Zambia Revenue AuthorityZambia Revenue Authority

Post Clearance Audit (PCA)

Presentation at the Symposium on Trade Facilitation for African Countries

Nairobi, Kenya13 – 16 November 2012

By: Reuben Kunda

To share information and To share information and experiences with other experiences with other administrations on the set up administrations on the set up of PCA in Zambiaof PCA in Zambia

OBJECTIVE

ContentsContents

• Brief History of PCA in ZambiaBrief History of PCA in Zambia• Legal basisLegal basis• Post Clearance Audit, what it is aboutPost Clearance Audit, what it is about• Objectives of Post Clearance AuditObjectives of Post Clearance Audit• Sources of AuditsSources of Audits• The Compliance ModelThe Compliance Model

ContentsContents

• Brief Audit ProcessBrief Audit Process• Benefits to Customs and stakeholdersBenefits to Customs and stakeholders• ConclusionConclusion

BRIEF HISTORYChapter 6 of General Annex to the RKC - Chapter 6 of General Annex to the RKC - Customs Controls:Customs Controls:

Limited to that necessary to ensure Limited to that necessary to ensure compliancecompliance

Move from transaction-based to audit-Move from transaction-based to audit-based or mixed controlsbased or mixed controls

Use risk management techniquesUse risk management techniques Use trader’s commercial recordsUse trader’s commercial records Apply compliance measurementApply compliance measurement Use MOU’s with trade and MAA’s with Use MOU’s with trade and MAA’s with

other Customs other Customs

BRIEF HISTORY

• Introduced in 2000 under Audit & Introduced in 2000 under Audit & Business Risk section (ABR) with Business Risk section (ABR) with 12 staff.12 staff.

• Now has an establishment of 30 Now has an establishment of 30 officersofficers

LEGAL BASIS

• Sections 9 (general powers of an Sections 9 (general powers of an officer) - power to enter any business officer) - power to enter any business premises and request for documents premises and request for documents for examination.for examination.

• Section 113 - authority to enter and Section 113 - authority to enter and search of premises of licenced search of premises of licenced manufacturers and authority to seize manufacturers and authority to seize documents.documents.

LEGAL BASIS, Cont’d

• Section 188 - persons carrying on Section 188 - persons carrying on business to keep proper books and business to keep proper books and avail such to officers upon request.avail such to officers upon request.

What is PCA?

• A process aimed at providing A process aimed at providing assurance that businesses and assurance that businesses and individuals subject to Customs and individuals subject to Customs and Excise controls have complied fully Excise controls have complied fully with all relevant legislation and with all relevant legislation and requirementsrequirements through examination of through examination of internal controls, accounting systems internal controls, accounting systems and relevant documentation.and relevant documentation.

BACKGROUND OF PCAs

Opportunities and challenges besetting international trade:•Flexibility in facility set up and access to market•Just In Time•Increased volume and speed of international trade.

BACKGROUND OF PCAs

Opportunities and challenges besetting international trade cont’d:•High revenue expectations by Govt•Expectations of trade for quick and Expectations of trade for quick and efficient customs clearance.efficient customs clearance.•Trade Facilitation, a legitimate Trade Facilitation, a legitimate expectationexpectation

RESPONSE BY CUSTOMS

Strategies aimed at striking a Strategies aimed at striking a balance between control and trade balance between control and trade facilitation.facilitation.•Allow compliant businesses quick Allow compliant businesses quick customs release.customs release.•Enhanced customs control on Enhanced customs control on less/non-compliant businesses.less/non-compliant businesses.

RESPONSE BY CUSTOMS

• Use of risk management to Use of risk management to customs controlcustoms control

• Use of audit based control called Use of audit based control called PCA.PCA.

Objectives of PCA

• Evaluate strength of client’s internal controlsEvaluate strength of client’s internal controls• Determine client’s compliance levelsDetermine client’s compliance levels• Assess any revenue shortfallAssess any revenue shortfall• Recommend improvements in clients internal Recommend improvements in clients internal

controls to assure future compliancecontrols to assure future compliance• Client educationClient education• Evaluate effectiveness of Customs controlsEvaluate effectiveness of Customs controls• Recommend adjustments in Customs controls Recommend adjustments in Customs controls

(risk targeting, procedures, legislation, etc)(risk targeting, procedures, legislation, etc)

Sources of Audits

• Customs Compliance StrategyCustoms Compliance Strategy– Client SegmentationClient Segmentation

• LargeLarge• MediumMedium• SmallSmall

• Senior ManagementSenior Management• Customs PortsCustoms Ports• Clients etcClients etc

The Customs Compliance Model

BISEP

Industry factors:•Industry definition•Region•Size, segment, participants•Profit margins•Cost structures•Industry regulation•Industry issues

•Competition•Seasonal factors•Infrastructure•Labour

Sociological factors:

