Weak controls on preferential tariffs costs the European Union millions of euros annually, say auditors

Out-Law News | 23 May 2014 | 8:38 am | 4 min. read

The European Union was at risk of losing €655 million in customs revenues in a single year due to weaknesses in French, German and UK customs management of preferential trade arrangement (PTA) tariffs, the European Court of Auditors (ECA) has said.

Weaknesses in the management of PTAs by the three EU member states in 2009 meant they could not be guaranteed to recover customs debts owed by businesses in other countries within the three-year legal deadline relating to such duties, said the ECA.

Management and operational failures by some member states also led to some imports wrongly benefiting from PTAs they were not entitled to, resulting in a loss of revenue for the EU.

In addition, the European Commission does not know what level of revenues are annually foregone as a result of PTAs, said the ECA. A lack of appropriate evaluations on the impact of PTAs on the EU budget means that policymakers and tax-payers are "insufficiently informed" as to whether the implemented policy has delivered the intended results.

The Commission is also failing to make sufficient use of measures designed to counter fraud in relation to PTAs, and legal provisions of the PTAs do not contain sufficient safeguards to protect the financial interests of the EU, said the ECA.

PTAs are agreements between countries by which they grant preferential terms to trading partner countries. Reciprocal PTAs reduce tariff barriers between trading countries with the objective of increasing trade, economic growth, employment and consumer benefits for both parties. In the case of unilateral PTAs, the EU grants preference without reciprocity to a developing country with the objective of providing it with tariff-free access to the EU market, in a measure designed to help eradicate poverty in the developing nation and promote sustainable development.

The EU has PTAs with 180 countries and territories across the globe and imported more than €240 billion worth of goods in 2009 under PTA agreements, representing 14% of EU imports that year, said Baudilio Tomé Muguruza, the ECA Member responsible for the report

The ECA is the independent external auditor of the European Union, tasked with ensuring EU funds are correctly raised, accounted for and spent. It is made up of 28, one from each EU member state. The ECA carried out an audit of the European Commission's activities in relation to PTAs and those of five member states to evaluate whether the Commission has appropriately assessed the economic effects of PTAs and whether PTA controls by member states ensure goods do not wrongly benefit from preferential tariffs. The five EU member states chosen for the audit sample were the UK, France, Germany, Italy and Spain.

To establish the effectiveness of controls by member states, auditors chose a statistical sample of 60 imports to the state in 2009 which were subject to time-bars. Customs revenues on an import are considered to be time-barred if the customs authority fails to communicate the level of customs debt incurred by an import within three years, and so loses the right to recover the customs debt.

Auditors found that Germany's selection of importers for post-clearance audits "does not sufficiently take into account the specific risk of time-barring in PTAs". They also described part of the German risk management system for PTAs as "time-consuming, complex and burdensome" and noted that only one new local risk profile was introduced to its system in 2011 and 2012.

Under the French system, "preferential origin is not a priority in the risk management system," the auditors said.

Auditors found that the UK system accepts copies of movement and origin certificates when performing documentary checks on imports under PTAs. They commented that "only originals can fully provide assurance of the authenticity of these certificates." They also said that the frequency of checks was "very low" and that PTAs have not been selected as an audit theme for post-clearance audits in the UK.

The ECA commented: "These weaknesses were confirmed by the amount of revenue potentially lost in these three member states. By extrapolating the errors found in its sample of 2009, the Court has estimated the amount of duties at stake in these member states because of time-barring to be €655mn. This represents around 6% of the gross amount of import duties collected in the five selected member states that year."

Auditors also found that on many occasions, goods were granted PTAs despite a lack of "necessary supporting evidence". This included cases in which goods did not carry official stamps by the beneficiary country's customs authorities, the absence of origin and movement certificates and certificates which did not match supporting documents for the imports. Such errors occurred in 38% of cases in the UK, 11% of cases in France and 10% of cases in Germany.

The Court also found that although the European Commission made some progress in the quality of its analysis of PTA impacts on the economy, it has not appropriately assessed all the economic effects of PTAs and that "the completeness of revenue collection is not ensured."

It found that the Commission "does not have information on the revenue foregone in each budget year as a result of PTAs in force or a forecast of revenue that will be foregone."

The Court said that because the Commission has not always carried out prior and post evaluations to assess the economic effects of PTAs on EU budgets "policymakers, stakeholders and European tax-payers are therefore insufficiently informed of the main advantages and disadvantages of the different trade policy options and of whether the implemented policy delivered its results."

The ECA has recommended a number of measures the Commission could implement in order to reduce losses to the EU budget.

These include creating risk profiles on PTAs, to ensure a common approach to risk analysis across member states, and verifying that member states improve the effectiveness of their risk management systems and control strategy.

The Commission should also carry out monitoring visits to countries benefiting from preferential treatment to improve the financial follow-up of OLAF investigations in order to prevent losses to the EU budget due to time-barring.

In its response to the ECA's report, the Commission said that it has placed a special focus on the effectiveness of member states risk management systems and control strategies during its own inspections in recent years and will continue to verify states improve these.

The Commission said it did not consider that prior and post evaluation of revenues foregone due to PTAs "would provide budgetary authorities with a sufficiently accurate yearly forecast of custom duties collection to improve financial management of the EU budget."