EMCS. A challenge for companies and tax authorities?

EMCS A challenge for companies and tax authorities? Kerstin Topanka Europese Fiscale Studies Postmaster Douane 2009/2010

Contents 1 Introduction... 3 1.1 Preamble... 3 1.2 Question... 4 2 General overview... 5 2.1 Definition excise goods... 5 2.2 Importance excise duties in the EU... 5 3 Current legislation until 1 April 2010... 6 3.1 Introduction... 6 3.2 Definition excise goods... 6 3.3 Current process for excise movements... 7 3.3.1 Definitions... 7 3.3.2 Accompanying Administrative Document... 8 3.4 Summary... 10 4 New legislation from 1 April 2010... 11 4.1 Background... 11 4.2 New process for excise movements... 12 4.2.1 Introduction... 12 4.2.2 New definitions... 13 4.2.3 Electronic Administrative Document... 14 4.2.4 The different phases to introduce the e-ad... 16 4.2.5 Implementation process in the different MS... 17 4.2.6 Link to Electronic Customs... 18 4.3 Impact EMCS for the business and tax authorities in the MS... 19 4.3.1 Timeline for implementation... 19 4.3.2 Information Technology... 20 4.3.3 Administration... 21 4.3.4 Logistic... 22 4.3.5 Finance... 22 4.4 Summary... 23 5 Rollout EMCS within one organisation... 25 5.1 General overview... 25 5.2 Project overview... 26 6 Conclusion... 32 Abbreviations Bibliography 2

1 Introduction 1.1 Preamble On 16 th December 2008 the Council of the European Union (EU) adopted a new Directive 2008/118/EC concerning the general arrangements for excise duty and repealing Council Directive 92/12/EEC of 25 th February 1992 effective from 1 st January 1993. With the Decision No 1152/2003/EC of the European Parliament and of the Council of 16 th June 2003, on computerising of the movement and surveillance of excisable products the new Directive, was required to be implemented. The Directive 2008/118/EC provides a legal framework to introduce the computerised system for monitoring the movement of excisable goods under excise duty suspension arrangement. All Member States (MS) shall implement the Excise Movement Control System (EMCS). With the introduction of EMCS from 1 st April 2010 onwards the transit of the excise goods, on which no duty has yet been paid, will be accompanied by the electronic Administrative Document (e-ad). The paper Administrative Accompanying Document (AAD) ceases to exist on the 31 st December 2010. László Kovács, European Commissioner for Taxation and Customs sees the implementation of the new Directive as a coordinated EU fight against tax fraud. MS cannot be effective if they act alone in this area. The measures adopted today are part of a whole package designed to improve cooperation and the effective exchange of information between national administrations in the fight against tax fraud. Tax fraud deprives necessary resources from MS, which are needed to implement their national social, environmental or economic policies. Today this problem is more acute than ever, as governments face the effects of the global financial crisis. 1 1 See Press notice Europe Rapid Midday Express, European Commission Taxation and Customs Union, 16 th December 2008 László Kovács was European Commissioner for Taxation and Customs from 2004 to 2009. 3

1.2 Question Starting point of my essay is to reflect the current and new legislation for the movement of excise goods under excise duty suspension arrangement and to look into the intentions of the European Commission for the new legislation. I am going to write about the content of the new Directive, the plans and the process for the introduction of EMCS. Further I would like to outline which impact the new computerised system has for the companies and tax authorities which are dealing with movements of excise goods under excise duty suspension arrangement. Finally I am going to make my conclusion and want to follow the question if EMCS with the facts which are known today really, can improve the monitoring of the movements of excise goods under suspension of excise duty and the fight against fiscal fraud in the area of excise duties, or is EMCS blocking the functioning of the internal market and the free movement of goods within the EU? The last part of my essay is about a rollout of EMCS in one organisation. I am going to describe the process in a multinational entity with business in the petrochemical industry from the moment that the law was published until the introduction of the e-ad in 1 st April 2010. 4

2 General overview 2.1 Definition excise goods Excise duties are taxes which are paid for the consumption or the use of certain goods. Due to economic expediency and convenience are excise duties levied at the producer or trader. The end user pays the price including these taxes. Thus excise duties belong to the indirect taxes. 2 In contrast to Value Added Tax (VAT), they are mainly specific taxes, i.e. expressed as a monetary amount per quantity of the product. 3 2.2 Importance excise duties in the EU The excise duties are an important pillar of the tax revenues of each MS in the EU. Every MS gets the income of the excise duties in their national budget like the income from VAT. When the figures are checked for Germany the federal government accounts show a value of about 63.5 billion in 2008. This is about 13% of the total German tax revenue. 4 The United Kingdom (UK) tax and customs authorities announced in their Departmental Report 2008 for 2007-08 41.2 billion revenue for oils, alcohol and tobacco taxes. 5 The Netherlands calculate in their Prinsjesdag report 2009 income of 10.7 billion from excise goods like alcohol, mineral oil and tobacco for 2010. 6 2 See web page www.zoll.de, definition Verbrauchsteuern I will keep the terminology of the native language when I quote text from original Dutch/German, as no translation is available. 3 See web page http://ec.europa.eu/taxation_customs/taxation/excise_duties/gen_overview/index_en.htm 4 See web page www.zoll.de; these are including the German national excise duties for coffee 2008 1 billion and 0.01 billion for alcopops. 5 See Departmental Report 2008, Her Majesty's Revenue & Customs, UK, July 2008 6 See web page www.prinsjesdag2009.nl, 15 september 2009 5

