A. Assessment of Customs Value

8. Assessment of customs value is based on an outdated legal and regulatory framework. The actual Customs Act (1984)⁵ in its article 34 uses the Brussel Definition of Value (BDV)⁶ as a basis for the assessment of the customs value of the imported goods. BDV treats customs value as the price at which the goods would be sold. The essential elements being price, time, place, quantity, and commercial level. In most cases, the BDV artificially inflates the cost of imported goods and negatively impacts the final price to consumers. The use of the BDV is not in line with the international standards. Iraqi authorities should consider the use of the “transaction value” outlined in the WTO Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade (1994), also known as WTO Valuation Agreement.

9. The assessment of customs value at GCA is completed by one or two units as per the case. The assessment process starts with the customs affairs unit at the border crossing point (BCP) who is responsible of the admissibility of the customs declaration by reviewing the correctness of submitted information (name of the importer, name of the seller, imported products, etc.). The physical inspection follows this activity. In the cases where the frontline posts customs officers could not assess the customs valuation of the imported goods for any reason (e.g., new imported products, lack of information), the related declarations are referred to the “valuation determination unit” at the GCA headquarters (HQ) for more analysis and final assessment. Like many other countries, assessment of customs value for imported cars represents the most difficult challenges.

10. As long as the declared import value does not exceed the value stored in the value database by five percent, the assessment of customs value is based on the declared value of the imported goods supported by the commercial invoices.⁷ Otherwise, the declared value will be rejected by GCA and subject to a fine at a fixed amount of 750,000 Iraqi Dinars,⁸ and the value database’s data will be used for duty calculation. The practice is known as “minimum price”.⁹ GCA HQ Value Database Committee is managing and updating the value database. Besides, GCA unilaterally applies unique and arbitrary fixed rates for insurance and freight cost which also comprises customs value: 1.25 USD per ton for insurance and 2,500 USD for freight cost.

11. The “minimum price” is not in conformity with the International standards. Value information stored in the database should not be used as minimum prices, but for risk management purpose through which import with declared value lower than the value data may be tested if it is normal trade transaction (e.g., no dumping, no special relationship between the seller and the buyer, no business agreement on commission and royalty, etc.).

12. At this moment, GCA may not have challenges in under-invoicing, but likely over-invoicing. GCA applies minimum price so that under-invoicing would be rejected. To the contrary, over-invoicing is likely used by traders to illegally transfer the hard currency abroad. Based on our discussion with the Iraqi customs officials, it has been revealed that for a large number of import transactions, the amounts transferred through the Iraqi Central Bank, as a payment for the imported goods exceeded the amounts of the declared customs value. The excess amounts are generally used either for investments in foreign countries’ markets or repatriated to Iraq to be sold in the local hard currency black market. GCA hopes that the future implementation of the Automated System for Customs Data (ASYCUDA) world with interface with Central Bank will offer a comprehensive and definitive solution to this issue.

13. The STX did not examine whether or not Iraqi tax laws regulate cross border profits shifting, but It advised that GCA should start discussion with the Iraqi tax administration about how it can support the fight against cross-border profit shifting. Together with the tax administration, GCA should develop their own approach to tackle cross border profit shifting by using international standards and good practices¹⁰ as available technical sources.

B. Assessment of Tariff Classification

14. GCA needs to enhance its capacity to conduct goods classification for tariff rate application in a manner of uniform application and interpretation. Until 2016, a flat tariff duty rate of five percent was applied to any imports and there was no need for classifying goods. The situation changed in 2016 by the introduction of a multiple tariff rates schedule ranging from zero to 80 percent. Since 2018, partly due to weak GCA capacity in goods classification, the tariff structure has been simplified with four customs duty rates: 0, 10, 15, and 30 percent.

15. Before the customs import declaration, import goods classification is needed for the use by other government agencies regarding import certificates, licenses, quota eligibility, and hard currency control. For some of these objectives, “The State Company for Iraqi Fairs and Commercial Services”¹¹ confirms goods classification in the application. In some rare cases, the importer and the Iraqi Fairs and Commercial Services does not agree with the goods classification, GCA is invited to give its opinion to them. Import declarations and these import supporting documents must contain Iraqi goods classification code based on Harmonized System (HS).

