The draft notices and liability to customs duty
On 22 April 2016 the DIBP and the ABF jointly issued two draft notices for comment by industry addressing potential liability to customs duty. These may prove to have significant consequences for many in the supply chain as, when taken together, they will confirm the suspicions that all of those in the supply chain could be liable for customs duty - regardless of whether they were party to the relevant commercial transaction causing goods to be imported. One of the notices also raises a number of other insights into the views of the agencies towards the role of the licensed customs broker (LCB).
Draft DIBPN Notice 2016/12 - liability under DDP transactionsThe first (DIBPN No 2016/12) confirms the position of the agencies as previously set out in ACBPN No 2014/50 that they were entitled to recover customs duty from an Australian purchaser of goods even if they had been purchased pursuant to a DDP transaction. That notice overturned the earlier position of their predecessor agency in 2000 to the effect that duty would be recovered from the overseas supplier in a manner consistent with the relevant DDP Incoterm. The release of ACBPN No 2014/50 created some consternation as it changed the policy position on which many parties had relied in choosing to purchase under a DDP transaction to manage risk to duty. DIBPN 2016/12 cites in support of that position the decision of the AAT in Studio Fashion (as described in earlier updates and as discussed in CPD sessions for the CBFCA). This leaves the purchaser of the goods in a DDP transaction potentially liable to pay customs duty twice - once to the supplier under the commercial contract and then to the DIBP if the supplier does not declare the duty properly or pay that duty. Which is an outcome inconsistent to the intent of the Incoterms arrangements and may only leave the purchaser with an action against then overseas supplier.
Draft DIBP Notice 2016/13 - who is the "owner" and liable for customs dutyThe second (DIBPN No 2016/13) is a longer notice addressing, in very general terms, the contentious issue of who will be treated as the "owner" of goods for the purposes of liability for customs duty pursuant to section 165 of the Customs Act 1901 (Act). This has been an issue of uncertainty for all in the supply chain, including LCBs and other service providers who have been concerned that they too, could be held liable for customs duty even though they are not party to the commercial transaction. The development of the draft notice has been the subject of many requests by the CBFCA for a number of years and has, more recently, been the subject of requests to the DIBP by industry representatives in groups established under the National Committee on Trade Facilitation (NCTF). The issue and the associated risk have not been clear for many years and the risk has increased as the DIBP/ABF have now taken to issuing demands for duty directly on LCB already.
The request through the NCTF to legislate to limit those potentially liable to duty was politely refused on the basis, as set out in the notice, that the Commonwealth wanted to maintain flexibility as to the parties from whom it could recover customs duty. However the converse to that flexibility is that a wider variety of parties who now come within the definition of "owner" could be liable for customs duty. Interestingly, the notice gives the impression that in determining who is the "owner" and liable for customs duty the agencies will, effectively, make a "value judgement" on who is the more appropriate party to be liable for customs duty in any circumstances. Which is an interesting proposition and seemingly at odds with the idea of certainty to liability in revenue statutes.
The position and liability of licensed customs brokersThe second notice pays special attention to the position of LCBs both in terms of the DIBP's expectations as their liabilities to pay duty. It remains of considerable surprise that, on the one hand, LCB hold a special position within the supply chain as a de facto extension of the agencies through their obligations to those agencies yet, on the other hand LCB attract the most comprehensive scrutiny, obligations and liabilities, especially compared to other service providers in the supply chain. It now seems that those obligations and liabilities extend to potential liability to pay customs duty.
For these purposes the draft notice includes some areas worthy of consideration
- It only make specific reference to the LCBs, but not others such as freight forwarders, insurers, financiers and others who could equally be construed as "owners" and liable to customs duty. The specific reference to LCBs and not others does leave open the issue of the position and expectations on those other parties.
- In dealing with LCBs it provides detail on the role of the LCB in determining liability to duty. As the notice provides, "DIBP will have regard to the role a licensed customs broker has played in a situation where duties are outstanding. This will assist us in determining who we may issue a demand notice to under the circumstances presented in each case". Which could, of course, include the LCB.
- The DIBP and ABF have, probably for the first time, made comment on the "ethical" and professional expectations of LCBs. The notice refers to the obligations of the LCB to act in an "ethical" fashion although not identifying what may be those ethical obligations and to whose standards they are to be measured. There are already extensive obligations on LCBs in legislation and in their licence conditions so the imposition of ethical obligations without further details of those obligations creates a new level of risk. It also begs the question as to what are the expectations on the others in the supply chain?
- The notice does not identify whether the approach it discloses will be applied retrospectively at all or only in the future. That is an important consideration from an audit perspective
- The notice makes reference to other professional expectations on LCB to also exercise their functions in a "professional, correct and ethical manner to ensure that the duty and tax properly payable on goods is, in fact, paid. It is expected that brokers will act with integrity and utilise their professional knowledge, skills and judgement when making such determinations". This would seem to put paid to the direction by many clients to "just put this through the ICS" and require LCBs to review and question each and every FID - for which they should be paid. Hopefully the DIBP advertises this very obligation widely so all clients using LCB are aware of the standard and their need to pay for that expertise - and hopefully all LCB will adopt that position rather than turning a "blind eye" to it for expedience. Keep in mind that this expectation sits alongside a variety of other obligations for LCB including to take steps to avoid "identity theft" and criminal involvement in the supply chain. All a tough task for LCBs, many of whom are SMEs and who may now look to external consultants to minimise the associated risks
- The obligation imposed on LCBs regarding proper duty being paid also opens a question for those LCB involved in advice on means to reduce duty and tax payable in legitimate structuring means - will they now be exposed if the DIBP takes the view that such advice is contrary to the role of LCB? That would seem to be unreasonable compared to the position of external advisers not under such obligations.
In timely fashion the draft notices were released in the course of my presentations to CBFCA State Conventions on "ethics in the supply chain" and the impact on LCBs. They were placed on the DIBP website the day before the CBFCA State Convention and I was able to include content from the notices in my presentation - which was the cause of some disquiet by some LCBs and their insurers. That will increase as more parties appreciate the effect on the supply chain.
Of course the notices are only draft and after submissions it is hoped that these uncertainties can be clarified and the associated effect on others in the supply chain is taken into account and widely advertised. I have already worked with the CBFCA to make an extensive submission to the DIBP and ABF. It would be unreasonable for the uncertainties created by the notices to continue and for the position of LCBs to continue to be exposed compared to others in the supply chain. At the least, LCBs and others in the supply chain need to review their exposure and adjust practices, insurances and contractual provisions and indemnities with others in the supply chain - especially with their clients.