3 Current legislation until 1 April 2010 3.1 Introduction In 1992 the Council adopted Directive 92/12/EEC. The objective is mentioned in the introduction as follows: the establishment and functioning of the internal market that require the free movement of goods including those subject to excise duties. 7 Before this Directive came effective on 1 st January 1993 the borders between the several EU MS still existed and the controls of excise goods took place at the border of each MS. 8 But with the introduction of the internal market the excise duties are levied in the MS, where the excise goods will be consumed, a new legislation and new rules were required. 3.2 Definition excise goods The Directive defines following European excise goods in Article 3: - mineral oils, - alcohol and alcoholic beverages, - manufactured tobacco. The EU law for excise goods is harmonised for these three excise goods categories but the tariffs are not uniformed. Every country implements their own tariffs. The EU law only knows a minimum and maximum tariff for alcohol and tobacco products. Several MS still have additional excise duties, for example coffee and alcopops in Germany and alcohol free drinks in the Netherlands. 7 See Council Directive 92/12/EEC of 25 th February 1992 8 See web page http://ec.europa.eu/taxation_customs/taxation/excise_duties/gen_overview/index_en.htm 6

3.3 Current process for excise movements 3.3.1 Definitions The Council Directive 92/12/EEC starts with general comments before it comes to definitions. When an excise good is released for consumption, the excise duties will be charged, always in the MS of destination. When a private person buys excise goods for his own use the excise duty is charged in the MS where the products are purchased, in the MS of dispatch. The competent tax authorities of each MS gives authorization for producers and storage locations to be an authorized warehousekeeper to make sure that the excise duties are fully paid on time and to the correct value. 9 The competent tax authorities require that audit checks are possible at a later stage. These checks of the movements of excise goods from one MS to another should not affect the free movement within the European Community. With the Directive a procedure for the movement of excise goods under dutysuspension arrangement is established. For the purpose of the chargeability of the duties the national tax authorities need to know how the movements flow; for all movements an AAD needs to be issued. When excise goods are imported into the EU then it is necessary to put them under the same regime excise duties being suspended like excise goods produced in the EU. In the event of an offence or irregularity the excise duties should be collected in the MS where this event is reported or transpired or in the MS of departure. In the Directive 92/12/EEC some definitions are developed in Article 4. The competent authorities of one MS authorise a natural or legal person as an authorized warehousekeeper to produce, process, hold, receive and dispatch excise 9 The spelling of certain definitions are different between Council Directive 92/12/EEC and Council Directive 2008/118/EC. Examples are authorized warehousekeeper and duty-suspension arrangement in Directive 92/12/EEC and authorised warehousekeeper and duty suspension arrangement in Directive 2008/118/EC. In the chapter about the current legislation I use the terminology of Council Directive 92/12/EEC. 7

goods in the course of excise duties being suspended under tax-warehousing arrangements. A tax warehouse is a place where excise goods are produced, processed, held, received or dispatched under duty-suspension arrangement. A registered trader is a natural or legal person without authorized warehousekeeper status. The tax authorities of the MS give permission to receive excise goods under duty-suspension arrangement. It is illegal that the registered trader retains or dispatches excise goods. A non-registered trader is a natural or legal person without authorized warehousekeeper status. Occasionally he receives excise goods under the dutysuspension arrangement. The non-registered trader must guarantee the payment of the excise duties to the tax authorities of the MS of destination before dispatch of the excise goods. According to these definitions the result is that excise goods movements under suspension of excise duty are monitored between tax warehouse(s) and registered traders. This also includes from time to time the movements of excise duty being suspended between tax warehouse and non-registered trader and when excise goods are imported into the EU or they are exported out of the European Community. Later on in the Directive all the requirements are mentioned for the certain operators in the excise good business. From the authorized warehousekeeper national tax authorities require a guarantee which covers production, processing and holding of excise goods. Further requirements are that an authorized warehousekeeper complies with national requirements of the MS where the warehouse is situated, keeps accounts of stock and product movements, produces products when required and consents to all monitoring and stock checks or audits. 3.3.2 Accompanying Administrative Document According to Article 15 the movement must take place of excise goods under dutysuspension arrangement between tax warehouses within the EU. 8

The consignor shall issue an AAD with four parts. Copy No 2, 3, 4 will accompany the excise movement under duty-suspension arrangement. - No 1: The consignor must retain this copy on his records. - No 2: The consignee must retain this copy on his records. - No 3: This copy needs to be returned to the consignor for discharge and must be signed and stamped by the tax authorities of the MS of destination. - No 4: This copy is for the competent tax authorities of the MS of destination. The tax authorities of the MS of dispatch can request that the copy No.3 of the AAD must signed by the national tax authorities of destination. The Directive also states what details, the returned copy to the consignor, must contain. This includes that a copy shall be returned at latest 15 days following the month in which the goods were received. 10 In the case the 3 rd copy is lost the tax authorities can send a request for payment for the full excise duties. In several MS the alternative proof is, when the 3 rd exemplar of the AAD got lost, in the National Law adopted. In the Netherlands it is possible to provide the customs authorities with an alternative proof. The Dutch jurisprudence has confirmed in several cases that the taxpayer has the chance to prove, through similar documents, that the excise goods movement under duty-suspension arrangements is completed or the excise goods are exported. 11 German customs authorities can accept, exceptional for the lost 3 rd copy of the AAD for the movement of excise goods under suspension of excise duty, a duplicate of the AAD or also a combination of alternative documents like - CMR or CIM - Shipping bill - Bill of Lading - Consignment note 10 See Commission Regulation (EEC) No 2719/92 of 11 th September 1992 11 See cases: AV0398, Hoge Raad, 39180, 27 januari 2006 and AT8954, Hoge Raad, 40716, 1 december 2006 9