•Norms•Reciprocity•Age•Gender•Education level•Ethnic background

Economic factors:•Inflation•Interest rates•Tax system•Govt policies•International influences

Psychological factors:•Risk•Fear•Trust•Values•Fairness/equity•Opportunity to evade

Business factors:• Structure – sole trader, partnership, trust, Company• Business activities (type) -local, inter-region, -International• Financial data• Business age

Brief Audit Process

• Client SelectionClient Selection• Initial Risk DeterminationInitial Risk Determination• Audit PlanningAudit Planning• Audit ExecutionAudit Execution• Audit FinalizationAudit Finalization• Final Risk RatingFinal Risk Rating• ReportingReporting• Follow-up (Return audit)Follow-up (Return audit)

EXAMPLE OFAUDIT PROCEDURES & APPROACH

• Detailed audit plans are developed Detailed audit plans are developed and subjected to peer reviews.and subjected to peer reviews.

• Each audit area is approached by Each audit area is approached by outlining ‘assertions’, ‘risks’ and outlining ‘assertions’, ‘risks’ and detailed ‘tests’ aimed at treating detailed ‘tests’ aimed at treating identified risks.identified risks.

• Below is an example for valuation Below is an example for valuation area.area.

Valuation

Ass

erti

ons Valuation

Allocation Completeness Accuracy

R

isks

There is no sale Not all indirect payments have been included in the customs value Relationship has influenced the price Not all Clause three adjustments have been made Invoice currency, extensions and additions are wrong

Audit Objectives

To establish whether all elements of the customs value have been appropriately allocated, completely and accurately at correct values in accordance with the Fifth Schedule of the Customs Act on all declarations

Client Systems Targeted

Tests of Control Substantive Procedures

Purchasing System

Sales System Banking

System Non-current

Asset Management System

Reconciliation of import transactions with accounting, purchase and warehousing sections

Reporting procedures to Customs for identified anomalies

Segregation of duties Existence of a functioning

ordering system Existence of up to date

daybooks Existence of up to date ledger

accounts Numerical sequence of order

forms Existence of systematic and up

to date fixed asset register

Sample should be based on weighted average by HS and VDP and stratified by value Trace import invoices to purchase order, proforma and purchase ledgers Compare unit cost declared to customs to unit sales cost locally; investigate

significant differences Review contracts of sale; check for any indication of assists, royalties,

especially when dealing with branded items Examination of chart of accounts to confirm any existence of indirect

payments/costs (royalties, commissions, assists, etc) necessary for customs value determination (price, Clause 3)

Match remittance details with import invoices/CE 20s (goods, transport & insurance) and ledger entries. Remittances for royalties may have been missed, for example.

Match total value of remittances with total customs value for audit period Review contracts for insurance, transport and other inbound logistics Confirm inclusion of port charges and other handling charges Compare the total value of importations against the total value of suppliers’

accounts for the audit period. Confirm completeness of the price actually paid or payable by checking

inclusion of all direct and indirect payments Compare with identical/similar goods values

Audit Output

• Internal ReportInternal Report• External ReportExternal Report• Agent’s Advisory LetterAgent’s Advisory Letter• Client’s risk profile and risk ratingClient’s risk profile and risk rating• Update of Incidence Register and Update of Incidence Register and

ASYCUDA risk parametersASYCUDA risk parameters• Request for investigation (fraud Request for investigation (fraud

cases)cases)

POST AUDIT PROCEDURES

• Client educationClient education• Client self-assessment Client self-assessment

Benefits

• Trade facilitationTrade facilitation• Efficient use of resourcesEfficient use of resources• Deterrent to non-complianceDeterrent to non-compliance• Long term and comprehensive compliance Long term and comprehensive compliance

management focusmanagement focus• Client educationClient education• Opportunity to understand client’s Opportunity to understand client’s

businessbusiness

Benefits cont’d

• Effective implementation of the Effective implementation of the WTO Valuation AgreementWTO Valuation Agreement

• Promotes the self assessment Promotes the self assessment strategy (voluntary compliance).strategy (voluntary compliance).

• Provides feedback to customs Provides feedback to customs ports to assist them in their risk ports to assist them in their risk profiling.profiling.

Conclusion cont’d

Customs is facing the following challenges:Customs is facing the following challenges:• Increasing trade volumesIncreasing trade volumes• Limited resource baseLimited resource base• Increasing government and public Increasing government and public

expectationsexpectations• Declining duty ratesDeclining duty rates• Increasing exemptionsIncreasing exemptions

Conclusion

• Effective and efficient utilisation of Effective and efficient utilisation of WCO best practice instruments WCO best practice instruments such as risk and audit based such as risk and audit based controls among others, is the only controls among others, is the only panacea to handling the ever panacea to handling the ever increasing and complex business increasing and complex business environment.environment.