Effective compliance: interview with Jack Nuijten Before joining L&L, Jack worked for more than 15 years as an indirect tax and trade compliance officer with a multinational company. In this role he has been the author, implementer and maintenance engineer of several global compliance programmes. Read more The Union Customs Code (UCC): the path to compliance The European Commission has worked for some 10 years on the successor to the current Community Customs Code which was implemented in 1992. The resulting Union Customs Code (UCC), which will become applicable on May 1st 2016, has taken into account the changing global environment and will be a major step forward in the way the customs authorities deal with businesses. Read more Effective compliance requires clarity of rules The tightening net of foreign and international security policies is raising the risk threshold for companies with cross-border activities. Economic sanctions and export controls, jointly known as ‘trade controls’, have resulted in an exceedingly complex network of rules and regulations. Read more Excise taxes: High values, high stakes Excises will be levied from certain consumable products, such as alcoholic beverages, tobacco products and mineral oils. Excises tax rates can be significant; in most cases the amount of excises exceeds the value of the product itself. For example, the retail value of a package containing 20 cigarettes of 6 euro (in the Netherlands) includes taxes (excises and VAT) equaling approximately EUR 4.60. Read more Adding value to your VAT compliance programme Although most companies have a well-established VAT compliance programme, often embedded in the companies’ ERP system, a recent poll has shown that over 80% of businesses are still using spreadsheets to manage their VAT compliance, in at least one of the jurisdictions in which they operate, despite tax authorities, around the world, investing in better tools. A good VAT compliance and reporting programme may, however, bring other benefits that reach far beyond the avoidance of VAT penalties and interests. Read more 2 November 2015 International Trade & Customs Bulletin 2 Effective compliance: interview with Jack Nuijten Before joining L&L, Jack worked for more than 15 years as an indirect tax and trade compliance officer with a multinational company. In this role he has been the author, implementer and maintenance engineer of several global compliance programmes. Question: From your experience, can you explain why Compliance, in general, has become so important for businesses? Jack: Over the last 10 to 15 years the exponential development of I.T. has brought greater transparency to every aspect of our world. As a result of this heightened exposure and the scrutiny of financial and political developments, it has attracted, the drive to facilitate international trade has become intimately associated with the need to ensure compliance with accepted standards of doing business. The same phenomenon can be seen in the wide concerted effort to ensure that all of us, and particularly big business, should pay a fair share of tax. Enforcement of acceptable standards of reporting and disclosure in fiscal matters are also seen as essential. Failure to comply with these standards will lead not only to sanctions being imposed by the regulatory bodies, but can also seriously damage the reputation of corporations in the eyes of the general public. Question: Having worked in a multinational company for many years, can you give us your view on implementing the compliance process ? Jack: Well, I will start by saying that, in my view, compliance, in its broadest sense, should now be an integral part of the strategic vision of the top management of all companies. We must realize that in the current international environment, compliance is an absolute pre-requisite for a successful company. The interconnectivity of Financial, Tax and Trade regulations requires an integrated (top-down) approach to compliance. Take for example transfer pricing. In a multinational company (with a lot of intercompany transactions) transfer pricing impacts Corporate Tax, Value Added Tax as well as Customs value. Question: In this (broad) landscape of Compliance, what is the influence and the role of I.T.? Jack: Keeping track of (International) Trade flows needs I.T. systems. The sheer volume of mass-transactions requires data processing and the elimination of human intervention in order to function properly. Data-integrity and data ownership, therefore, have become key themes in doing business. This logical development, however, also enables ERP systems to be used in support of compliance (e.g. in the field of master data management and management of trade-flow rules). “Data-integrity and data ownership, therefore, have become key themes in doing business.” 3 Question: Which function or department should be responsible for Compliance, and what human resources should be devoted to it? Jack: As so often, the answer is: “it depends”. The answer to both these questions will depend on the size and nature of the business activity. It is important that the Compliance function should have a straight reporting line to the company’s top management. This allows top management to underline the importance of compliance by having cases directed to it. When it comes to the headcount directly involved in the compliance function, there are businesses that integrate the compliance function directly into all the departments involved, with only a few people in a central compliance function. On the other side of the spectrum, some companies create a centrally located compliance department, with compliance embedded in their IT systems. In that situation, compliance