- Delivery note - Discharge report or - Receipt of payment when they show the main details of the AAD and can convince the main customs office that the excise goods are received. 12 3.4 Summary The current process shows that the monitoring of the documents for each movement of excise goods is the responsibility and honesty of the companies themselves. The companies need to follow-up and monitor the return of the AAD copies within a certain period of time. In case of an audit the national tax authorities check the administration in a company, especially the completeness of the documentation, for all excise movements within and outside EU. Companies must provide the completed and signed 3 rd exemplar of the AAD. At this moment the national tax authorities only receives the information that the excise good movement has transpired or through random checks. Currently the administrative part, controlled by the tax authorities, is only checked afterwards by an audit. National tax authorities require more information during or upfront the excise movement for monitoring and to avoid tax fraud. This was the intention to adopt Decision No 1152/2003/EC and to step over to a computerised system. 12 See Presentation Verbrauchsteuerrecht, Rechtswissenschaftliche Fakultät, Westfälische Wilhelms-Universität Münster, RegDir M. Bongartz, Sommersemester 2009 10

4 New legislation from 1 April 2010 4.1 Background With the Decision No 1152/2003/EC the European Parliament and Council decided on 16 th June 2003 to computerise the movements and surveillance of excisable products. 13 The initiation of this decision was the report to the Directors General for Customs and Indirect Taxation from the High Level Group on fraud in tobacco and alcohol sectors in 1998. The report explains when and where fraud and irregularities with tobacco and alcohol products occurred. The group identified different types of fraud and list them in the report as follows: - smuggled from third countries without being declared - imported from third countries but described incorrectly - legitimate dispatches out of the EU but smuggled back - abuse of the transit system - abuse of the system of movement of excise goods under duty suspension arrangement or export - abuse of the system of movement when excise duties have been paid - bootlegging of excise goods purchased in a low taxed MS. 14 The High Level Group came to the conclusion that tobacco fraud happened more frequently on import or export transactions. Against fraud with alcohol products was more noticeable on intra-community movements. Furthermore the budgetary impact of the lost of excise duties is specified. 15 In the Report of the Commission to the Council precise figures are mentioned. The estimations are that the MS lost revenue as a result of fraud in 1996 to the value of 4.8 billion ECU in total. Broken down it was 3.3 billion for the tobacco sector and 1.5 billion 13 See Decision No 1152/2003/EC of 16 th June 2003 14 See Report to Directors General for Customs and Indirect Taxation from the High Level Group on fraud in tobacco and alcohol sectors in 1998 15 See ditto 11

for the alcohol sector. 16 Second part of the report it outlined the weaknesses in the current system which were analysed: - failure to ensure that existing rules and obligations are fully complied with and trader reluctance to accept responsibilities incumbent on them under duty suspension facilities - insufficient and inadequate co-operation between the tax authorities administration of different MS - insufficient contact and co-ordination with administrations of third countries - inadequate monitoring of criminal organisations - inadequate resource levels and poor resource allocation - insufficient use of modern risk analysis, intelligence procedures or information technology tools The High Level Group gives two main recommendations. The first one is to introduce a computerised system to control and monitor movements of excise goods. The second recommendation is to support the implementation of the New Computerised Transit System (NCTS). It was advised to introduce urgently a prior notification system, an Early Warning System of Excises. 4.2 New process for excise movements 4.2.1 Introduction It took 6 years to adopt the new horizontal Directive. The Council passed the Council Directive 2008/118/EC on 15 th January 2009. The Commission Regulation (EC) No 684/2009 which implements this Directive was adopted by the European Commission on 24 th July 2009. 17 The aim of the new computerised system is to allow the MS to obtain real-time information on excise goods movements and to carry out the requisite checks. This 16 See Report to Directors General for Customs and Indirect Taxation from the High Level Group on fraud in tobacco and alcohol sectors in 1998 17 See web page http://ec.europa.eu/taxation_customs/taxation/excise_duties/gen_overview/index_en.htm 12

includes checks during movement of products. 18 The new Directive 2008/118/EC repeals Directive 92/12/EEC effective from 1 st April 2010. The Council allows the MS a transitional period to introduce the e-ad. The paper AAD ceases to exist on the 31 st December 2010. Some of the definitions are substantiated in the new Directive and jurisprudence is adapted and changes from other Directives between 1992 until now are included. Directive 2008/118/EC specifies more the excise goods mentioning previous Directives related to EU excise goods: - energy products and electricity covered by Council Directive 2003/96/EC - alcohol and alcohol beverages covered by Council Directives 92/83/EEC and 92/84/EEC - manufactured tobacco covered by Council Directives 95/59/EC, 92/79/EEC and 92/80/EEC. 4.2.2 New definitions Compared to the Directive 92/12/EEC, new definitions are introduced in the Council Directive 2008/118/EC, the registered consignee and the registered consignor. The registered consignee gets the authorization, from the competent tax authorities of the MS of destination, to receive excisable goods under duty suspension arrangement from another MS. The registered consignor is authorised to dispatch excise goods under duty suspension arrangement. From 1 st April 2010 the registered consignor is only authorised to import excise goods from countries outside the EU into the EU under suspension of excise duty according to Article 17 b. 19 Companies or businesses, like freight forwarders, need to apply for authorisation in the MS where the import of excise goods will take place. This new rule simplifies the imports of excise goods for all involved economic operators. This means a tax warehouse is no longer a condition anymore. 18 See Decision No 1152/2003/EC of 16 th June 2003 19 The new horizontal Directive refers to Article 79 in Commission Regulation (EEC) No 2913/92 of 12 th October 1992 establishing the Community Customs Code. 13

