Customs control of excise duties

From April 2002 to May 2003, the Dutch and Belgian Courts of Audit collaborated on an investigation of how Customs implements excise duty regulations on mineral oils. The purpose of the joint investigation was to reach a judgement on how the Dutch and Belgian tax administrations/customs services operate and, in so doing, to help to strengthen the control measures used. The investigation was also designed to further harmonise and modernise the Community's excise duty legislation with a view to improved implementation at national level. Excise duties on mineral oils, a national tax, generated €5,223 million for the treasury in 2001 and €5,761 million in 2002.

The core question for the investigation was whether Customs is succeeding in appropriately implementing and enforcing the laws and regulations governing excise duties on mineral oils. The Courts of Audit have answered the question by investigating the excise duty system for mineral oils, the management (granting, maintaining and monitoring) of excise duty licences and the implementation by Customs of controls on the entire mineral oil sector (sector supervision).

1. Conclusions

The Courts of Audit concluded that the excise duty system as a whole, which was designed to be administratively closed, has, in practice, experienced constraints which impede its implementation and/or control capacity. This has fostered significant fraud - primarily as a consequence of inadequate harmonisation of the Community's excise duty regulations in general and inter and intra-member state rates in particular. Furthermore, Customs cannot physically inspect goods subject to excise duty immediately. Inspection takes place at a later time and is primarily administrative.

The Courts of Audit are therefore calling for wholehearted ministerial support for European plans to further harmonise excise duty rates and to implement a Europe-wide automated monitoring system.

The Courts of Audit have ascertained the following: management of excise duty licences for mineral oils is not fully orderly and auditable, a situation prevailing in Belgium also. Issuing and maintaining licences - the cornerstone of the excise duty system - does not always proceed as prescribed. This means that uniform implementation is not ensured.

Furthermore, the records of controls performed are unsatisfactory. This does not guarantee provision of information and precludes feedback on risk analysis. The risk management concept used by Customs to implement its tasks has therefore come under pressure. The national and Europe-wide computer information systems have proved unsatisfactory as they are incomplete and out-of-date. In addition, Customs has insufficient knowledge of how to implement administrative and/or physical inspections in the area of mineral oils. Improvements have been recommended in respect of all these points. The Courts of Audit have noted a total lack of operational cooperation between the Dutch and Belgian administrations in the area of physical inspections of cross-border oil transport. Cooperation here is recommended.

How the responsibility for collecting excise duties at national level is carried out has prompted the Court of Audit to note that Customs is not complying with many regulations - sometimes because these are out-of-date and do not reflect recent developments. The setup does not dovetail with reality in the field and this gives rise to differences in regional implementation. The Court of Audit finds that the target-group approach used by Customs to carry out controls has not yet been properly worked out. In the transitional phase of moving from an individual to a target-group approach, it is not clear exactly what controls must be carried out and at which level they should be managed. Moreover, Customs does not have a good picture of the risks that arise during the transition. A positive development is that Customs has, in the meanwhile, determined which customers will continue to be handled individually and which will fall under the target group approach.

The sector-wide approach is still in the early development phase. In 2001-2002, Customs carried out few nationwide controls and did not even come close to the 50% target set. Moreover, with this approach it is still not clear to what extent the risks described must be covered. To date, many of these have still not been covered by controls managed at national level. The ones managed at regional level have thus far consisted mainly of physical inspections and have targeted "unknown customers". The 30% target for controls managed by District Information Divisions (DIAs) has not yet been achieved. There is an observable trend toward DIAs paying greater attention to excise duties on mineral oils.

Furthermore, the Court of Audit has ascertained that the provision of information about planned and implemented excise duty controls of mineral oils is deficient. For instance, subdivision into management levels is not feasible and not all the controls are recorded in the computer system set up for this purpose. The managerial information from Customs is structured in such a way that "hard" figures on actual management are unavailable, even though target figures have been formulated to this end.

2. Recommendations

The Court of Audit considers that improvement of all aspects of control programme implementation supervision and planning is important and that structural capacity must be created within the primary processes. The target-group approach must, in its opinion, be worked out more satisfactorily, especially as regards the transitional phase from individual to target-group controls. To determine the degree to which control management targets are achieved, it is recommended that managerial information from Customs be made suitable for that purpose.

3. Reaction of the State Secretary for Finance

Responding to the report on behalf of the Minister as well as in his own capacity, the State Secretary for Finance endorsed most of its conclusions and promised to follow up on the Court of Audit's recommendations. During and shortly after the investigation, Customs draw up several internal guidelines to improve procedures. The State Secretary said that the report presents a clear picture of customs control of excise duties on mineral oils. He is pleased that the investigation encompasses two member states and believes that this highlights the international dimension of the problem. He finds it of interest to note that, in a number of situations, Belgian and Dutch Customs are confronted with the same type of problems.

The State Secretary puts great store by the Court of Audit's conclusions and recommendations. He believes that it has pinpointed several weaknesses and has had a catalysing effect. Since then, several shortcomings have been corrected.

A working group has been set up to make concrete proposals based on the Court of Audit's recommendations. The group will present its report in late 2003. The State Secretary added that the improvements will be implemented by 2005 and recorded in the Customs Client Management Manual.

The State Secretary does not agree with two of the recommendations. First, he does not want a rebate system for gas oil subject to a low rate of tax because, in his opinion, this would contravene the government's policy on the administrative burden of companies. Second, he does not wish to see any change in the policy on Customs staff access to information of other Tax Administration services. Although the Court of Audit understands this position, which is based on the Tax Administration's policy on ethical standards, it hopes to see more efficient use of the existing information-gathering capabilities.

4. Afterword by the Court of Audit

The Court of Audit welcomes the many measures already adopted or planned and is pleased with the pace with which the State Secretary is dealing with them. It hopes that the planned improvements will contribute to strengthening Customs' risk-based target-group approach and to closing the gap between actual and intended results in the area of excise duties on mineral oils. The Court of Audit will follow the progress achieved by 2005 at the latest with great interest.