Where there is a tax payable, there is incentive to fraudulently reduce the tax. Customs duty, the tax payable on imported goods, is no exception. A common method of fraudulently reducing the tax payable is to declare a false value of the imported goods. Recent cases have highlighted that the risks associated with this conduct extend to purchasers who were not the importer of record or involved in the fraud.
Not the importer? You can still be liable
You may think that if you are not the importer of record, you are off the hook. While a Customs authority may first look to the importer, in Australia there is precedent for the Customs authority seeking underpaid duty from the innocent Australian end customer. Similarly, a recent US case resulted in large fines being imposed on an end customer that failed to do enough to prevent customs valuation fraud by the supplier.
High risk transactions
In many instances the importer of record is the company that will receive the goods. Where this is the case, it will be harder for deliberate customs fraud to occur without the consignee's knowledge. The higher risk transactions are where goods are purchased on a DDP (delivered duty paid) basis. This means that the overseas supplier has responsibility for importing the goods and declaring the value of goods to Customs.
In the usual course of events in a DDP transaction it is also the supplier that will be responsible for any false information being provided to Customs. However, Australian Customs will bring proceedings against an innocent Australian customer where it is not efficient to bring a claim against the foreign supplier / importer. This may be the case where the foreign supplier does not have any assets in Australia. The Australian legislation allows Customs to recover underpaid duty from various entities, including the owner or the goods or the consignee of the goods.
In 2017 a US clothing company, Notations Inc, agreed to a $1 million settlement with the US Government in connection with underpaid duty on a goods it purchased on DDP terms. In that case, the Chinese supplier and its US subsidiary submitted false documents valuing the goods at 25% of their true value.
Notations was alleged to have turned a blind eye to the possible fraud and failed to verify that the supplier was filing truthful and accurate documents with US Customs.
A benefit of a DDP transaction is that the goods arrived at your warehouse without you having to lodge any documents with Customs. This means that it would be unusual for you to see the documents filed with Customs. How then can you identify potential valuation fraud? Warning signs include:
- the price of the goods seems too good to be true
- you negotiate a price for a single transaction and the agreed sale price is split into multiple invoices, only one of which is for the purchase of goods
- the allocation of the consignment price to individual goods does not reflect the commercial transaction
- a customs or pro forma invoice is used where there is no reason for not using the commercial invoice
- you are asked to alter your purchase order in a way that has no commercial justification
- you are asked to make payments to an entity that is not your supplier
- the commercial invoice lacks basic details
- the supplier is resistant to having the customs declarations reviewed by a third party.
What can you do?
Australian and US authorities have made clear that importers cannot treat DDP transactions as risk free. We recommend considering the below measures to provide confidence that the supplier is complying with customs laws:
- ask for copies of the import declarations. Where the importer is your supplier there should be no reason why the supplier cannot show you what customs value was declared. However, it may be reasonable for the supplier to keep details of their own supplier/manufacturer confidential
- insist on a third party audit of the import declarations
- require adequate explanations for any request to produce documentation or make payments that do not reflect the commercial agreement
- question documentation, such as invoices, that do not seem legitimate or match the commercial terms
- inform your supplier that if you become aware of any fraud, you will report it to Customs. A fraudulent supplier will quickly find another customer rather than deal with a company with that makes life more difficult for them
- ensure the supply contract includes an indemnity for any taxes or fines you are required to pay on account of false information provided by the supplier. You must also ensure that the indemnity can be enforce in the country where the supplier hold's assets.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.