is operated and enforced by the system itself, with a compliance officer responsible for updating and supervising the system. “It is important that the Compliance function should have a straight reporting line to the company’s top management.” Question: What do you do if a breach is detected? Jack: Before answering that directly, I will explain what should be done, as part of the implementation of a compliance program, to deal with such a situation. A company’s compliance policy should include educating all employees about the importance of compliance, supporting openness and creating incentives for compliance initiatives and penalties for hiding issues. Clear escalating models should be built into procedures, supported by a help-line. If and when a violation surfaces, it is important not only to take corrective action, but also to communicate issues and actions within the company as well as to the authorities involved. Question: Implementing a Compliance Program is one thing, what about maintenance? Jack: Compliance is a not a one-off exercise. The majority of businesses involved in Trade are AEO certified (by the Customs authorities) and have signed a Compliance agreement with the Direct Tax authorities (for Corporate Tax, Wage Tax and VAT) in countries where this type of Horizontal Monitoring has been implemented. As a condition of facilitating trade, businesses must periodically maintain and review/update their organization and administrative processes/systems, and report all relevant changes to their counterparts. The periodic review and the resulting performance report form the basis of internal and external benchmarking against goals set and conditions of licenses and agreements. “When a violation surfaces, it is important not only to take corrective action, but also to communicate issues and actions within the company as well as to the authorities involved.” 4 Question: How, in your view, should SME’s deal with Compliance? Jack: SME’s are increasingly involved in the same global business environment as large Multinational Companies (MNC), with the added impetus of the exponential growth of the Internet, giving them ever wider access to global trade. Their involvement in international trade means the majority of SME’s are AEO certified and take part in Horizontal Monitoring. Implementing and maintaining Compliance Programs should be balanced according to the size and organizational structure of each SME. The aim is not that an SME’s should be less compliant than a MNC. Final question: Any golden tips? Jack: Top of the list is training employees on the aspects of compliance that are relevant to the responsibilities of their individual functions. Overtraining does not lead to a higher level of compliance but only to inefficient use of resources. Secondly, try to find the ideal moment to start the implementation of a compliance program. For instance the introduction of a new ERP system, major business changes like mergers. These moments are ideal, as such projects necessarily involve many, if not all of the departments within an organization. “Overtraining does not lead to a higher level of compliance but only to inefficient use of resources.” 5 The Union Customs Code (UCC): the path to compliance The European Commission has worked for some 10 years on the successor to the current Community Customs Code which was implemented in 1992. The resulting Union Customs Code (UCC), which will become applicable on May 1st 2016, has taken into account the changing global environment and will be a major step forward in the way the customs authorities deal with businesses. The core vision of the UCC can be summarized as follows • Facilitation of legitimate trade and fighting fraud • Reduction of barriers to international trade and reinforcing the need to ensure security and safety at the external borders of the Union • Use of information and communication technologies leading to a paperless environment for customs and trade • Granting Authorized Economic Operator (AEO) status to compliant and trustworthy economic operators • Simplifying and facilitating customs for AEO’s, who also benefit from a more favorable treatment in respect of customs controls The AEO certification, as such, is not new (the system was introduced back in 2008), but under the UCC the conditions for certification in the 28 EU Member States will be unified. The key words when granting AEO status are compliant and trustworthy economic operators. Fulfilling the criteria will lead to less interference by the customs authorities in the supply chain. The UCC offers (much more than the CCC) the key features to support this facilitation. Starting May 2016, over a period of several years, existing customs licenses/authorizations (including AEO certification) need to be renewed under the conditions of the UCC. Transitional rules apply, spreading the workload over a period of several years (2016/2019). It is advisable for businesses to review the expiry date of existing licenses/authorizations in anticipation, and to determine, in advance, any necessary changes to processes enabling a smooth transition to licenses under the conditions of the UCC. The success of the UCC will be dependent to a large extent on the ability of EU Member States to implement the necessary IT systems needed for the full employment of the facilities afforded by the UCC. The simplification of Centralized Clearance can be taken as an example. Under Centralized Clearance, an AEO may file Customs declarations with the customs authorities responsible for the place where they are established, for all goods entering the Customs territory of the EU, regardless of the country from which the goods have actually enter the customs territory. This simplification, which can be a major benefit for operators, is dependent on IT systems which are currently still under development. Actual implementation of this part of the UCC is anticipated to take place by October 2020. On July 28, 2015, the EU Commission decided on the UCC Delegated Act (C2015, 5195), specifying some of the provisions of the Union Customs Code. The Delegated Act is under consideration by the European Parliament and the Council (for a period of two months, with a possible extension of a further two months). Further clarifications, which are expected to emerge over the next few months, will be included in the next edition of our Customs and Trade Bulletin. 