GUIDELINES FOR POST-CLEARANCE AUDIT (PCA) VOLUME 2

1. GUIDELINES FORPOST-CLEARANCE AUDIT (PCA)VOLUME 2 WORLD CUSTOMS ORGANIZATION

2. IMPLEMENTATION OF PCA The PCA process as outlined in these guidelines consists of the following steps: • Development of audit programs and standardized audit procedures • Identification of potential subjects for audit • Selection process • Planning the audit • Conduct of the field audit • Conclusion of the audit/Reporting • Evaluation and follow-up

3. Development of audit programs and standardized audit procedures

4. Selection process (I) Profile of importers e.g. • Capital • Company structure • Business partners (suppliers, agents, customers etc.) • Type of transaction • Method of payment, etc.

5. Selection process (II) Trade data e.g. • Volume of importations • Amount of duties paid • Tariff classification and duty rates • Valuation declarations • Country of Origin of imported goods • Ports of loading • Transportation type, etc.

6. Selection process (III) Past records of the auditee e.g. • Audit records • Customs entry errors • Offense records • Tax, VAT compliance information, if available

7. Selection process (IV) Related information/Intelligence e.g. • Common irregularities in the same business sectors • High-risk countries of origin • High-risk goods, etc.

8. Pre-audit research Pre-audit research is a preliminary examination which serves two main purposes: • to focus on specific risk areas of an auditee's systems and import declarations, through analysis of available data; and • to draft an audit plan that includes the audit objectives, scope, methodologies and assignment of auditor/team members.

9. Notification of audit The auditee should be advised of the following: • The general procedure for the visit and its objectives • Details of the documentation to be made available (specifying the period to be examined, if known) • Names of personnel who will carry out the audit • Facilities to be made available for the auditor/s (e.g. adequate working area)

10. Third-party audit (if necessary) Physical inspection/control (if necessary) Conduct Of The Field Audit

11. Basic guidelines • Foster a cooperative relationship • Auditors should positively guide the auditee regarding declaration errors caused by a lack of understanding of laws and regulations • Auditors must refrain from revealing their provisional impressions to the auditee during the course of the audit • Maintain a professional and courteous attitude towards the auditee

12. Checklists on specific issues – Customs Valuation (I) 1. What knowledge does the importer have of Customs valuation methodology (in particular, the elements to be included in the transaction value in accordance with the WTO Valuation Agreement)? 2. Does the operator have adequate internal controls and accounting systems which ensure all payments made in relation to imported goods are recorded and identified in order to facilitate reconciliation with Customs value declarations? 3. Is the declared value supported by purchase orders, sales contracts, invoices, etc.? Bank statements and proof of payment may also be checked. 4. Is the importer related to any of his suppliers (as defined in Article 15.4 of the WTO Valuation Agreement? If so, has the relationship influenced the price for Customs purposes (Article 1 of the WTO Valuation Agreement refers)? 5. Where a CIF value system is used, have freight and insurance costs been properly included? Do the delivery terms on invoices and freight contracts (INCOTERMS) match freight charges declared? Is the freight prepaid by the operator (risk of omission from the Customs value)?

13. Checklists on specific issues – Customs Valuation (II) 6. Where an FOB value system is used (i.e. the country has made such a decision under Article 8.2 of the WTO Valuation Agreement), have freight and insurance charges been properly excluded from the Customs value? 7. Have commissions been properly declared and accounted for? (Buying commissions may be omitted and selling commissions should be included in the transaction value.) 8. Has a correct exchange rate for a foreign currency been applied? 9. If a Customs value declaration form has been completed (in addition to the Customs declaration), is it supported by the importer’s records? 10. Where discounted prices have been declared, are they genuine discounts which have been earned? Are the discounts freely available to all potential buyers? 11. Are any payments made in advance for imported goods which have not been included in the declared value?

14. Checklists on specific issues – Customs Valuation (III) 12. Is the Customs value declared very low in comparison with an onward sale of the goods to a third party? (This is not conclusive, but an unusually large profit margin for the goods concerned may indicate that the import value was under declared). 13. Is payment for the imported goods transferred through a third company? If yes, have the appropriate amounts been included in the Customs value? 14. Have any materials, components, etc. been provided free of charge or at a reduced price to the manufacturer/seller for incorporation into the imported goods? (possible “assist” under Article 8.1(b) of the WTO Valuation Agreement) 15. Is the importer party to any royalty or license agreement relevant to the imported goods? (possible inclusion of royalties or license fees in the transaction value under Article 8.1 (c) of the WTO Valuation Agreement). 16. Did the importer use a valuation method other than transaction value? If so, confirm that a transaction value cannot be determined. If no sale has taken place, this will be evident. Importers should be encouraged to consult with Customs before using an alternative method of value.

15. Verification of the Customs value • Price negotiations and discounts • Commercial price lists and related literature • Payment terms • Terms of Sale • Additional terms • Separate payments

16. Evaluation and follow-up Customs administrations should develop a mechanism to assess and evaluate the success of the PCA program. This may include: • An improvement of compliance levels • Additional revenue collected • Number of investigation referrals • Cost/benefit analysis

17. Irregularities etc. • Irregularity means the breach of laws and regulations, regardless of its cause, such as deliberate intention (fraud), negligence, or simple mistake (error) • Fraud means the wilful intent of a taxpayer to evade a tax • Negligence means a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the given circumstances • Error means a mistake in a Customs declaration.

18. Indication of serious offense • An auditor will from time to time encounter strong indicators suggesting a serious offense. As auditors are not involved in the investigation of cases with a view to criminal prosecution, they should deal with such evidence with a different approach. • Subject to the in-house arrangements, documentary evidence of an offense should be immediately referred via the Head of the PCA Unit to the competent investigation authority for consideration whether or not the case is suitable for investigation with a view to prosecution. If the case is considered suitable to be so investigated, the audit is terminated.