How can an importer be exempted from paying import tax debts
All about Art 3 of the Indirect Taxes Israeli law
Gil Nadel, Adv
The Problem
The heroes of our story are importers who receive a demand for retroactive payment of import duties from the tax authorities forimport of goods. The notice of debt is quite a blow for the importer, for four basic reasons:
A. The timetable for paying the deficit: according to the notice of debt, the importer must pay the deficit within a short period of time, since the sanctions accompanying non-payment are extremely drastic i.e: hold of cargo and activation of collection proceedings, charging the tax deficit with interest and fines!
B. According to the law, debt of import taxes can be demanded within five years (and sometimes even more) from the date in which the original tax fee should have been paid, In other words, the tax authorities can go back five (or more) years!
C. Import taxes are not levied on the profit which the importer derived from the deal, but are generally calculated as a percentage of the value of the imported goods. An importer who did not pass the import tax on the buyer may lose all his profits from the transactions or even suffer serious losses.
D. Since this is a demand for payment issued to the importer post facto, it is difficult for the importer to predict when the matter will arise and act preventatively tominimize the danger.
The legislator was aware of the importer's dilemma in the case of a retroactive tax debt and therefore established a mechanism that allows the importer to receive an exemption from payment of the tax debt under certain conditions. We refer to art 3 of the Law of Indirect Taxes (Over- or Under-Paid Duties) 1968. According to art 3 of the law, an importer is exempt from payment of a tax-related debt if: (1) the tax debt does not result from incorrect information that the importer gave or from information which he should have given but failed to give; (2) the importer did not and should not have known about the tax deficiency; (3) the importer did not pass ob the tax to the buyers.
As the Supreme Court has already nicely clarified in one of his judgments, the heart of the arrangement is good faith. An importer who believed in good faith that a product from exempt from import taxes and priced the product accordingly may receive an exemption from paying the debt. An importer who should have suspected that the product was liable to import duties but preferred to shut his eyes and to not pay the tax in the first place, cannot enjoy this exemption.
The Customs Authority Interprets Paragraph 3 Narrowly
Art 3 to the Law of Indirect Taxes raises many questions for the Customs Authority about the importer: if we are not mistaken in our position- why should we waive the required tax for the importer? Why should the public fund the failures of the importer? Accordingly, the Customs Authority interprets the law narrowly and extremely illiberally, so that there are few cases in which the Customs Authority actually exempts the importer from payment of the debt. According to the estimations of those who deal with the field, only a few percent of the requests under art 3 are answered affirmatively.
The second condition of art 3 constitutes the largest obstacle standing before the importer, and the Customs Authority often claims that the importer knew or should have known about the deficiency. The Customs Authority tends to claim that the importer knew or should have known that the goods should have been classified under HS heading subject to payment of duty. According to the law and the court judgments, the knowledge of the customs agent, who serves as an agent of the importer, can be attributed to the importer, so that we must ask whether the customs agent should have known that the product should be classified under HS heading subject to payment of duty.
The Recent Decision of the Magistrate's Court of Tel Aviv
Recently, a decision was issued by the Magistrate's Court of Tel Aviv discussing the interpretation of the above art 3. While the decision is one of a lower court that does not have binding power, there is no doubt that some of the court's rulings are good news for the importers and customs agents (Civil Case 072590/04Willifood v. State of Israel). That case discussed of cheeses which were produced in Denmark, which had green veins, characteristic of the mold that is created in the cheeses as part of their maturation. The Customs Authority issued the importer a notice of debt, claiming that the correct classification of cheeses with mold veins is under HS code 04.06.4010 which includes cheeses belonging to the blue cheese family which are charged a high rate of duties. Following the clarification issued by the World Trade Organization, the importers accepted the Customs Authority's stance on the question of classification and their chief hope lay in art 3 of the Law of Indirect Taxes.
In relation to the first condition of art 3, the court ruled that when the incorrect classification was noted in the import entry, it does not constitute giving incorrect information, since the question of classification is a legal matter which does not fit the category "information". In our opinion, there is no doubt that this is a highly significant ruling, since all classification deficits are related to a mistake in classification made in the import entry, and ruling that a wrong classification constitutes an incorrect information would have denied any use of the Law of Indirect Taxes to receive an exemption from customs deficits due to incorrect classification.
In relation to the second condition of art 3 of the Law of Indirect Taxes, generally the tool that the importer can use to justify himself is the existence of some physical inspection conducted on the goods in which the Customs Authority confirmed the mistaken classification. In such a situation, the importer can say- if the Customs Authority made the same mistake as I did, clearly I did not know and should not have known about the deficiency. Thus, for example, in the decision of the District Court of Tel Aviv in the Amcor matter (1083/99 Amcor Refrigeration Ltd v. Customs and VAT Administrator, decision given 6.3.2005), the court accepted Amcor's plea and ruled, inter alia, that Amcor should not have known about the deficiency, since the sales tax authorities conducted inspections at Amcor over the years, confirmed their statements and did not notify Amcor of any mistakes.