Article 19.3 describes the temporally registered consignee who occasionally gets excise goods. The competent tax authorities can authorise for limited, time or a limit of transactions, at least for one movement of excise goods. The new Directive gives MS the possibility to define a direct delivery due to Article 17. The excise goods will be delivered directly to a place of an authorised warehousekeeper or registered consignee within the MS of destination. 4.2.3 Electronic Administrative Document From 1 st April 2010 the movement of excise goods under duty suspension arrangement takes place with an e-ad which is processed in the computerised system in accordance with Article 21 Council Directive 2008/118/EC. The consignor submits a draft of the e-ad to EMCS. The tax authorities of the MS of dispatch carry out verification for this movement. When the data is valid the e-ad gets a unique administrative reference code (ARC) assigned and the consignor receives this information back. The consignor provides the carrier with a printed version of e-ad or with another commercial document with the ARC for the excise goods movement. During the movement of the excisable goods the carrier can show the e-ad with the ARC upon request to the tax authorities. After receipt of the excise goods at the destination the consignee sends a report of receipt to EMCS. The tax authorities of the MS of destination carry out an electronic verification in the report on receipt. The acknowledgement of receipt has the same legal value as the signed and returned 3 rd copy of the paper AAD. 20 According to Article 20 the movement of excise goods under duty suspension arrangement commences when the goods leave the tax warehouse of dispatch or the excise goods are imported into the EU. The movement ceases when the excise goods have arrived in the tax warehouse of destination or the excise goods are exported outside the EU. 20 See EMCS information, Functional Excise System Specifications, Taxation and Customs Union Directorate General, 15 th September 2006 14

The tax authorities of the MS of export give the customs office of exit the confirmation of exit via the Export Control System (ECS). This message is transferred to EMCS after the excise movement has been completed. Graphic: EMCS in Practice 21 Article 22 and 23 of Council Directive describe exceptions from this procedure for the movement of energy products. If the consignee, is not known at the moment of dispatch then the tax authorities of the MS of dispatch can allow the consignor to complete a draft e-ad without a consignee, when the transport is by sea or inland waterways. Besides that the tax authorities of the MS of dispatch can allow splitting movements of energy products under suspension of excise duty but within the following rules: - the total quantity of these splits does not change 21 See web page http://ec.europa.eu/taxation_customs/taxation/excise_duties/circulation_control/emcs_practice/index_en.htm 15

- this procedure is allowed in the MS where split takes place and - the tax authorities are informed about the place of the shipment splitting. The Council Directive describes also the rules when EMCS is not available. In general when the computerised system is not working the fallback system is the paper AAD. The same is applicable during the transitional period from 1 st April 2010 until 31 st December 2010, when the sending or receiving of the e-ad, is not implemented in one of the MS the paper AAD will still be valid. 4.2.4 The different phases to introduce the e-ad With the Master Plan the EMCS computerisation project was carried out and in it are mentioned the requirements of the computerised system for the MS and the EU database. 22 EMCS will be introduced within the phases 0 until 3. Phase 0 is the preparation of the introduction of the system in all MS. In this phase from 2002 until now general specifications like System for Exchange of Excise Data (SEED) are developed. It is an Excise Authorisation Verification. Companies can check whether the mentioned tax warehouse number is registered and valid. SEED is already working since October 2006. In phase 1 from 2002 until now the computerisation project is prepared and EMCS systems specifications are defined. In phase 2 from 2006-2010 EMCS is developed and the several phases are implemented. The e-ad can be received on the national excise applications of EMCS. All MS must be in this phase from 1 st April 2010. 23 The next step will be that the e-ad could be sent, changed or cancelled. All MS can be in this phase from 1 st April 2010 and must comply as from 1 st January 2011. In phase 2 additional functions shall be available, like Early Warning System of Excises and Movement Verification System, and will be integrated into EMCS as 22 See Master Plan EMCS computerisation project, Taxation and Customs Union DG, 16 th January 2007 23 See Council Directive 2008/118/EC of 16 th December 2008 16

from 1 st January 2012. All MS must have developed these additional functions for their national excise applications at this time. From phase 1 the MS must ensure a web portal where the companies can send the e-ad. Most of the MS will provide a business-to-business (B2B) connection to the national excise application. The European Commission Taxation and Customs Union estimates that about - 100,000 economic operators will be connected with EMCS - 4, 000,000 intra-community excise goods movements and - 5, 350,000 national excise goods movements will be handled per year in EMCS. 24 4.2.5 Implementation process in the different MS The Directive specifies in Article 48 that all MS shall adopt and publish their implementation of this Directive in national law, regulations or provisions before 1 st January 2010. When the national web pages of the several MS are looked up, there is very little published until today. Most of the MS will come with their implementation as National Law at the latest moment before year end 2009 and with new information beginning 2010. For instance in the Netherlands the implementation of the new Directive was published on 17 th November 2009 as legislative proposal with almost the same content as the Council Directive 2008/118/EC. 25 Article 30 and 31 of the Council Directive allow simplified procedures for frequent and regular movements of excise goods under duty suspension arrangement only on the territory of one MS. When two or more MS are involved a bilateral arrangement needs to be agreed upon. However Belgium, the Netherlands and Luxembourg already announced that they want to keep simplified procedures between their countries in accordance with Council Directive 92/12/EEC and they are negotiating. 26 24 See EMCS News No 1, European Commission Taxation and Customs Union, October 2006 25 See Wijzing van de Wet op de accijns in verband met richtlijn 2008/118/EC van de Raad van 16 december 2008, Ministerie voor Financiën, Nederlande, 17 november 2009 17

Germany uses the implementation of new Directive 2008/118/EC into National Law specifically for the national excise of coffee and alcopops, and to harmonise the excise numbers for the different excise goods for one company tax number. 27 The provisions are adjusted to the Community excise goods but do not introduce EMCS for the movements of coffee and to retain the paper AAD. 28 4.2.6 Link to Electronic Customs With the introduction of EMCS the EU tax authorities are going to connect two electronic systems for tax control and to fight against tax fraud. When an excise good movement under the duty suspension arrangement goes outside the EU, in accordance with Article 25 Council Directive 118/2008/EC, confirmation of exit via ECS is required. The Decision No 70/2008/EC is related to the development in the direction electronic customs within the European Customs Union. 29 The European Parliament and the Council outlined in the Decision that target for a paperless environment for customs and trade is: - to increase the efficiency of the organisation of customs controls, - to ensure the seamless flow of data in order to make customs clearance more efficient, - reduce administrative burdens, - help to combat fraud, organised crime and terrorism, - serve fiscal interests, - protect intellectual property and cultural heritage, - increase the safety of goods and the security of international trade and - enhance health and environmental protection. 26 See Presentation EMCS project, Federale Overheidsdienst Financiën België, oktober/november 2009 27 See web page www.zoll.de, Info-Schreiben der Hauptzollämter zur Einführung von EMCS, November 2009 28 See Entwurf eines Vierten Gesetzes zur Änderung von Verbrauchsteuergesetzen, Bundesministerium der Finanzen, Deutschland, 11. Februar 2009 29 See Presentation Electronic Customs, Postmaster Douane, Europese Fiscale Studies, Johan Stoopen, 12 november 2009 18

