Valuation database as a risk assessment tool: Ecuador, India and Kenya Customs share their experience
The WCO receives many requests from its Members for assistance on the development and use of valuation databases. The Organization acknowledges that such databases may be a useful tool, particularly for developing countries who have yet to apply effective post-clearance audit controls, and who face challenges from high levels of non-compliance and informality.
It is strongly underlined however, that valuation databases should be used only as a risk assessment tool and must be developed within a broader risk management framework, alongside other risk indicators. In addition, it is equally important that business operators maintain adequate commercial documentation, which can be produced when Customs requests evidence of payments made for imported goods.
The first point of reference for an administration considering the development of a valuation database should be the WCO Guidelines on the Development and Use of a National Valuation Database as a Risk Assessment Tool, as well as the WCO Revenue Package’s Practical Guidelines for Valuation Control which also offer examples of WCO Members’ best practices. This article takes a look at how the Customs administrations of Ecuador, India and Kenya use their valuation databases as a means of facilitating risk assessments.
Establishing a valuation database
The type of software and hardware used for a valuation database is a matter for each administration. But whatever the system used, it works best by extracting key data on previous importations from the Customs clearance database.
The Indian Customs Valuation Database project, more commonly referred to as the National Import Database (NIDB) project, was initiated in June 2004 to develop a real-time, electronic database for goods imported through all Customs stations in India. All data pertaining to valuation is compiled on a daily basis from import declarations. The data on commodities which is considered sensitive is then analysed by a software programme to determine unit values, weighted average values of identical goods, and percentage deviations and outliers, while being supplemented with international price information.
This analysis is done by forming clusters of identical/similar goods and working out representative prices based on mathematical formulae with the help of statistical tools, in order to identify transactions where the declared value may be in doubt. The idea is not to automatically reject declared values, but rather to facilitate the verification process. The data, duly analysed and flagged by Indian Customs’ Directorate of Valuation (DOV), is then sent to all assessing officers for use as an effective tool to detect under-valuation and valuation fraud, in order to safeguard Customs revenue.
The quality of import data captured is crucial for achieving reliable risk assessment. In Ecuador, to ensure the quality of the data, a group of specialists vet or ‘clean’ the data extracted from the Customs clearance database before it is input into the database. Values are not included where, for example, descriptions are inadequate – indeed, prices vary considerably for goods within a particular classification depending on brand, package size, quality, and country of manufacture. During a physical inspection, photos of the goods are also taken and stored digitally along with the price data for the product in question, providing a further means of comparison.
Ecuador Customs is, moreover, working on a project to enhance the quality of the goods description appearing on a Customs declaration by creating catalogues on certain products that importers or exporters can refer to when completing their Customs declaration.
To overcome similar difficulties, especially in analysing or comparing contemporaneous imports due to the fact that information related to the description of goods, units of quantity, and so on are submitted in a non-standardized or non-uniform format, Indian Customs has incorporated new technological changes to its valuation database. The new version includes an ‘items-profiling’ module, which enables inconsistencies to be overcome.
The profiling module has the capability to distinguish various ways in which a particular item can be described on a Customs clearance. For example, ‘Stainless Steel,’ can be written as ‘Stain Less Steel,’ ‘stainlesssteel,’ ‘S S,’ ‘SS,’ or even ‘S.S.’ Without such capacity, a computer would read these ‘entries’ as different items, and create different clusters of the same goods.
In addition, the module can also classify the same commodity according to specific attributes which have an influence on the price, as required by the user – for example, the brand, model, grade, size, and colour, thereby enabling an officer to cross-check the contemporaneous imports of identical and/or similar goods. The new system is also more user-friendly in regard to submitting queries and retrieving data from the database, and has a better reporting module for issuing standard reports.
Risk management module
Once a database is established and populated with data, an administration must develop a procedure for using it. Some administrations have integrated their valuation database into their risk management module (RMM), as recommended by the WCO. In India, the Directorate General of Valuation (DGOV) joined hands with the national Risk Management Team to devise a strategy for valuation risk assessment and control, in the context of developing a Risk Management System (RMS) for import and export cargo clearances.
The valuation database has been integrated with the Risk Management Module (RMM) through an interface called the ‘valuation corridor,’ which takes inputs from the database, such as details on the imported commodity, tax compliance indicators, and key factors for assessment. These inputs are mainly fed into the RMM as ‘compulsory compliance requirements.’ It is only when a stakeholder fails to comply with these requirements that the systemic facilitation is stopped, and the declaration is diverted to an officer for consideration. Moreover, based on more specific inputs/intelligence from the database, some consignments are directed for examination and assessment by an officer.
To measure the performance of the different tools used by the DGOV, a reporting module was embedded in the Indian RMS. The facilitation level has been the biggest yardstick to measure the performance of various valuation tools. There has been an increase in the facilitation level, which Indian Customs is endeavouring to further enhance.
Ecuador Customs also evaluates the performance of a group of specialists in charge of identifying risk parameters/variables and feeding them into the Customs RMS. Direct feedback is provided by the officers executing the controls on a monthly basis, and adjustments to the risk parameters are made accordingly.
Indian Customs developed its Customs valuation database and RMS on its own. Having gained a lot of experience on how to develop, maintain and use such tools, it started assisting other countries in the setting up of their own systems.
One of the countries which benefited from the experience of Indian Customs is Kenya. This fruitful cooperation started in 2006 and led to the launch in 2009 of a new valuation database in Kenya, which is compliant with the principles of the World Trade Organization (WTO). The database enables the Kenya Revenue Authority (KRA) to mitigate any resultant hurdles from subjective valuation decisions which are contrary to the principles of the WTO Valuation Agreement.
The Simba 2005 system which Kenya Customs was using at the time did not support the management of an efficient valuation database nor valuation corridor management functions. Indian Customs’ DOV was identified as having such a system, and was contacted accordingly. With a positive response from the DOV, KRA representatives made a visit to understand how the valuation database, as a best practice, was implemented in India. Various aspects, including infrastructure, use, capacity building, technical assistance and other areas of cooperation, were discussed and agreed upon.
Thereafter, the DOV team visited Kenya Customs to undertake a status evaluation and needs analysis, after which they embarked on developing a database tailored to the KRA’s needs. The database was uploaded, tested and piloted, and went live in the latter part of 2008 after confirmation that it met the KRA’s needs at that time.
A Memorandum of Understanding (MoU) was signed and is still in force between the KRA and India’s Centre for Development in Advanced Computing (C-DAC) which carried out the system development for the KRA under the supervision of the DOV. From time to time, there is consultation between the three parties on possible areas of enhancement and other agreed deliverables, as contained in the MoU.
The valuation database was integrated with Simba 2005, and the KRA’s Post-Clearance Audit (PCA) Unit utilizes the information for risk analysis with a view to enhancing voluntary compliance and recovering any revenue that may have been lost. Indian Customs played the role of project coordinator for the development of the KRA’s Customs valuation database, hence the methodology adopted by the KRA is similar to the Indian valuation system.
The KRA is in the process of acquiring an automated RMS which will be integrated with the valuation database for automating risk profiling. Meanwhile, risk profiling for valuation purposes is undertaken by staff, especially those working in the Valuation and Tariff Section as well as in the Post-Clearance Audit and Enforcement Units, to arrive at informed and justified valuation decisions.
Echoing the positive experience of Indian Customs, compliance levels were also enhanced in Kenya, following the introduction of the valuation database for risk profiling. Ecuador too improved the effectiveness of their valuation controls, both at the clearance level and at the post-clearance level.