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    InterviewRevisiting customs valuation system

    Revisiting customs valuation system

    Date:

    Behailu Bedasa is a senior expert at theEthiopian Customs Commission’s (ECC) Customs Valuation and Development directorate. With eleven years of experience, Behailu is leading Ethiopia’s customs valuation reform and restructuring introduced since 2019.

    With over 85 percent of Ethiopian importers presenting forged import documents by under-invoicing transaction prices, Ethiopia loses substantial revenue from Ethiopia’s huge import business, which constitutes over 20percent of the GDP. On the contrary, importers have complained of unrealistic customs duty calculations.

    In the past month, Behailu’s directorate launched the Ethiopian Customs Valuation System Generation Two (ECVS-G2), a fully automated price analyzing software, replacing the existing Indian system, which has been mal-functioning for the past decade. Behailu sat down with The Reporter’s Ashenafi Endale to talk about the new system and what it holds. Excerpts:

    The Reporter: How do you determine import prices and custom duty rates?

    Behailu Bedasa: Price is the nucleus of every transaction in the international market. In Ethiopia,these prices are needed for Ad valorem tax system for Customs Duty.’ This means customs duty cannot be calculated without finding the price first.There are countries that do not use Ad valorem customs system.  They levy customs duty without the prices. The price of two smartphones can be similar but their tariff can vary. Ethiopia’s customs is complicated because the principle arises from the science that ‘customs duty shouldbe based on the exact transaction prices.’ If two people buy the same smartphones with different prices, they pay customs based on the transaction value.

    Customs valuation reference arises from the international market. The burden of proof to present price information is primarily mandated to customers, in particular, importers. If an importer enters a wrong price today, other importers will be taxed wrongly. As customers do not present original information, the Customs Commission generates the price. But not giving information affects importers themselves.

    Every importer presents documents of transaction values to the Commission. But the biggest challenge is verifying whether the transaction documents importers present is valid or not. We have our own price reference data center to cross check. Commercial invoice, packing list, pro-forma invoice, purchase order, bank permit and many other documents are crosschecked to find the exact transaction value. All these documents must be presented to the Commission by importers. If there is a mismatch within these documents, it means the information is invalid; hence we use the price in our data center.

    Since various market factors affect market prices, transaction values are dynamic. Two importers can buy identical commodities from the same supplier in Dubai, but for different prices. Custom Commission’s price data center is used only when all other scientific price finding mechanisms fail. We operate as per WTO valuation agreement, which is the manuscript and all our customs laws are derived from that.

    Is it the price data system of Customs Commission or the customs officers that usually commit errors?

    Scientific price valuation started in Ethiopia since 1996. All prices used to be listed on a book because import commodities were limited. Around 1999, SGS, a UK based customs software solutions, started doing the price valuation job for Ethiopia.

    SGS basically works on pre-shipment inspection and collects prices around the world and sold the data to Ethiopia. SGS had at-hand-access to the price information in international markets; hence, Ethiopia privatized customs price valuation work to SGS, which worked for around three years. But the exact customs duty they collected from Ethiopian importers was more than what they reported to Ethiopian revenue offices at the time. They collected much more customs duty than what the government levied, using the margin for themselves.

    By 2003, Ethiopia established a customs office and took over the price valuation task from SGS. Price lists were printed on CD discs and sold to importers and transit agents. The CD is revised every three month, six month or more, whenever new price data is found, which was in operation for almost ten years. The problem of the CD system was that it could not be revised frequently, despite the international pricing system becoming highly volatile and prices varying even within a day.

    In 2013, an Indiansoftware company named CDACautomated the CD system. The new technology was funded by donors. CDAC developed the Ethiopian Customs Valuation System (ECVS) and new price data were captured by Valuation Detail Declaration (VDD) software. Nonetheless, this system failed to operate for the past eight years. The Indians were not willing to come to Ethiopia and maintain it. The VDD was not accepting new data because of loading problems.

    After various researches, we discovered that the Indian’s system could not execute the scenario they promised ten years ago. Rather, it became a bottleneck to Ethiopia’s customs system exposing it to corruption.

    We decided to redevelop the VDD and ECVS systems from scratch. Local software developers started the job two years ago, with more features and innovations that fit current needs. I participated on the business side, while others did on the engineering side.