For that purpose, the provision of information and communication technologies (ICT) for customs purposes is of crucial interest. 30 Following the latest news about EMCS and the link to ECS it is not clear when both systems will be linked. At the moment the link is anticipated to be available during 2010. A link to the Import Control System (ICS) is not considered essential but would more than enhance the relationship between EMCS and electronic customs applications. 31 4.3 Impact EMCS for the business and tax authorities in the MS 4.3.1 Timeline for implementation At the first stage it was planned to introduce EMCS in April 2009. The Decision No 1152/2003/EC gave 6 years for the implementation of EMCS. The starting point of Council Directive 2008/118/EC will be 1 st April 2010. When the web sites or announcements of the national tax authorities of the MS are checked, the progress of the implementation of EMCS in the several MS may differ. Problems can be foreseen when there is no adequate timeframe proposed for all MS for the different steps of introduction. Every MS handles this in a different way. Belgium declares that e-ad s can be received and sent from 1 st April 2010. 32 In contrast the Netherlands are only ready to receive e-ad from 1 st April 2010 and can only sent as of from 1 st January 2011. 33 Germany announces that receiving e-ad as from 1 st April 2010 will be implemented. Companies can already voluntarily send the e-ad but have to do it for the entire process, from the 1 st January 2011 they are obligated to. 34 UK applies the same procedure. 35 The European Commission published in September 2009 in his Monthly Central 30 See Decision No 70/2008/EC of 15 th January 2008, introduction paragraph 2 31 See web page www.douane.nl; the introduction of ICS is planned in 2012. 32 See Presentation EMCS project, Federale Overheidsdienst Financiën België, oktober/november 2009 33 See Nota naar aanleiding van het verslag wijzing Wet op de accijns, Ministerie voor Financiën, Nederlande, 17 november 2009 34 See web page www.zoll.de, Info-Schreiben der Hauptzollämter zur Einführung von EMCS, November 2009 35 See web page www.hmrc.co.uk see EMCS 19

Project Planning that 19 MS will be ready to receive and send e-ad s and 6 MS are only ready to receive e-ad s from 1 st April 2010. Denmark and Poland already announced that they will not be ready to receive e-ad from 1 st April 2010 and they are going to implement EMCS from 1 st January 2011 in one step. 36 The different time frames for the introduction of EMCS in the different MS have European multinationals to consider. It will be a challenge for them dealing with this because the time frame is quite short for preparing the implementation in the companies. It could be that mainly in the transitional period, from paper AAD to e-ad, the increased administrative burden will be above the average due to two flows which are needed to be maintained. 4.3.2 Information Technology Every MS can decide how they want to implement EMCS on national levels. Some of the MS develop themselves a national EMCS web based portal. Other MS put the development of the national excise applications in the hand of external software developers. That all MS are aligned when they exchange data with EMCS electronic messages are defined in the Commission Regulation (EC) No 684/2009. 37 For instance Swedish tax authorities are resigned to introduce EMCS for national movements of excise goods and they retain the paper AAD for these ones. 38 Also the companies have to make a decision how they want to approach EMCS. It makes a difference if the company is small or large and whether the company, has only a business in one MS in the European Community, or it is a multinational with production or tax warehouses in different MS. They will consider different scenarios and different requirements. Businesses need to make a decision to what is the most effective and efficient software solution. A smaller company with a small amount of e-ads will use the access to EMCS via a national web portal of the competent tax authorities. They request for a reliable and secure web access. 36 See Working Paper CED 698 TAXUD/2009, European Commission Taxation and Customs Union, 16 th December 2009 37 See Annex I of the Commission Regulation (EC) No 684/2009 of 24 th July 2009, Annex II defines all codes for EMCS. 38 See European & Customs Trade Communiqué, Edition 37, August/September/October 2009, Price Waterhouse Coopers 20

Larger companies or multinationals need an overview where and how many e-ad will be handled in the different countries. The final decision depends on this assessment and can vary from MS to MS. For huge amounts of e-ad it will be handier to have separate own web access as a company to EMCS. Such a software application has also the advantage that it could be linked with the company s inventory management of the excise goods. Some MS will certify software which can provide the businesses the access to EMCS. If companies develop their own web interfaces to the national excise application then they have to ask the competent tax authorities for approval to use this software. It is also expected that Enterprise Resource Planning (ERP) systems like SAP will provide an integrated solution. It will link the ERP system directly with EMCS. SAP has not announced yet for which countries such an application will be available. 4.3.3 Administration The 1 st April 2010 has a huge impact for the administrations in the companies and in the national tax authorities. From this date the processes are changed. The companies must to be able to receive the e-ad, to process and to send the e-ad at a later stage. National tax authorities must be able to process and verify the e-ad. The responsible group or person for the excise movement administration within a company needs to decide, with the responsible Information Technologies (IT) department, how to approach EMCS. They need to take into consideration that the time frame for the introduction of the e-ad could be different from MS to MS. The target of the responsible person for excise movements in a company is that they are compliant with the new rules and use the correct reporting tools. Before starting EMCS the new software needs to be implemented where applicable. People who are dealing with excise movements under duty suspension arrangement - in the companies - at load locations 21