6 Effective compliance requires clarity of rules The tightening net of foreign and international security policies is raising the risk threshold for companies with cross-border activities. Economic sanctions and export controls, jointly known as ‘trade controls’, have resulted in an exceedingly complex network of rules and regulations. Today, a simple international commodity transaction may give rise to questions about classification, the country of destination, end-use, and end-users, in order to assess whether that transaction is permitted, subject to notification or licensing, or prohibited. Despite its wording, the term ‘export controls’ not only concerns the export of goods, services, technology and technical assistance, but also their transit and re-export. Export control regulations have consequences not just for exporters, but also, by way of extension, for brokers, shippers, and service providers. Compliance with all these rules and regulations poses a real challenge for the business community. Without the required level of expertise, even routine transactions may breach regulations that are controlled and enforced by different domestic and foreign regulatory authorities. In the event of a breach, the consequences can be dire, ranging from heavy fines and criminal prosecution to the disruption of relations with clients, suppliers, shareholders and the authorities. The crucial point about economic sanctions and export controls, however, is that they should lay down clear and consistent rules telling companies what they can and cannot do. If trade controls lack clarity and consistency they will create legal uncertainties. This will have a chilling effect which could go far beyond the actual intent of the measures. In this respect the EU bears a particularly heavy responsibility. A lack of precision in EU regulations will lead to differences in interpretation, implementation and enforcement at the level of the 28 EU Member States. In addition to an unintentional impact on trade, this will create an uneven playing field for EU businesses. Regrettably, the clarity of EU sanctions still leaves much to be desired. Exemplary is Council Regulation (EU) 833/2014, which contains a comprehensive and detailed set of sectoral sanctions aimed at the Russian Federation. This is particularly so for the regulation’s restrictive measures aimed at denying Russia access to EU capital markets which have turned out to be a real challenge for European companies because of the many interpretational issues they give rise to. Despite helpful guidance from the European Commission, the scope of key terms and provisions and the extent of civil liabilities that may be incurred, remain unclear. This has especially caused financial institutions to withhold their cooperation or withdraw from transactions which they might otherwise have supported, had sufficient clarity been provided. Of course, it is the task of companies to closely monitor the legal framework and to ensure the implementation of robust compliance programs throughout their organizations. But even the best of compliance efforts cannot cope with imprecise regulation. Therefore, it is the principal responsibility of governments and international organizations to ensure that there is a consistent and well-defined legal framework. To ignore this task is to invite unintentional distortion of markets and competition which will cause a sanctions backlash. Companies faced with haphazard trade controls should never stop voicing their concerns and explaining their practical problems through established channels and organizations. This is the only way to persuade their governments and international organizations like the EU to provide clearer guidance and better rules. 7 Excise taxes: High values, high stakes Excises will be levied from certain consumable products, such as alcoholic beverages, tobacco products and mineral oils. Excises tax rates can be significant; in most cases the amount of excises exceeds the value of the product itself. For example, the retail value of a package containing 20 cigarettes of 6 euro (in the Netherlands) includes taxes (excises and VAT) equaling approximately EUR 4.60. EU and national excise legislation provide the legal basis for levying excises. These include arrangements for the storage, transport and monitoring of excise goods, while excises duties are under a suspension arrangement. If license holders fail to comply with the applicable rules, excise can become due, even where the excise goods in question are not distributed for consumption. A tax warehouse is a special warehouse where excisable goods can be produced and/or stored under suspension of excises. Excises are in principle due upon discharge of excise goods from a tax warehouse for consumption. Excises will be included in the retail price of products meaning that the end consumers, in effect, pay the excises. Companies releasing excise goods for consumption take on the role of tax collector on behalf of the authorities. Discharge from a