    The new system is called ‘Generation two’, ECVS-G2 or shortly G2. The first automated system developed by Indians ten years ago, is G1. We did not totally replace it but improved the Indian’s system. The new system has been tested in all customs stations and has proved to be efficient and any customs officer can access price data from the G2 server within a minute.

    So is the Indian system obsolete now?

    As per a WTO principle, price data should be revised every 90 days. The new system we developed refreshes price data every day. This is a success for a developing country. We did not maintain the Indian system. We took their idea, and developed our own version of the software. The CDAC’s systemwill be blocked soon. But we can access it if needed. There is vast amount of data in it, which might be needed for audit purposes, national statistics, or other objectives. We exported the old data onto the new software, and stored it for future use.

    Howdo customs officer pick one price, if the system displays various prices for the same commodity?

    There are six types of price valuation mechanism. The first and preferred is transaction value, followed by identical, similar, deductive, computed and fallback valuation mechanisms.

    Customer compliance is very low in Ethiopia, thus it is difficult to find the transaction value always. WTO states that all necessary documents must be presented, to use the transaction value method, which Ethiopian importers do not do.

    Transactional value is actual, fact, while identical mechanism uses historical data to find prices near to the actual price. The products must be identical. If all the methods fail, we go to Mercato and ask the price of the same product. We deduct the tax, freight, and profit margin and finally find the sales price from suppliers abroad. We also refer the data base. Customers also bring us manufacturing price list. We might check prices over the internet but that is difficult to use, since there are few genuine and trustable sites to quote. But the science does not support quoting of internet prices.

    Cost building is also another method, where overhead cost of the manufacturer is studied to determine the end price of a product. These mechanisms are used to go back and find price references within 180 days.

    The new system can make price analysis and generate weighted average price, if different prices are registered for the same product. The software eliminates prices that are 30 percent above or below the weighted average. So, our customs officer uses the weighted average to tax the importer. The system itself cancels outlier prices andrecords each steps on how it generated the weighted average price. This is used for auditingpurposes later. Thus, customs officer cannot impose duty arbitrarily.

    The new VDD accepts fresh prices from prices importersdeclare daily at all of our 16 customs branches. Everyday at 6AM midnight, all the fresh price entries of the day, are moved from the sixteen branches to the central data center, so that the system starts with new price data the next day.

    Importers usually complain of unfair customs duty. Is the failure of the Indian software the only reason behind this problem?

    There were so many problems in Ethiopia’s customs valuation system. The Indian system could not serve Ethiopia’s customs system, which has depth and width. Sometimes, it takes days for the Indian software to generate one price data reference.

    The system fails frequently.

    The Commission has over 1,500 professionals, who sit and assess prices every day. When all of these assessors log-into the system at the same time, the server cannot handle all of them. The old system processes data requests of only few assessors.

    When the system fails to generate price references, the customs officer then has no option but decide the price by using unreliable pricing sources. This is exposed to corruption.

    The Indian system was costing Ethiopia too much, though the idea was good initially. According to our study, the Indian VDD has been accepting only fifty percent of the fresh price entries registered daily. This created huge data source gaps in Ethiopia. If there is no data, importers cannot get analyzed price data’s, which leads to unfair taxation. For the past eight years, the customs system has been crippled.

    But the new system we have developed cuts out all the irregularities.

    However, the Indian software is not the only factor for Ethiopia’s customs valuation problem. The challenge begins from the black market, foreign currency shortages, tax evasion, erosion of trustworthiness of importers, and many other factors that are still crippling Ethiopia’s customs system.

    According to our studies, over 85 percent of commercial invoices presented to the ECC are not original. It is largely under-invoiced. For instance, Prado is an expensive vehicle. Importers declare they importedPrado for USD0.50, and present the invoice documents. Similarly, Rav4 vehicle is imported for USD0.15. Many vehicles have been documented as being imported with less than USD10. There are thousands of such data on our system.

    Why did the Indians fail to share the technology with you?

    CDAC has contractual flaws from the beginning. There were also problems with the hand-over. CDAC was an aid, not a purchase. Ethiopia tried through diplomacy, but the Indians refused to do so, but it was a good springboard for us to develop the new system with our own IT experts and business model.

    How much did it take to develop the new system?