16. Once the customs import declaration is placed, the tariff classification assessment is conducted in two phases. In the first phase, BCP assesses the classification, which is then reviewed by HQ’s “Tariff Verification Unit”. Customs assessment on tariff classification is based on GCA’s assessment with information provided by the importer, the research and investigation on the characteristics of the imported product, following the General Rules for the Interpretation of the HS which is the internationally established standard.¹² A fine at a fixed amount of DI 750,000 is imposed for any discrepancies between the declared tariff classification and the assessed one.

17. The second phase starts when all the customs declarations are sent for desk transactional audit at the tariff verification unit. The purpose of this review is not to ensure the accuracy of tariff classification assessment. Rather, it is to ensure that the calculation of the customs duties and related charges are accurate. Both phases lack coherence, uniformity, and clear procedures on the General Rules for the Interpretation of the HS. This results in a significant number of inconsistency and discrepancies between the two phases. Thus, a high number of new reassessments are regularly generated.

18. The collection of debts due, following the recalculation of the sums owed in customs duties, taxes, and related fees, are causing real concern to GCA. The lack of staff,¹³ the use of manual and outdated collection procedures and the difficulties to track and trace the non-compliant importers, cause delays and raise many concerns about collecting the amounts. Some of them will be extinguished before the end of the collection process as per the statutory extinctive prescriptions for the customs action penalty limited to 3 years.¹⁴ Other issues that exacerbate the situation is the actual delays in proceeding with the audits. The tariff verification unit is currently reviewing customs declarations for 2018 and 2019.

19. No customs or certified independent laboratories are in place to ensure assessment accuracy of the tariff classification of the imported goods. In some instances, a complete lab analysis may be required to accurately determine or confirm the good’s composition. Many Customs Laboratory Guides which provides several practical advice in setting up and operating modern customs laboratory are freely available.

C. Assessment of Goods’ Origin

20. All exports to Iraq need valid certificates of origin that must be authenticated and legalized by the Iraqi representatives in the export countries which is mandatory supporting document of the import declaration.¹⁵ In case of non-compliance with this requirement, the imported goods can still be released if appropriate guarantee, which covers the related customs duties and charges provided. These documents are transmitted by the Iraqi representatives in the export countries to the General Commission for border crossings in Iraq¹⁶.

21. Iraq has decided to withdraw from all free trade agreements which it has acceded¹⁷, except one with Jordan. As a result, declarations applying to the preferential tariff rates are almost non-existent and no substantial needs to examine the goods’ origin. Also, consular visa on certificate of origin may authenticate the document, but it does not assure the contents are just because Iraqi representative offices unlikely have capacity to check the contents of certificate of origin. During this STX assignment, no unit in GCA is accountable of the objective of the current process of certificate of origin and determination of goods’ origin. Except goods coming from Jordan, goods’ origin information may be used only to comply trade statistics which applies non-preferential rules of origin.¹⁸

A. Appeal Mechanism

23. The appeal mechanism regarding the decisions on customs valuation, determination of goods’ origin, and tariff classification has been reinstated after over a decade of suspension.²⁰ Appeal mechanism is stipulated under the Customs Act (1984), particularly in Articles 74 to 77. The current customs clearance procedures, mostly based on predeterminations, and the ban on logging an appeal once the imported goods are still under the custody of the customs administration, leaves very little room for contesting decisions relating to the determination on the customs value, rules of origin and tariff classification.

24. In addition to clarification of appeal mechanism, discrepancies between Iraqi customs appeal mechanism and those stipulated in international standards should be addressed in customs law revision. Modern appeal mechanism is well described in the international conventions which is designed to improve predictability and accountability as well as uniformity in the rulings and widely accepted by authorities and traders of many countries²¹ – Iraqi authorities would benefit from them and have no need to reinvent the wheel. Discrepancies are, among others, in eligible time period for appeal after the original decision is made by GCA, eligibility of judicial appeal as last resort after the administration appeal was one placed; possibility of release of goods with guarantee while the appeal case on that goods continues; who to handle the appeal in the GCA; and who to bear the cost. Upon the legal framework is modified in line with international standards, associated SOPs should be developed, and proper training and awareness raising would be provided both GCA staff and traders.

