedures, high number of bonded warehouses relative to the economy (especially for heavily taxed goods such as alcohol and tobacco), or indefinite temporary admissions are signs of serious dysfunctions and likely substantial revenue loss. ### Special procedures — Notes for further medium-term actions - 1. International transit procedures should rely on electronic exchange of data between respective customs authorities; destination office should report completion to the original point of entry and border posts on the route should note crossings—this requires interconnection of national customs IT systems. - 2. Free Zone (FZ) activities are challenging; governments should retain customs control of the FZ within the customs authority rather than a separate FZ agency. The FZ should be part of the customs territory benefiting from special treatment. Customs should be able to access in real time the FZ’s inventory control system complying with a standard predefined by the customs authority. *Source: https://www.imf.org/-/media/files/publications/tnm/2019/tnmea2019001.pdf* ### 3. Control of special procedures for transformation of goods presents specific difficulties. Training of ### 3. Control of special procedures for transformation of goods presents specific difficulties. Training of officers in the understanding of specific high-risk industrial processes is needed. ### IV DUTY EXEMPTION — A. The Issue - Proliferation of import duty and tax exemptions is particularly common in low-income and fragile countries. - Consequences: - Some traders import goods duty-free or at a lower rate while others carry a heavier duty burden. - Major drain on government revenue and negative impact on competitiveness and societal fairness. - Recommended policy direction: - Broad tax policy reforms to set clear principles for the exemptions regime, balancing negative revenue impact versus social and economic benefits. - Rescind unnecessary or counterproductive exemptions (FAD recommendations referenced). - Typical administrative process for exemptions: 1. Laws, agreements, and regulations grant customs duty or tax exemptions. 2. Traders request authorization before planned imports to confirm entitlement. 3. On arrival, customs declarations are accompanied by the authorization certificate. 4. After verification that goods match the certificate, customs release goods without payment or with reduced taxation. 5. Exempted goods must be used/consumed per conditions in law, agreements, and regulations. - Common weaknesses and loopholes: - Imprecise definition of exempted goods, beneficiaries, or conditions. - Insufficient customs control exploited by non-compliant traders. ### IV DUTY EXEMPTION — B. Suggested Short-Term Actions - ACTION 1. Define exemption rights with precision, and publish them. - Precisely define authorized beneficiaries, characteristics of exempted commodities, and obligations after customs release. - Ministry of Finance and customs should proactively draft secondary legislation/regulations; set annual quotas for certain exemptions. - Law should authorize Minister of Finance or Director General of Customs to adopt directives for administration of exemptions. - All exemption schemes, regulations and directives should be published in the gazettes. - ACTION 2. Assign numerical identification to the exemption criteria. - Integrate codes into the customs IT system for automated processing. - Identify exempted commodities by numerical codes of the Harmonized System (HS), subdivided as needed. - Categories of beneficiaries defined with objective and verifiable criteria, including legal status (e.g., “government-approved non-governmental organizations”). - Customs should access TINs of beneficiaries and require importers to report their TIN in exemption applications and customs declarations. - ACTION 3. Monitor the importers’ obligations after customs release. - Customs should conduct desk reviews and field audits to verify correct use of exempted imports. - Revise Customs code where necessary to provide powers to visit importers’ premises for stock reconciliations. - ACTION 4. Customs should report revenue foregone and administrative challenges to the authorities and suggest improvements. - Minister of Finance should be aware of the revenue cost of exemptions for the fiscal year, by exemption scheme, economic sector, and beneficiary category. - Customs should release accurate and comprehensive reports including irregularities and proposals for improvements. ### IV DUTY EXEMPTION — C. Expected Impact - Policy decisions in Section A are the most effective to reduce revenue foregone. - Administrative measures proposed (e.g., precise definitions) can have a significant impact. - Observed magnitudes: - In sub-Saharan African countries, revenue foregone from exemptions can account for about a third of potential revenue collectible by customs. - In the Caribbean this often exceeds 20 percent of potential customs revenue. - Notes: - A proportion of these percentages corresponds to uncollected VAT; if imports had generated tax a substantial proportion would have been credited. - Risk of diversion of VAT-exempt goods remains important. - Evidence of abuse: - Limited customs audit coverage, observed results, and anecdotal evidence (e.g., unauthorized transfers of exemption authorizations, sudden increases in imports) suggest large-scale abuse. ### IV DUTY EXEMPTION — D. Notes for Further Medium-Term Actions - 1. Utilize an IT module to process exemption authorizations and interface with customs clearance IT; part of customs IT strategy and supported by technical assistance. - 2. Revise