HERALD WEEKLY ISSUE 579: 31 August 2011

How government lost $1.2million
As if to illustrate that leakage does not only occur with water pipes, a report tabled in parliament (Paper No 31) at the last session, by the Minister for the Audit Office states that poor decisions by senior public servants resulted in a loss of taxation revenue to government of more than $1.244 million from 2006 to 2009.
This finding comes following a special review undertaken by the Audit Office into a complaint that CITC had avoided paying the full levy on their soft drink imports by separating contents from packaging on their invoices. While Audit Office say the practice was unfair, it was not illegal and overseas advice, says Audit, was that soft drink products should be levied as one product.
The report makes it clear there was no illegal activity or misrepresentation on the part of CITC
Below, for the public’s information is the full executive summary tabled in parliament containing the key findings, conclusion and general recommendations.
The full report tabled in parliament is on the Audit Office website also a copy may be obtained from the Audit Office.
DATE: 29 July 2011
TO: Hon Mark Brown, Minister of Finance & PERCA
FROM: Paul Allsworth, Director of Audit
Audit has completed its review regarding a complaint that alleged local business CITC had avoided
paying the full levy on their soft-drink imports by separating contents from packaging on their
invoices’ The complaint alleged that CITC had not paid any levy on packaging when other
importers had paid a full levy on the cost of the whole product. The complaint also claimed that
because of the arrangement, CITC had gained an unfair advantage over other importers and there would have been a huge loss in Government revenue, over many years.
It was alleged the practice was an arrangement between CITC and the Ministry of Finance and
Economic Management [MFEM] specifically through the Customs division (hereafter Customs).
A special review was initiated with the following objectives:
- determine if there was an arrangement in place between customs and any importer which allowed the separate classification of packaging and contents;
- determine if there was any basis to the complaint and allegations made; -determine whether such an arrangement is legal under the relevant Cook Islands legislation and policy;
- determine if Government revenue from the arrangement was properly collected and ascertain if any losses to Government revenue was incurred;
- identify any anomalies or breaches of legislation or Government policy and address any areas of concern
The Audit office has a responsibility under section 27(g) and 32 of the PERCA Act 1995-1996 to pursue any concern that arises in respect of the management of public resources which in its opinion justifies further investigation and to report its findings to parliament.
We confirmed there was an arrangement in place, specifically between Customs and CITC that:
- allowed CITC to separate contents and packaging on imported products supplied by Coca Cola (NZ) since the mid 1980’s until the practice was revoked in September 2009;
- by separating their invoices, CITC had paid a 10% levy on packaging and 40% levy on contents, whereas other local importers had paid the full 40% levy on the cost of tire product as a whole;
- as a result of the arrangement, CITC had gained a significant financial advantage over otherimporters, including the steady increase in the value of packaging from 2001 onwards and especially when the 10% levy on packaging for all imports was removed by an Executive Order on 1 July 2006;
- total loss in Government revenue could not be quantified however from our analysis and calculations we estimate for the period 2006 to 2009, a loss in Government taxation revenue in excess of $1,.244 million.
Who approved the original arrangement with CITC, when it first commenced exactly and the specific terms of the arrangement could not be established due to a lack of documentation and recollection by former staff. When the former Treasurer and Manager of Customs, Mr Geoff Stoddart approved the continuation of the arrangement with CITC in 2006 we found that:
- the legal head of Customs at the time was the former Financial Secretary, Mr Kevin Carr and it is debatable whether Mr Stoddart had the necessary authority to approve the arrangement on the basis that he did, including authorization of refunds to CITC;
- Mr Stoddart should have brought the matter to the attention of Mr Carr for review before approval and implementation;
- Mr Stoddart failed to review the practice in-line with relevant legislation, policy and public servant ethical standards, in particular the values of impartiality, transparency and accountability;
- Mr Stoddart should have sought advice from NZ Customs and Crown Law and did not properly consider the impact of the arrangement on other importers or loss in Government revenue.
In Audits view, prior to 2009 Customs had weak processes in place for the collection of Government revenue, such as the:
- inability to confirm if legislative amendments/modifications had been implemented and adhered to by Customs staff;
- inconsistent classifications of products;
- poor storage of documentary records;
- weak communication procedures internally, with import agents and other agencies;
- weak operational guidance and direction.
We are pleased to advise that the proposed Customs Revenue and Border Protection Act, based on
