Combating alcohol and tobacco duty fraud
EU policy: compliance and effects
Differences in excise duty rates between the member states of the European Union (EU) make the illegal production, transportation and sale of tobacco products and alcoholic drinks a lucrative business. Every year, the EU member states lose billions of euros in duties. We have audited the way in which the Netherlands combats tobacco and alcohol duty fraud in compliance with European regulations. What precisely does European policy entail? What is the state of compliance and what effect does the policy have?
Owing to lack of agreement between the EU member states, there are significant differences in the excise duties charged within the EU. This encourages fraud. One of the instruments the EU has introduced to combat fraud is the Excise Movement and Control System (EMCS), a computer program to complete customs formalities for the movement of excise goods on which duty has not yet been paid. The EMCS, however, cannot solve the problem of duty fraud. The system is concerned with only one form of duty fraud within the EU: fraud involving goods on which excise duty does not need to be paid because they are not yet in free circulation. Other forms of duty fraud, such as illegal production and smuggling within the EU, are not covered by the EMCS.
The Netherlands complies with European duty rules but does not give high priority to combating duty fraud. Customs 'includes' excise duty in its regular controls, but the Tax and Customs Administration, Customs and the Fiscal Information and Investigation Service (FIOD) have not set concrete targets to combat duty fraud. Furthermore, the capacity available at Customs and the FIOD to combat duty fraud has declined in recent years. In comparison with other EU member states, the Netherlands carries out relatively few checks.
To enforce the law, Customs is making greater use of 'horizontal supervision' and business certification. Horizontal supervision is based on trust: businesses with adequate operational management may control themselves and are subject to fewer checks. There are risks in this minimalist approach and the Netherlands may lose import duties and excise duties. The results of Customs' excise controls are not known. Customs does not keep records of how many checks it carries out. It therefore has very little if any information on the cost of controls or on the irregularities it detects. It cannot be said whether the Netherlands achieves the goals of other EU policy to combat duty fraud. The Netherlands has not set targets for duty fraud. There are also no aggregated data on the Netherlands' efforts to combat duty fraud. Neither does the Netherlands systematically investigate how much excise duty it loses. There is accordingly little (in the case of cigarettes) or no (in the case of alcohol) information available on the size of the black market in excise goods.
We made the following recommendations to the Minister and State Secretary for Finance:
- Have Customs carry out unscheduled inspections of certified traders this year, based on an automated, random sample so that traders do not know whether they will be inspected or not.
- Have Customs report at least every three years on how many checks it has made of excise goods, how much they cost and what effect they had.
- Adapt the Dutch use of the EMCS as quickly as possible to improve and simplify risk analyses. Also, have Customs align the EMCS with other customs systems so that duty fraud involving tobacco and alcohol can be combated more effectively.
- Systematically collect information on the size of the black market in excise goods and the amount of duty that is lost to the public purse. Then formulate clear and concrete targets and a strategy to combat duty fraud.
The State Secretary for Finance has undertaken to increase the physical checks of certified traders. He also said that Customs would take measures within the existing policy framework to make information on the cost and effect of controls more transparent. The EMCS will be aligned with other customs systems in the course of 2013.