The implementation of the General Agreement on Tariffs and Trade (GATT) following WWII ushered in the new age of global trade. Following the devastating lows of the 1930’s, the world economy has seen marked increases in trade since the GATT’s implementation.
Most recently, in support of the global recovery from the 2008 financial crisis, the members of the World Trade Organization successfully negotiated the Trade Facilitation Agreement (TFA), also known as the “Bali Package”.
This was the first major global trade negotiation success since the commencement of the Doha Round in 2001. The WTO’s TFA, which came into force in February 2017, focuses mainly on customs administrative processes in order to speed up the movement, release and clearance of goods.
The agreement also aims to increase cooperation measures between customs and other authorities to better facilitate the movement of goods. One of these processes is the post-clearance audit (PCA).
Easing trade flow is not without its challenges
A PCA is the verification of customs declarations through the examination of documentation held by traders or their agents after the goods have been “released” from customs control. This is a key control method used to ease the movement of goods through a risk-based selection process. This also marks a departure from a purely transaction-based approach to an audit-based process.
The approach to post-clearance audit has evolved over the years. The Revised Kyoto Convention (RKC) gave greater focus to modernizing and improving customs processes in border management administrations.
A major challenge in the post-clearance audit processes is finding an accurate way to measure the effectiveness of the audit program and the compliance level or ‘compliance health’ of trade.
Due to the complicated nature of the import and export industry, compliance challenges can be significant. There can be a lack of documentation to support or challenge the importer’s or exporter’s records. Third parties that are in foreign jurisdictions may not co-operate with auditors, and variances in how different regions conduct audits and verifications may result in confusing and inconsistent decisions for traders.
The reality is that importer and exporter compliance behaviour is complex, with multiple factors to consider when attempting administration of border regulations.
6 rules for audits as per the OECD
The OECD Centre for Tax Policy and Administration (CTPA) provided recommendations in 2006 which, although specific to tax administrations, could apply to any audit-based program. In accordance with the OECD’s CTPA, audit programs must:
- Promote voluntary compliance
- Detect noncompliance at the individual importer or exporter level
- Gather information on the “health” of the import and export systems, including information on compliance rates and trends in noncompliance
- Gather intelligence
- Educate importers and exporters
- Identify areas of the law that require clarification
Post clearance audits are critical in encouraging the trading community to be in compliance. At the same time, the reality of limited resources requires a strategic approach to planning, implementing and maintaining an effective PCA program.
Unlike a tax audit, a customs PCA is rarely a full audit. A full audit is all encompassing, including a comprehensive review of all aspects of a taxpayer’s liability. Whereas a PCA, on the other hand, is similar to a limited-scope audit or a single-issue audit, where one or two programs are generally reviewed around a sampling of commodities – consequently, a full picture of trader compliance is difficult to achieve. The application of a risk-based audit process is critical, as is a method for capturing and sharing audit results at an enterprise level.
The WTO TFA states border management administrations must ensure that there is a comprehensive legal framework to support post-clearance audits.
In addition, organizations should also follow established management processes, including a comprehensive measurement framework with well-defined verification and audit procedures. This framework should also include a necessary support structure with robust human resource management and development programs to support the entire process according to the OECD.
PCAs play a key role in empowering developing trading nations
Through the use of PCAs, fewer resources are required at the border for inspection, freeing up resources for other important border work. These audits are critical in reducing lost revenue for both developed and developing countries. Even countries with relatively low duty rates can benefit significantly from an effective PCA regime.
The challenges faced by both developing and developed countries are chiefly around resources. Regardless of the return on investment for PCAs, often there are too few tools, too little training, and underdeveloped or nonexistent systems.
A strong, well developed post-clearance audit program can be a critical tool in managing trade, provide important intelligence on the functioning of the trading community, and increase revenues for governments.