Customs Codes to classify exemption schemes as a type of special relief procedure; traders and officers would comply with specific legal obligations after release of goods. - 3. Exclude persons/legal entities involved in customs fraud from exemption privileges. - 4. Implement a tax expenditure exercise: identify all tax and customs exemptions, determine baselines, estimate costs, and produce an annual report to Parliament as part of the budget process; publish benefits and costs. - 5. Subject the entire exemptions regime, including authorizations, to an annual audit by a national body (e.g., National Audit Office or Public Accounts Committee) and publish the outcome. - 6. Consider introducing a zero or very low tariff rate for capital and intermediate goods to reduce pressure for duty exemptions (effective for goods predominantly used as inputs; more complex when goods can be inputs or consumption goods). ### V OTHER AREAS REQUIRING PARTICULAR ATTENTION — A. Classification of Goods in the Tariff Nomenclature - Background: - Goods are classified in the Harmonized System (HS); many commodities require application of HS rules. - Verification of classification often left to untrained employees in local offices; lack of specialized officers and risk assessment. - Suggested short-term actions: - Develop advanced tariff classification rulings. - Encourage traders to request rulings and proactively publish administrative tariff classification decisions for challenging goods. - Have specialists at the central office review classification; local staff limited to checking conformity with central rulings. ### V OTHER AREAS REQUIRING PARTICULAR ATTENTION — B. Country of Origin - Background: - Control of country of origin is important where preferential origin grants lower duty rates. - Control of origin has not been a focus in many low-income and fragile countries; capacity to detect origin fraud remains limited. - Suggested short-term actions: - Set up a national team to study trends and variations of origin of imports. - Train field officers to detect false or inapplicable preferential origin documentation. - Coordinate requests to export countries for verifying certificates of origin. - Instruct customs officers to check for indicators of origin during examinations and act on discrepancies. ### V OTHER AREAS REQUIRING PARTICULAR ATTENTION — C. Collection Enforcement - Background: - Enforcement actions have revenue and deterrence effects only if evaded duties and penalties are fully recovered. - Customs capacity to enforce revenue collection is generally low; follow-up to recover money is often poor. - Rules for handling customs debts occurring after or outside clearance processes are usually vague or nonexistent. - Suggested short-term actions: - Revise customs regulations to establish procedures for notification, recording, and payment of customs debts that occur after or outside clearance. - Automate these rules in the customs IT system. - Simple collection cases handled by customs offices; complex/high-risk cases handled by a specialized enforcement collection unit (possibly outside customs, e.g., a domestic tax enforcement unit). ### V OTHER AREAS REQUIRING PARTICULAR ATTENTION — D. Integrity - Background: - Strong perception that corruption is common in customs agencies in developing countries due to officers’ power over valuable commodities. - Contributing factors: ambiguous/incomplete laws, inadequate management control, insufficient audits, conflicts of interest, very low salary levels. - Long-term pro-integrity strategy elements: - Education campaigns, systems audit programs, declarations of conflicts of interest by customs officers, clearing agents, and perhaps traders. - Sound HR strategy with clear rules for recruitment, promotion and separation; reasonable pay scales; regular asset declarations by customs staff. - Suggested short-term actions: - Managers and supervisors to conduct ongoing checks and internal inspections of customs operations and report periodically in writing to head of customs. - Establish a dedicated and, if possible, independent body to actively and promptly follow up on allegations of bribery, corruption and abuse of position. ### VI CONCLUSION - Measures in this note require correct and complete application, strong commitment from country authorities and Customs management, a coherent action plan, and monitoring of implementation to produce significant revenue results. - Technical assistance is critical and should be substantial, adjusted to local absorption capacities, and effectively coordinated where several donors are involved. - Some measures may require additional resources and limited legal changes. - Encouraging targeted initiatives exist in some countries (examples cited: national customs valuation service in Mauritania and Burkina Faso; strengthened customs transit monitoring in Benin and East Africa; clear framework for customs clearance procedure). - Concurrent improvements needed in IT, human resources management, monitoring of performance, and professional ethics to improve administration efficiency and increase revenue collections. ### ACRONYMS AND ABBREVIATIONS - FAD — Fiscal Affairs Department - FZ — Free Zone - HS — Harmonized System - IMF — International Monetary Fund - IT — Information Technology - TA — Technical Assistance - TIN — Taxpayer Identification Number - VAT — Value-Added Tax - WTO — World Trade Organization - WCO — World Customs Organization *TNM/19/01 International Monetary Fund Fiscal Affairs Department* --- _Source: https://www.imf.org/-/media/files/publications/tnm/2019/tnmea2019001.pdf_