    The new system was developed with support from the World Bank and the International Financial Corporation (IFC) and was left open-ended for enhancements. The Commission entered agreement with the Addis Ababa Science and Technology University to develop the overall IT infrastructure for the Commission. We are also working with the Information Network Security Agency. So, the technology will evolve.

    Is G2 online now? How can it be accessed when there is no connection?

    The system has been fully operational since November.

    G2 uses ECC’s intra-net system. This internet is safe, unless there is a problem on Ethio telecom’s infrastructure. We did not face any fluctuations when we tested the software over the past six months.

    How does the Commission cross-check NBE’s import permits against pricing documents presented by importers?

    There is no ready-made pricing for customs valuation. The customs proclamation gives a self-assessment privilege. It states that the importer declares the transaction values and customs duty. If the price is wrong, there will be a wrong tax duty.One of the documents importers must present to the Commission is an original bank document, including a Letter of Credit.

    But the challenge isthat importers present forged documents. They have no problem with presenting the bank document. But the price in the document is wrong. The central bank gave permits for importer to buy expensive vehicle with USD0.50 and the importer has no problem of presenting the document to the Commission. The question is,is that the real transaction value? Our job is to find that out.

    Howcan importers and transit agents access the new pricing database?

    There are currently over 1,000 customs agents, working with the Commission. They are certified assistants for importers. They used the CD pricing data system but after it was automated, they could not access it. Under the new system, we are opening a data module dubbed ‘IP for agents and importers.’ IP module can store around 20 million data points. We have integrated their information, and currently, we are creating passwords for agents and importers to be able to access G2 servers.

    From their laptops, agents, transistors and importers can access the customs valuation data of their items. They can calculate their customs duties and start processing clearance, before the cargo shipment arrives. Soon, we will finalize the password and train over 1,000 transit agents, on how to utilize the new system.

    A new law that was passed mandates customers to finalize customs clearance within ten to fifteen days. It is the customs valuation that has been taking a longer time before. Now, we have managed to finalize this within a day. This performance is similar across all branches. G2 will reduce customs procedures, clearance time, as well demurrage costs and enable customers to process everything from home.

    The Commission usually asks importersto pay previously exempted taxes when the government faces budget deficits.

    There is a Post Clearance Audit (PCA), which is done immediately. So there is no way that such cases would happen. Of course, Ethiopia’s proclamation allows you to go back five years and re-audit a customs case. We are members of the World Customs Organization so we adhere to international principles. Customs should never delay, according to this international principle. Over 30 percentof importers in Ethiopia are ‘green’ and their cargo passes without customs valuation or searching the containers.

    The amount of actual import value is higher than the forex approved by the NBE. How does this discrepancy happen?

    The mismatch occurs due to under-invoicing, among other reasons. NBE’s approval is usually much lower than the actual price. Plus, goods and services enter through Franco Valuta, not necessarily through NBE’s LC. There are many ways to create the discrepancy.

    Why doesn’t the NBE check the custom commission’s price data before approving LC’s for V8 imports as low as USD0.50?

    Unless it is a matter of procedure, the central bank knows USD0.50 cannot buy car. NBE tried to take price references from the ECC before approving a LC. They started this trend three years ago, but they stopped it because it has a negative effect. If NBE starts to approve LC’s with the right price, very few importers can access forex and imports will fall.

    Is it not this gap between the ECC and the NBE that is creating space for contrabands and under-invoicing?

    Price valuation is exclusively the commission’s task. Valuation substitution is done when the customer fails to declare the right transactional value. Customs is not only about controlling but also facilitation. The central bank has its own system. Commercial banks operate under a free market. But customs has its own science.

    Is the customs valuation for a personal luggage different from normal imports?

    Internationally, luggage customs valuation is different from normal import pricing. Passenger price data has been stored on excel and distributed to customs stations, before and now it is included into the G2, in a separate module. Bole international airport, which has used the excel before, is now using the G2. Self-assessment and price declaration is not mandatory for passengers. The rate is similar with importers’ but price varies. Passengers also do not pay the three percent withholding tax.

    There are special border trade arrangements with neighboring economies. If the customs valuation is centralized, how will it work for border areas?

    At 15 kilometer from border lines, there are customs stations. If the border trader declares at the stations, the customs valuation is processed by the G2. For transactions happening within the 15 kilometers from the border line, a new legal framework is being drafted as it cannot be regulated by customs law.

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