- tax warehouses and - at tax authorities need to get training how to use EMCS. Customs officers need to get training, not only for the use the verification for the movements, but also how to handle this new tool for risk control. 4.3.4 Logistic The e-ad will influence the logistic process and certain rules will be applicable. An e- AD can only be cancelled before the excise movement has started. During the movement the e-ad with the ARC needs to go with the shipment. For energy products Council Directive 2008/118/EC allows splitting of an excise movement. Due to Article 10 Commission Regulation (EC) No 684/2009 will apply this rule in EMCS only from the 1 st January 2012. Flexibility is not guaranteed for all scenarios which happen in the day to day business of excise goods movements. In these areas EMCS will constrain the free movements of excise goods within the EU but has disadvantages against the paper AAD. Therefore the paper AAD is still needed. On the other hand the intention of EMCS is the fight against tax fraud by eliminating the possibilities, which the paper documentation gives, room for fiscal fraud, for instance by changing or manipulation. 4.3.5 Finance It depends on which approach for EMCS companies will choose or how complex their businesses are with excise goods movements under duty suspension arrangement in the EU. They will need a budget to implement software to be linked with EMCS or that they can adjust their ERP system. When a company goes for using the web portal of the competent tax authorities there are no costs involved. When a company decides to implement a software application the costs could be more then thousand of Euros. But the introduction costs include also money for the national tax authorities and has impact on the budget of the MS in the coming years. 22

In the report for the implementation of the Council Directive 2008/118/EC into the Dutch law for excise goods it is mentioned that the costs for the introduction of the national excise application in the Netherlands are estimated as follows: - in 2008 6.3 million - in 2009 8 million - in 2010 4.3 million and - in 2011 and 2012 each with 2 million per year. 39 The German Federal Ministry of Finance calculated 25 million for the development and implementation of the national computer system for EMCS. In the draft of the implementation of the Council Directive 118/2008/EC into national German law, is mentioned that they estimate that by trend costs for EMCS, will decrease and it has no influence on the expected prices and the price level of excise goods. 40 4.4 Summary The new Directive does not give an innovative change of the process movement of excise goods under duty suspension arrangement. In general the paper AAD will be replaced by the e-ad and in case of a failure within the introduction period of EMCS the paper AAD will be the back up. EMCS will change the role of the competent tax authorities. In the process of the paper AAD the national tax authorities can only play a role during a tax audit. At this time they check if the 3 rd exemplar of the AAD is returned to the consignor. From the 1 st April 2010 onwards, with the introduction of EMCS, the competent tax authorities of the MS will get an active role during the excise movement process under suspension of excise duty. Both tax authorities in the MS of dispatch and destination will validate the announced excise movement and approve it. 39 See Nota naar aanleiding van het verslag wijzing Wet op de accijns, Ministerie voor Financiën, Nederlande, 17 november 2009 40 See Entwurf eines Vierten Gesetzes zur Änderung von Verbrauchsteuergesetzen, Bundesministerium der Finanzen, Deutschland, 11. Februar 2009 23

Both authorities are able to make risk analysis on real-time data and will be able to monitor the movements where necessary more speedily and efficiently. The tax authorities can also focus on risk control and can address target-oriented controls. Another aspect is that through the introduction of EMCS the EU tax authorities connect different Electronic Customs systems, EMCS with ECS, for tax control and the fight against fiscal fraud. Problems can be foreseen that the risk control system for the tax authorities will be linked later to EMCS. When this happens it will really be the milestone to ensure compliance and fight against tax fraud. 24

5 Rollout EMCS within one organisation 5.1 General overview In the following chapter I want to describe the rollout of EMCS in one company and using the example of a multinational. With this overview I want to show how the process takes places, from the published change of the new law, until the introduction and adaption of the new legal requirements in one company. I am leading a project which has the target that my company is ready for the change from paper AAD to e-ad. My company, LyondellBasell Industries (LBI), is one of the leading producers of fuels, petrochemicals and polymers in the world. LBI is a market leader in the production of Propylene Oxide in the world and a significant producer of fuels and refined products, including bio fuels. 41 Main production plants of the company are located in the United States, Europe and Middle East. The European chemical plants are situated - in the Netherlands: in Rotterdam-Botlek and Maasvlakte - in France in Fos-sur-Mer. The European refinery is situated in France in Berre. The European polymer plants are located - in the Netherlands: in Moerdijk - in Germany: in Münchsmünster, Frankfurt/Main and Wesseling - in Italy: in Ferrara, Brindisi and Terni - in UK: in Milton Keynes and Carrington - in Spain: in Tarragona. The company s objectives for the next year will be more streamline business processes of both previous companies. One milestone will be the integration of the 41 See web page www.lyondellbasell.com 25

two SAP systems from Lyondell and Basell into one common global system as from 1 st July 2010. The SAP project is currently planned but is presently in the development phase. To develop this scope, the project team members are meeting with end users, subject matter experts and IT business leads to understand business process requirements and to identify functional gaps and best practices. During this process the new legal requirements, concerning EMCS and Electronic Customs, are mapped as functional gaps. At the moment every LBI entity in Europe is working with an external software application to be linked with ECS. IT Business Solutions proposed to the project team following business case: all external software applications for ECS in every MS should be terminated and it is suggested to implement the SAP Global Trade System (GTS) for the required Electronic Customs systems. For the EMCS implementation from 1 st April 2010, IT Business Solutions is currently checking which application within SAP can offer the best solution and how it will match the LBI requirements concerning excise goods movements within the EU. 5.2 Project overview LBI uses the IT Enterprise Stage Gate Process as Project Management Framework. It is a process to achieve alignment among stakeholders regarding the problem, solutions and implementation in an IT project. Stakeholder is a person who is positively or negatively impacted by the change, initiative or project. The Stage Gate Process ensures that the right thing, at the right time, is done and looks up-on the strategic and tactical perspective. The Leadership will make a Go or No Go decision at every step. The following stages can be taken in an IT project. - Stage 1; the opportunity is framed. What is the problem we are trying to solve? What are the benefits which we will realise with this project? - Stage 2; the solution is selected. 26

