5th Report of Market Access Ombudsman Council (March 17, 1998)

7-(2) Improvement of post-clearance audit methods

1. Complainant: Tokyo Chamber of Commerce and Industry

2. Ministry concerned: Ministry of Finance

3. Background:

(1) Consumption tax

1) Post-clearance audit methods
Post-clearance audits of the consumption tax carried out by customs officials are based on the right of those officials to ask questions (as described in 2] below) about ledgers and documents, etc. in which information must be recorded and which must be preserved (for example, records on corporate taxes and consumption tax must be preserved for 7 years), as called for under the Consumption Tax Law and other laws.

2) Customs officials' right to audit through questions, etc.
When it is necessary to conduct an audit of consumption tax, customs officials have the right to question individuals receiving taxable goods from bonded areas, or to inspect the taxable goods, ledgers and documents, and so on (Consumption Tax Law, Article 62, Clause 3). Individuals declining to answer questions, who answer untruthfully, who refuse to allow the officials to carry out their duties or hinder their duties, or who otherwise object are liable to a fine of ¥100,000 or less (Consumption Tax Law, Article 68).

(2) Customs duties

1) Post-clearance audit methods
Post-clearance audits of customs duties carried out by customs officials are based on the right of those officials to ask questions (as described in 2) below) about ledgers and documents, etc. in which information must be recorded and which must be preserved, as called for under laws other than the Customs Law.

2) Customs officials' right to audit through questions, etc.
When it is necessary in the conduct of their duties, customs officials have the right to question importers, within the scope deemed necessary, ledgers and documents about goods imported, or to inspect the goods (Customs Law, Article 105, Clause 1, main text and sub-section 6). Individuals declining to answer questions, who answer untruthfully, who refuse to allow the officials to carry out their duties or hinder their duties, or who otherwise object are liable to a fine of ¥500,000 or less (Customs Law, Article 114, Section 5).

(3) Additional Tax

Given that post-clearance audits by customs officials have tended to be found cases of underfiling return in tax, additional tax for deficient returns and additional tax for no return or after due date to internal consumption tax and tariff have been introduced since October 1997 on imported goods, in order to maintain fair imposition of duties and other taxes on taxpayers and to encourage accuracy in self-assessed taxation.

When a customs audit determines that a self-assessed filing return was inaccurate and a corrected or revised declaration is filed, the additional tax for deficient returns are, in principle, the additional tax amount in the revised declaration multiplied by 10% (for some specific amounts, 15%) (Customs Law Article 12-2, Clause 1). Additional tax for no return or after due date when no declaration has been made by the time of import on goods requiring a tax declaration, and when the amount of tax is determined or when a revised declaration is filed after the amount of tax is determined through a customs audit, are the amount of tax to be paid after determination of said amount, or filing of a revised declaration, multiplied by 15% (Customs Law Article 12-3, Clause 1).

4. Complaint:

(1) Need for consumption tax audits

Post-clearance audits are conducted for import declarations relating to the consumption tax, but from the viewpoint of balance between imports and exports, to importers who end up receiving a deduction or a tax refund for the consumption tax on goods stocked, after filing a revised declaration, the audit represents a considerable burden. Therefore, companies targeted for audits relating to the consumption tax should be selected appropriately.

(2) More appropriate targeting for post-clearance audits

The Tokyo Customs Bureau conducts post-clearance audits of all head offices within its jurisdiction once every four years, and all documents relating to goods which have transited customs elsewhere must be kept in Tokyo. Further, since the target of audits varies depending on the fiscal year, businesses are expected to keep track of large quantities of documents, including bank remittance slips, currency rate certificates, suppliers' invoices, invoices outstanding, etc. Audits should be restricted to cases involving sums over specific amounts, and not cover all cases.

5. Results of deliberation:

Post-clearance audits should be carried out using methods which do not merely accommodate the auditing side, but should also take into consideration the costs of preparation and the work efficiency of the parties being audited, i.e. the taxpayers. The ministry concerned asserts that it only requires the minimum amount of documentation necessary. However, the feeling of the Complainant is that compared to the documents actually examined during the audit, the volume of documentation which must be made available is extremely large, and taxpayers are forced to bear an unnecessarily heavy burden.

The introduction of newly additional tax for tariffs and the consumption tax in October 1997 is likely to increase the incentive for taxpayers to file accurate declarations in self-assessed taxation. Accordingly, some believe that there is room for loosening tariff audit methods.

The ministry concerned states that it audits companies with a good record of filing declarations less frequently. This is a praiseworthy action, but it should take other measures, for example, clarifying the documents required, and so on, to encourage importers to file declarations accurately and to reduce the burden imposed on them.

Although documentation stored on floppy disks and other media is already being used in the audits, considering that the Corporate Tax Law allows records to be preserved on electronic media, as recommended in the 4th Report of the Market Access Ombudsman Council (March 17, 1997), use of information in this format should be further promoted.

Based on the above, our recommendations to the ministry in this case are as follows:

That a study should be undertaken immediately concerning tariff audit methods, including how ledgers and documents should be subject to audit and how stored in electronic data forming part of those documents is used, enhanced public relations concerning inspections, and so on, from the perspective of lightening the burden on taxpayers and improving the efficiency of tax collection, and that a conclusion be reached during 1998.

Government decision (March 23, 1998)

4-(2) Improvement of post-clearance audit methods

Study will be undertaken immediately concerning post-clearance audit methods, including how ledgers and documents inspected are used, how stored electronic data forming part of those ledgers and documents is used, enhanced public relations concerning inspections, and so on, from the perspective of lightening the burden on taxpayers and improving the efficiency of tax collection, and a conclusion will be reached during CY 1998.