B. Use of Information and Communications Technology

25. Being aware of the benefits of applying ICT to customs procedures and processing, GCA recently selected ASYCUDA World for its customs clearance ICT system. Once properly introduced and used, the system will provide significant changes in the customs operations and services to the stakeholders through accurate trade data, improved flow of information, reduced manual workload, streamlined procedures, and targeted control, which will strengthen the compliance, ensure national uniformity in interpretation of laws, increase efficiency and transparency, and demotivate corruptive practices.

26. The timeframe for implementing the new ICT solution is expected to start in the second quarter of 2021. A total of 84 months was planned for the entire project to be implemented. The following lessons learned from the other countries’ projects would be of interest of Iraqi authorities.

27. Strong capacity in project management and procurement management are quite important. United Nations Conference on Trade and Development will provide ASYCUDA software free of charge and likely provide TA experts which contract would be based on the number of days bound in the country. It would be the beneficiary’s responsibility to prepare infrastructure (e.g., data server center building), procure ICT equipment and supporting software/middleware, arrange telecommunication services, for which usually customs do not have experience and expertise. Often government level procurement authority will intervene, adding time for procurement clearance. Poor project management will easily end up with a substantial delay in the progress which will inflate the cost of United Nations Conference on Trade and Development TA experts regardless they are working or waiting for the progress in part of Iraqi authorities.

28. Change management and monitoring mechanism is imperative. This ICT system installation project will bring about revolutionary change in both customs and the traders in terms of working methods and mind-sets. Well planned series of awareness-raising and training are imperative both for customs officers and traders’ staff. Monitoring of readiness during the preparation as well as way of use after the launch is also important to maximize the effects of use of ICT. If optional components are also included in the project (e.g., e-payment, manifest, transit, warehousing), pertinent stakeholders, such as commercial banks and maritime transport agents, container terminal operators, cargo freight forwarders, must be covered too.

29. Customs law revision must be realized along with the ASYCUDA installation. If customs law revision delayed, there would be a situation where ASYCUDA can provide modern customs procedures from which both customs and traders would benefit but cannot activate them because the law does not allow doing so.

30. Review and change the import clearance documentation and workflow, namely, business process engineering (BPR) should be conducted along with the ASYCUDA installation project. Without BPR, ASYCUDA may retain obsolete procedures, simply changing paper format to electronic format and retain redundant/unnecessary processes, significantly undermine the benefits of automation. Once automated, system modification will become costly, ironically demotivating further reform and modernization. New system must have new procedures – therefore BPR to design and prepare new procedures and new processes must be made at an early stage of ICT system installation project. Issues of selectivity based on risk management is discussed in next sub-section.

31. Interface with tax administration should be considered in addition to interface with other trade-related government agencies. Like trade single window in other countries, interface with trade-related ministries and logistic service providers is discussed in Iraq²². An interface with tax administration appears less discussed (in case when ASYCUDA is under trade facilitation project). In Iraqi context, there is a project for a new tax administration ICT system. Synergy and collaboration should be sought between the two projects. Also, development and better management of tax identification number should coincide with ASYCUDA installation project. Reporting to the treasury system is usually an integral part of the project.

C. Risk Management

32. GCA does not assess the compliance risks to target high-risk declarations with respect to trade compliance related to customs valuation, rules of origin and tariff classification. The current practice requires a 100 percent documentary verification and physical inspection. This situation stretches out the precious GCA’s human resources and makes trade transactions costly, undermining Iraqi economic competitiveness as well as each control becomes shallow to detect irregularities. Very limited feedback from physical inspection results create uncertainty of staff’s performance and integrity. Lack of ICT capabilities of selectivity based on risk management explains this situation.