Do we understand the requirements? Have we analysed the alternatives and chosen the best solution? - Stage 3; the solution is designed. How will we implement the solution? - Stage 4; the solution is implemented. Does the solution completely meet the requirements? Is the organisation prepared to act upon the solution? - Stage 5; the solution is implemented. How will we continue to realise the desired results? For the roll-out of EMCS in the European entities of LBI the following steps have already been taken and considered. The flows and procedures of excise goods for the plants in Europe are under assessment. The requirements of national law in the several countries in the European Community are mapped. Basis for the decision is the mapping of all excise goods flows within LBI Europe and the national legal requirements in the MS where plants are located. LBI is involved in excise goods movements under duty suspension arrangements when raw materials are purchased for the production. Benzene, Butane and Propane go in production process of chemicals and polymers. These are excise goods of the category energy products according the Council Directive 2003/96/EC. 42 When these raw materials are received or dispatched for, or out of the production, the company is obligated in accordance with the legislation doing the administration of AAD s. This includes checking the shipment, requesting the signature for the received AAD with the Dutch customs authorities and sending it back to the consignor or alternatively issuing an AAD. During the production process for chemicals in the Netherlands a by-product is Propane and Pentane. These excise goods are sold with excise duty being suspended and an AAD needs to be issued. 42 See Council Directive 2008/118/EC refers to Council Directive 2003/96/EC in Article 1 27

Due to the Dutch law of excise goods it is possible to use the simplified procedures and issue the AAD only once in the month after month end close. The Dutch law allows these procedures when the movements are on regular basis. On stage 2 the following items are on the agenda; checking if B2B software is needed in the several countries of production plants of LBI. The decisions how the several countries will work with EMCS need to be followed-up by the MS where production plants are situated. The decision will be made between using the web portal of the national tax authorities or B2B connection to EMCS directly. The roll out of the new system EMCS requires the implementation of new work processes for the involved people in the company and related third parties. After implementing EMCS the system needs to be maintained due to changes in the production process of LBI or changes in the legislation. At the moment we are carrying out an assessment of the product flows to identify where excise goods go in the production process and where excise goods come out. Target is to get all details about the excise goods movements within the European plants of LBI. The review goes further into the details of the number of AAD s received and sent per month and how they are processed. To get all excise good flows and processes mapped the following questionnaire has been developed and sent to every plant in every countries financial administration. 28

Questionnaire Plant in country : Type of excise goods flows: domestic intra-community import export Nature of movements: arrival dispatch Means of transport: truck ship pipeline other Number of AAD per month arrival: 1-5 5-10 10-20 50 100 dispatch 1-5 5-10 10-20 50 100 Administration of excise goods today manual ERP outsourced Name of the goods with Common Customs Tariff 43 43 See Commission Regulation (EC) No 948/2009 of 30 th September 2009 amending the Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff 29

As an example of a completed questionnaire is one mentioned from the Dutch chemical plants in Rotterdam-Botlek and Maasvlakte. Questionnaire Dutch chemical plants: Rotterdam-Botlek, Maasvlakte Type of excise goods flows: x domestic intra-community import export Nature of movements: x arrival x dispatch Means of transport: x truck x ship x pipeline other Number of AAD per month arrival: 1-5 5-10 x 10-20 50 100 dispatch x 1-5 5-10 10-20 50 100 Administration of excise goods today x manual ERP outsourced Name of the goods with Common Customs Tariff 44 Butane 27111390 Propane 27111294 Pentane 27111294 Benzene 29022000 44 See Commission Regulation (EC) No 948/2009 of 30 th September 2009 amending the Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff 30

As a result from this assessment the Customs group and the IT Business Solution came to the agreement not to look for an external software solution for LBI in the Netherlands. Following points taken into account resulted in this decision. The AAD administration belongs to the business process of the raw materials purchase. The Raw Material Coordinators are responsible for certain products and are decentralised at every plant within Europe. With the introduction of EMCS the requirements of the process itself have not been changed. The Raw Material Coordinators only issue an e-ad instead of a paper AAD. The number of received and issued AAD s in the several EU countries of LBI production does not justify the need to choose an external software solution. E-AD s can be easily handled via web access of the competent tax authorities. Especially in the transitional period, from paper AAD to e-ad from April to December 2010, the Management has decided to retain the current process of the paper AAD. Another reason is that the company has sets the priority for IT Business Solutions on the SAP integration in Europe on 1 st July 2010. IT Business Solutions retain the right to change the decision by end 2010 and will check external software applications once more. 31

6 Conclusion The question was to describe the EMCS which will be implemented from 1 st April 2010 and to show what impacts this computerised system has for companies and tax authorities and finally to review that the EMCS is not impeded by the free movements of goods within the EU. The new Directive focuses on the monitoring of excise goods. The process itself has not changed. The MS have chosen not to take any risk. The wish is to develop an EU wide computerised monitoring system but not to choose for one centralised data system. Every MS has the freedom to work out his own national excise application and to do it using a different approach. Few of the MS have chosen to develop the national excise application with their own internal resources while others have engaged external software developers. EMCS is a complex conglomerate of different software solutions which are linked with the central European database. That makes the working process for data transfer and the clearing of the data more complicated. Another disadvantage is if users in the companies, who do the administration for different countries they need to be aware of different software applications. It can happen that the system in total works inefficiently due to technical difficulties. At the moment these difficulties were noticed with the ECS which was introduced in 2008. The confirmation of exit message does not reach the European central database and the export declaration does not get the confirmation of exit back from the office of exit. Currently 20% of the export declarations in the Netherlands are without confirmation of exit. 45 This means that about 20% manual workarounds are needed to be actioned and paper documentation to be maintained with alternative documents, like CMR s or import declarations, to prove the export and the 0% VAT rate on the invoices. The target of this Electronic Customs system is not really designed to reduce the 45 See web page www.douane.nl 32