Only in our case, the decision does not mention any physical inspection, and the court based its ruling on another analysis. The court relied on the fact that the World Trade Organization needed to clarify the interpretation of the expression "cheeses with blue veins" and to note that it also includes cheeses with green veins. Accordingly, the court concluded that such an amendment was intended to clarify that "before the amendment, the validation of the item was not sufficiently clear and therefore a clarifying amendment was necessary. Thus, prior to the amendment, we can accept the plaintiffs' claims that they did not know nor should they have known the correct definition."
The court was not satisfied at that point, and further added: "On this subject, I also accept the plaintiffs' clam that in light of the difficulty of classifying such a 'borderline case' in which the classification is unclear enough, the assessee's claim should be accepted that he did not know nor should he have known that the classification he gave was wrong." This is a ruling with a much wider implication.
Invalidation of Certificate of Origin, and the Recent Decision of the District Court of Be'er Sheva
In the disagreements arising from invalidation of the certificates of origin, the Customs Authority claims that the certificates of origin which it invalidated constituted incorrect information given to them by the importer. It makes no difference to the Customs Authority that when the goods were released, the certificate was valid and the importer relied on it in good faith. The test, according to the Customs Authority, is completely objective, and an invalidated certificate is considered an incorrect piece of information.
This stance was upheld by the court in a number of instances, and recently received a comprehensive discussion in the decision of the District Court of Be'er Sheva, CC 7182/06 Tempo Beer Industries Ltd. V. State of Israel, decision issued on the 17th of March 2009). The court repeated the ruling stating that an invalidated movement certificate constitutes an incorrect piece of information given by the assessee: "It has already been ruled that the condition should be given an objective interpretation, which means that, if it is ruled that the goods imported by the appellant were classified by it in the framework of its litigation with the Customs Authority in manner which was incorrect factually speaking, the condition does not apply and the appellant cannot enter the realm of the exception."
However, the court also ruled the importer did not take all the steps necessary to ensure the goods would meet the rules of origin and to ensure the movement certificate would be valid, since the importer did not manage to note the name of the supplier's representative who promised them that the goods were exempt from customs duty; did not clarify with the supplier whether the import of the goods by the previous importer had actually been exempt from customs; did not agree with the supplier, within the supply contracts, that the supplier undertook that the goods would meet the rules of origin (on the contrary - it seemed as if the supplier had complete freedom to change basic conditions affecting the rules of origin, with no sort of limitation); nor did they make any attempt to check with the supplier whether the goods would meet the rules of origin.
Accordingly, the court ruled that the deficits issued to the Tempo Company - a sum of over 7.5 million NIS (!) - are completely valid, and even obligated Tempo in legal fees and attorneys' fees of 70,000 NIS (!).
How Can the Requirements of Art 3 to the Law of Indirect Taxes Still be Met?
1. First off, it is best to start out after having received a confirmation/opinion from the customs agent regarding the classification stance (or the declaration of the value of goods for tax purposes). It's important to give the customs agent all the relevant information and to receive clear response from him. This way, you will be able to support your claim that you did not know and you (including the customs agent) should not have known about the existence of the deficiency.
If the case looks problematic- do not bet on art 3. It is better to request as soon as possible for information from the Customs Authority and, if needed, when the Authority rules that the product is liable in import tax, to pay the tax under protest and to file suit for a refund.
2. It is highly recommended to clarify whether the Customs Authority has a ruling of other directive relevant to your case. In a number of cases, the claim about "not knowing nor should have known" has been rejected in light of an existence of Authority directive.
3. It is recommended to follow up and document the position of market competitors as much as possible. The prices charged by competitors may show the import tax rates that they pay, and their classification stance. In one case, the court showed willingness to avail itself of this data.
4. Being naïve and unaware will not help! The Magistrate's Court of Tel Aviv, firmly rejected an importer's (and customs agent) position, after it became apparent to the court that the goods were not inspected by the importer and the customs agent for the purposes of classifying for the last ten years!
5. Sometimes other governmental organizations are involved in the process of release of goods: the Ministry of Trade, Commerce and Industry; the Ministry of Health (Pharmaceutical Branch, Food Services); the Ministry of Agriculture; the Standards Institute of Israel, etc. It is important to check the position of those organizations, since many times their position matches yours and opposes the position of the Customs Authority.
6. And most importantly of all - follow your cargo release procedures. Releases that were subject to thorough physical inspections and were verified by the customs house can spare you the inconvenience. In a number of cases, the existence of an authority confirmation denied the claim that the importer "knew or should have known about the deficiency".
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