33. During the ASYCUDA World installation project, GCA needs to reframe its current approach of control to targeting based on risk management. GCA will develop risk profiles by commodities, traders, origin and their combination and a mechanism to set selectivity criteria in ASYCUDA World, improved by accurate control result reporting and intelligence report, and KPIs. Similar approach should be applied to targeting PCAs. Risk management processes and internal procedures need to be developed and dedicated unit should be created in the GCA’s organizational structure. For the medium term, GCA will explore new advanced approaches like data mining that refine selectivity and work on more broader compliance management, such as advance electronic information, and Authorized Economic Operator program.

D. Post-Clearance Audit

34. The Customs Act (1984) does not provide legal basis for PCA. GCA does not have legal authority to ask the traders for supporting documents after the import clearance, and the traders are not obliged to keep business records relating the import. Moreover, GCA has apparently few needs of PCA at this moment as it controls all the declarations at the importation. As consequence, GCA does not conduct PCA.

35. Customs law revision should create legal basis for PCA. Such legal base should empower the GCA to conduct audit and, if any discrepancy found, recuperate duty due after the import clearance, obliging the traders to retain clearance-related documents in an acceptable form for certain years backed up by substantive penalty if they do not retain the documents. GCA also needs to develop objectives of PCA and prioritization among the objectives: e.g., replacement of certain documentary verification at the timing of importation; verification of appropriateness of selectivity criteria of ASYCUDA World (in future); assessment of business agreements impacting customs value, e.g., on commission and royalty; inventory check of bonded warehouse, end-use verification for certain duty/tax exemption program; and, in case (e.g., Authorized Economic Operator in future), assess the compliance capacity in terms of infrastructure, business process and management; and verification of import eligibility (e.g., certificate and license).²³

36. In parallel to customs law revision, GCA should start preparing future PCA. GCA will need to organize a series of awareness raising events and training both to its staff as well as the traders. It will create perhaps three to four PCA teams strategically and geographically allocated with means of transport. PCA teams should have good knowledge on customs valuation, rules of origin and tariff classification as well as knowledge on corporate book (e.g., inventory records, financial transaction records, corporate accounting software) and audit skills which usually customs officers do not have expertise and need training. A policy between desk audit and site-visit audit is also needed. Utmost attention should be placed in integrity: PCA will send staff to the trader’s premises in a closed environment which is regarded vulnerable against corruption.²⁴

37. PCA, among others, will benefit from collaboration with domestic tax administration. Such fields are, for example, training on how to read corporate books and audit skills, exchange of high compliance risk profiles, taxpayer and importers registration management for better targeting on risk management. Such collaboration will help GCA tackle the spread of the informal economy, the high rate of ghost traders, the widespread of fake invoices and related false information, duplication of packing list, etc.

E. Training and Communication

38. GCA does not have a comprehensive training strategy, training plan and capacity, including those for customs valuation, rules of origin, and tariff classification. There is no training center or institute dedicated to customs officers’ training. Currently, some voluntary experienced customs officers provide occasional and incremental basic training²⁵.

39. Training plan and training material should be carefully developed in the context of Iraq. The objective of training must be clearly identified: training for daily operations; awareness-raising as part of change management; training to develop new SOPs; preparation of new system; preparation of new SOPs, etc. Iraq is being introduced new law and new ICT system: training plan should align with such “new” procedures and systems. Unless training materials are ready, training may not be able to take place. Information sharing of international practices to ordinary staff should be refrained (unless awareness raising is the objective). With clear objective, training of international standards for dedicated staff developing “Iraqi regulations” along with international standards are advisable, preferably it is more form of workshop to create deliverables, e.g., detailed gap analysis, work plan. In such a case, GCA may consider benefiting from development partners, or as a temporary solution, using the WCO training resources available through e-learning for all the country members²⁶.

40. Trader education and information approaches help improve trade compliance without increasing administrative costs. The valuation program, rule of origin, and tariff classification are complex programs. Development of detailed guidance, organizing information sessions, particularly for new importers, setting up a support line are good practices to help the trading community comply with the most complex customs assessment issues.