administrative burden as long as the system is not 100% reliable. The software developers are still working on it to get the system in a more steady state. The working group Taxation and Customs did not consider other possibilities to reduce tax fraud. According to the Press Releases in 2004 and 2008 the main reason is the different tariffs of the EU excise goods in the different countries. Until now the MS could only agree with minimum and maximum tariffs. Within the next years the MS could agree that tariffs for alcohol and tobacco will cover a smaller range. 46 In 2004 the European Commission declared in his debate that the wide range of divergences in rates of excise duty and VAT between the MS, together with the frequently high tax burden on the products relative to their underlying value, constitutes an opportunity for legitimate cross-border shopping but also an incentive for fraudulent transactions and smuggling. A none uniformed tariff for EU excise goods will always give room for fiscal fraud and will continue to do so in the future. The distortion of competition for excise goods can not be erased by a European monitoring and controlling system. EMCS can deter the possibilities for fiscal fraud. The introduction of EMCS could be especially, in the beginning, be a stumbling block due to more administration and less available scenarios in EMCS and the fact that EMCS will be linked later to Electronic Customs like ECS. 46 See IP/04/669 Alcohol taxation, European Commission Taxation and Customs Union, 26 th May 2004 and IP/08/1149 Tobacco products, European Commission Taxation and Customs Union, 16 th July 2008 33

Abbreviations AAD ARC CIM CMR E-AD ECS EMCS ERP EU IT LBI MS NCTS SAP GTS SEED UK VAT Administrative Accompanying Document Administrative reference code Convention relative aux transports internationaux ferroviaires, in English: Convention concerning International Carriage by Rail Convention relative au contrat de transport international de marchandises par route in English: Convention on the Contract for the International Carriage of Goods by Road Electronic Administrative Document Export Control System Excise Movement Control System Enterprise Resource Planning European Union Information Technologies LyondellBasell Industries Member State(s) New Computerised Transit System SAP Global Trade System System for the Exchange of Excise Data United Kingdom Value Added Tax 34

Bibliography - Council Directive 92/12/EEC of 25 th February 1992 - Commission Regulation (EEC) No 2719/92 of 11 th September 1992 - Decision No 1152/2003/EC of 16 th June 2003 - Council Directive 2008/118/EC of 16 th December 2008 - Commission Regulation (EC) No 684/2009 of 24 th July 2009 - Decision No 70/2008/EC of 15 th January 2008 - Commission Regulation (EEC) No 2913/92 of 12 th October 1992 - Council Directive 2003/96/EC of 27 th October 2003 - Commission Regulation (EC) No 948/2009 of 30 th September 2009 - Press notice Europe Rapid Midday Express, European Commission Taxation and Customs Union, 16 th December 2008 - Departmental Report 2008, Her Majesty's Revenue & Customs, UK, July 2008 - Report to Directors General for Customs and Indirect Taxation from High Level Group on fraud in the tobacco and alcohol sectors, 19 th May 1998 - Master Plan EMCS computerisation project, Taxation and Customs Union DG, 16 th January 2007 - EMCS News No 1, European Commission Taxation and Customs Union, October 2006 - Nota naar aanleiding van het verslag wijzing Wet op de accijns, Ministerie voor Financiën, Nederlande, 17 november 2009 - Wijzing van de Wet op de accijns in verband met richtlijn 2008/118/EC van de Raad van 16 december 2008, Ministerie voor Financiën, Nederlande, 17 november 2009 - Entwurf eines Vierten Gesetzes zur Änderung von Verbrauchsteuergesetzen Bundesministerium der Finanzen, Deutschland,11. Februar 2009 - Presentation EMCS project, Federale Overheidsdienst Financiën België, oktober/ november 2009 - Working Paper CED 698 TAXUD/2009, European Commission Taxation and Customs Union, 16 th December 2009 35

- European Customs & Trade Communiqué, Price Waterhouse Coopers, Edition 37, August/September/October 2009 - Presentation Electronic Customs, Johan Stoopen, Postmaster Douane, Europese Fiscale Studies, Erasmus Universiteit Rotterdam, 12 november 2009 - Info-Schreiben der Hauptzollämter zur Einführung von EMCS, November 2009 - EMCS information, Functional Excise System Specifications, Taxation and Customs Union Directorate General, 15 th September 2006 - IP/04/669 Alcohol taxation, European Commission Taxation and Customs Union, 26 th May 2004 - IP/08/1149 Tobacco products, European Commission Taxation and Customs Union, 16 th July 2008 - Presentation Verbrauchsteuerrecht, Rechtswissenschaftliche Fakultät, Westfälische Wilhelms-Universität Münster, RegDir M. Bongartz, Sommersemester 2009 Cases - AV0398, Hoge Raad, 39180, 27 januari 2006 - AT8954, Hoge Raad, 40716, 1 december 2006 Web pages - web page of the European Commission Taxation and Customs Union http://ec.europa.eu/taxation_customs/taxation/excise_duties/gen_overview/index_e n.htm - web pages of several MS of the EU: - Germany: http://www.zoll.de/b0_zoll_und_steuern/b0_verbrauchsteuern/index.html - Netherlands: http://www.douane.nl/zakelijk/emcs/ - Belgium: http://fiscus.fgov.be/interfdanl/nl/index.htm - UK: http://www.hmrc.gov.uk/index.htm - web page www.prinsjesdag2009.nl - web page www.lyondellbasell.com 36