Visiting liquor stores and tobacconists

Dutch Customs is getting a firmer handle on points of sale for excise goods. The effect: more compliance, less distortion of competition.

An important part of Dutch Customs enforcement package covers the monitoring of points of sale for excise goods – AVPs. The agency is increasingly getting a handle on these companies and the products they offer. Customs officials Dirk Dennebos and Gerard Klaver explain their approach. “If you want as much compliance as possible, you need to prevent distortion of competition.”

Dutch Customs began focusing on properly organising the monitoring of license holders in the world of tobacco and alcohol at the start of the century. Two years ago, the agency decided to home in on AVPs – unlicensed stores, including supermarkets, petrol stations, liquor stores and tobacconists, that sell excisable goods. Because a number of them were failing to meet their obligations or committed fraud.

Unknown means untaxed
Klaver: “The initial question for us was: how many AVPs do we actually have nationwide? It turned out to be 110,000 – more than we had expected. It includes shops that are not part of a chain, and within this group we see an increased risk regarding the sale of alcohol and tobacco on which no excise duty has been paid.”
Dennebos: “But we were not there yet. On top of those 110,00 AVPs, an estimated 25,000 small companies are known to the Chamber of Commerce under another sector-specific code. So these are missing when you only focus on companies in the Chamber of Commerce database that sell products subject to excise duty. For example, members of our Physical Supervision team found a garage that also sold spirits but did not pay excise duty.”

Lack of knowledge
The segregation of duties at larger companies with a joint purchasing group usually offers a reasonable guarantee for compliant behaviour, according to Dennebos. “It is different for small business, however. For example, there are shops that specialise in the sale of products from the country of origin of their customers, such as Polish vodka or beer. Regular supermarkets only partly fulfil this demand.” “There is nothing wrong with doing trade, of course”, states Klaver. “But not everyone knows the rules, and this leads to an increased risk. Take wholesalers who do not pay consumption tax on imported soft drinks, for example. Or small supermarkets selling cigarettes, alcoholic and non-alcoholic beverages for which little or no excise duty or consumption tax has been paid in the Netherlands.”

Dennebos: “We pay around € 6.50 for a pack of cigarettes, but in some Member States it’s only € 2. In Moldavia, a packet of Malboro costs a mere 80 or 90 eurocents. There is a lot of profit in this. Moreover, the difference results in a production that increasingly focuses on other EU countries rather than just on the domestic market. And meanwhile, they do not pay tax or duty in any of the Member States. On the beer market, too, fraudsters seize their chance. Some brands do not have their own brewing kettles and have their product brewed elsewhere. Now, this doesn’t automatically mean fraud is being committed, but sometimes it concerns beer that for which no duty is paid at all, and it is therefore offered at too low a price. For example, just across the border with Germany liquor dealers can buy a keg of beer that costs half of what it should fetch here.”

Information and prosecution
Evading excise duty is not always a matter of intent, Dennebos points out. “Some AVP owners simply do not know any better. Moreover, entrepreneurs who come from areas with a corrupt government and a different fiscal morality are also more likely to deviate from the Dutch legislation. When you come from a country where bribery is normal, then you probably think it works that way.”
“The foundation of our enforcement pyramid continues to be providing a service”, says Klaver. “We want to inform and educate the business community through corrections, assessments and fines, where necessary. That’s good for all players. “If you want as much compliance as possible, you need to prevent unfair competition.”

Of course, part of this problem is caused by people who knowingly violate the law. Dennebos: “Some AVPs are actual con artists, others are the final element in criminal organisations that use a company for money laundering or other illegal purposes. We come down on these bad guys like a ton of bricks.”

Changed attitude
Good monitoring is all about working together with the bona fide businesses and enforcement partners, according to Dennebos and Klaver. “Our work has a significant overlap with that of the tax authorities,” states the latter. “After all, someone who illegally sells products subject to excise duty also doesn’t pay sales tax. By sharing information, you can monitor things more effectively. That is why we also exchange indicators with the police, and we have invested in good contact with the Fiscal Intelligence and Investigation Service. We are also joining forces with the tobacco, beverage and oil industries. And through the excise duty fraud hotline, individual entrepreneurs can report their suspicions of unfair competition. That helps tremendously. When we held a presentation about the hotline on the Tobacco Retailers’ Expo two years ago, people were still saying they were not going to snitch on their neighbour. Now we’re glad to see that this attitude has changed. If customers increasingly go to the supermarket down the road instead of your own business to buy entire cartons of cigarettes on which no excise duty has been paid, you’ll suffer from it financially.”

Dutch Customs not only seizes smuggled cigarettes at AVPs. Dennebos: “We also find cigarettes manufactured at illegal production sites, predominantly from Eastern Europe. And water pipe tobacco, which almost exclusively comes from the United Arab Emirates.”

Desired effect
Now the target group has been identified, Dutch Customs wants to start differentiating monitoring activities and visit the right customers based on risk analyses. “A large percentage doesn’t need to be checked physically, you can deal with them in administrative ways,” states Dennebos. “Last year started paying return visits to companies that we previously visited. On the whole, you find around 6 percent relapses; 94 percent is doing things right. An excellent score. It means that your enforcement strategy has the desired effect, as companies adapt their behaviour.”

Tracing back to the source
To prevent the evasion of excise duty, Customs also looks at other links in the chain. Klaver: “We mainly rely on so-called reinvestigation: where do products come from, where are they hidden from regular monitoring? When excise goods are moved from Poland to the Netherlands, for instance, we try to find out if that particular Polish supplier has also supplied other sites in the Netherlands. If so, we check to see if excise duty has been declared. If this has not been done, this is a reason for us to check this. There may be plausible reasons for this – if an intermediary is involved, for example.”

“Previously duty was charged on the number of illegal excise goods that were found, then a fine was added on top”, Dennebos explains. “But there were plenty of entrepreneurs who did not change their behaviour. When you visit AVPs, you may find a few illegal cartons of cigarettes and some liquor at most. Just like coffee shops, they are supplied in stashes by couriers who travel back and forth between the point of sale and a storage site. That’s why, in addition to these AVPs, we also target these storage sites for so-called related checks. An approach like this, which means you are basically counting back from the number of sugar cubes to the amount of coffee that was poured, has been standard practice at the Dutch Tax Administration for some time. For example, a staff member got excellent results in Amsterdam at a hookah lounge. Instead of looking at the amount of shisha tobacco he found to determine the amount of duty, which would be around 83 Euro per kilo, he used the amount of coals needed to smoke one session's worth. This resulted in an additional payment of a few million Euro.”

Although the results are encouraging, Customs NL is not there yet, according to Dennebos and Klaver. “We are currently working on a national project to deal with the shift from bricks to clicks, ergo sales via the Internet. Retail has been suffering from this more and more, as has the Treasury. So we have our work cut out for us.”

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