the NZ Customs Act and regarded regionally as model legislation, will be considered by Parliament later this year’ New Customs policy and procedures are nearly completed and it is envisaged these will be implemented in-line with the new Act in January 2012.
Under the current and proposed legislation the Comptroller is responsible for Customs and reports directly to the Minister. As Customs is a division and output of MFEM under the present structure, it is an unusual situation whereby the Comptroller can make decisions exclusive of his HOM, the Financial Secretary. It is our view that this situation must be addressed by the Minister, to ensure the Comptroller can meet his legislative obligations.
A fully automated Border Management System (BMS) has been developed as part of a joint initiative between MFEM (Cook Islands Customs) and several NZ Government agencies, including the NZ Customs Service. The project builds on the work already undertaken over the last two years to modernize the Cook Islands Customs Service.
The BMS will replace Customs current manual system and provide the Cook Islands with a fully integrated border processing and revenue collection system, with the goods component of the project to be delivered by September 2012.It is envisaged that Government revenue collection will be greatly enhanced and will lead to:
- a more accurate and increased collection of duties and taxes due to the uniform application of the law;
- automated calculation of duties and taxes and built-in controls;
- the reduced opportunity for corruption due to improvements in transparency and by providing decision-making guidelines.
This review concluded that the separate classification of contents and packaging of Coca Cola products imported by CITC provided a significant financial advantage over other importers. It must be emphasized that this situation came about because of poor decisions by senior Government officials and not through any illegal activity or misrepresentation by CITC.
Whether plastic bottles are suitable for repetitive use is open to interpretation however we
concluded that Mr Stoddart’s approval for the separation of aluminum and cardboards boxes on the same basis was illogical and unreasonable. Although the practice was not illegal, both NZ
and Australian Customs advised that soft-drink products should be levied as one product.
Because many source documents were missing, the exact loss of Government revenue could not be quantified prior to 2006, however from 2006 to 2009, we assessed that Government made an estimated loss in excess of $1.244million in taxation revenue as a result of this unfair practice.
Even if the decision to approve the arrangement from 2006 onwards was wrong or lacking in jurisdiction, it remains fully effective unless it is set aside by the Cook Islands High Court. Until its validity is challenged in Court, its legality is preserved and any decision to seek or recover any Ioss in revenue would ultimately be a decision for Government to make.
It is apparent that Mr Stoddart had an opportunity in 2006 to revoke the practice, however in our view, his poor decision to allow the continuation of the arrangement was a failure to uphold basic ethical standards expected of a senior public servant. We commend the efficient manner in which the current Treasurer, Mr Andrew Haigh, sought advice from the NZ revoked the practice as soon as it was brought to his attention. Steps have already been undertaken by Customs to address the areas of concern identified in this review.
General Recommendations
We recommend that before the computerized Border Management System has been implemented Customs should review their existing levels of staffing and resourcing to ensure they have sufficient capacity to provide assurance to the Executive (Cabinet) and Parliament regarding the integrity of Customs revenue systems and controls.
With the anticipated enactment of the new Customs Act, clear lines of communication with importers and other relevant stakeholders must be established and maintained to ensure compliance with legislative requirements and a uniform and consistent approach to revenue collection. Management decisions and changes to policy must be properly documented for any future review.
Consider reviewing whether the current Comptroller of Customs (Mr Andrew Haigh) can meet his legislative obligations under MFEM’s present structure. Or consider if it would be more practical to appoint the Financial Secretary, as HOM, as Comptroller to ensure he can properly and accurately report on all matters under MFEM’s outputs, directly to the Minister.
Any significant operational decision that may affect government revenue must be collectively reviewed with the Financial Secretary and Crown Law to ensure that an arrangement as disclosed in this report does not reoccur and to ensure decisions are in-line with Government financial policies.
Recommendations have been made to address areas of concern raised in the report. Could the recipients of this report, reply to our recommendations within l4-days of receiving this report. In
closing, I would like to take this opportunity to thank all those who assisted my staff during this
Paul Allsworth
Director of Audit
Cc: Hon Henry Puna, Prime Minister
Hon Tom Marsters, Deputy Prime Minister
Hon Teina Bishop, Minister
Hon Nandi Glassie, Minister
Hon Teariki Heather, Minister
Richard Neves, Financial Secretary
Navy Epati, Public Service Commissioner
Tingika Elikana, Solicitor General
Marie Frances, Chairperson PERC
Andrew Haigh, Comptroller of Customs

Charles Pitt

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