tax warehouse for consumption includes the: • departure of excises goods, including irregular departure, from an excise suspension arrangement; • holding of excise goods, outside an excise suspension arrangement, where excises have not been levied; • production of excise goods outside a suspension arrangement; • importation including irregular importation, of excise goods that are not placed under an excise suspension arrangement. From the above it follows that irregularities occurring while a license holder is legally responsible for excise goods (for which excises have been suspended) can result in the excise being levied. In most cases of irregularities, these substantial excise duties, for which the license holder is liable, cannot be passed on to consumers. In cases of irregularities occurring during cross border transport of excisable goods, for instance the theft of cigarettes during transport from the country of production to the country of consumption, there is a risk that more than one country deems itself entitled to levy excises, resulting in double excises being levied. These costs come on top of the costs of stolen goods, but consumers will not pay for those excise duties. Excises can also become due when excise products get lost during production in a tax warehouse. Again, in such case, consumers will not have to pay those excises. The transporter or producer must bear the extra costs. To avoid the levy of excises for products that are not put into consumption, the producer and transporter must comply with the rules as set out in EU and national excise legislation. Excise goods placed, under transport regulation under suspension of excises (EMCS), must arrive, complete, at their destination. The arrival of these goods must be properly registered. which means, in accordance with the applicable rules as well as the rules specific to the license that was obtained by the producer. Because the import of excise goods is also a taxable event, the customs rules that apply to goods imported from third countries must be complied with. If they are not, excises will become due in addition to import duty and VAT. 8 Risks and solutions: from the above it is clear that Compliance is of major importance for companies dealing in excisable goods. Both administrative mistakes as well as issues in the physical flow of excisable goods can lead to significant excise liabilities. Awareness of these risks and responsibilities, at all levels within a company, is crucial. Supply Chain control can reduce the risk of irregularities occurring (know your customers and service providers). Economies of scale can be obtained if excise compliance is integrated into general or other specific compliance programs. As an example: in an Authorised Economic Operator certification process, excise tax compliance can be integrated into the customs and safety compliance process (including excise specific processes, where needed). This form of integration stimulates cross functional awareness and understanding. www.loyensloeff.com Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities, partnerships, persons and practices trading under the name ‘Loyens & Loeff’, cannot accept any liability for the consequences of making use of this issue without their cooperation. The information provided is intended as general information and cannot be regarded as advice. Disclaimer Adding value to your VAT compliance programme Although most companies have a well-established VAT compliance programme, often embedded in the companies’ ERP system, a recent poll has shown that over 80% of businesses are still using spreadsheets to manage their VAT compliance, in at least one of the jurisdictions in which they operate, despite tax authorities, around the world, investing in better tools. A good VAT compliance and reporting programme may, however, bring other benefits that reach far beyond the avoidance of VAT penalties and interests. The purpose of a balanced VAT compliance programme is primarily to identify VAT risks and liabilities. In a rapidly changing business environment, however, (including global sourcing, online distribution and alternative manufacturing techniques, such as 3D printing etc.) it is increasingly important for companies to ensure that their VAT compliance programmes are up to date. Companies should also be aware that VAT authorities themselves, increasingly rely on automated risk analysis tools to detect potential VAT gaps, and they could certainly benefit, therefore, from taking their VAT compliance programmes a step further than the current spreadsheet. A thorough analyses of the data that a company collects – orders, invoices, bank transactions, reports, customer data,… – is nowadays an absolutely requirement for identifying VAT liabilities. This not only ensures that companies’ transactions receive the correct VAT treatment so that the company pays and deducts its fair share of VAT, but also that the company works with reliable trade-partners. A company can already be held liable for the payment of VAT if it knew or should have known that somewhere in the chain of transactions, a trader did not account for the VAT it legally owed. Especially in VAT matters, where penalties can easily amount to one or two times the amount of the VAT due, prevention is key. In addition to its obvious importance for VAT, VAT data can also be very helpful to check compliance in other areas such as customs, excise duties and even in regulatory matters such as export controls and sanctions. An integrated approach with other tax or regulatory areas will certainly benefit the company as it will on the one hand, reduce exposure to liabilities and on the other, improve integrated internal processes.