Administration of excise duties on tobacco and alcohol drinks improved, but serious risks remained. New check bands did not meet expectations
PRESS RELEASE on Audit No. 14/28 – October 5, 2015
The Supreme Audit Office (SAO) scrutinized tax authorities and the administration of excise duties on tobacco and alcohol from 2011 to 2014. According to an estimate made by the Customs Administration of the Czech Republic, annual tax evasion of the tobacco and alcohol excise duties ranged from CZK 1,000 million to CZK 2,000 million during the audited period. The efficiency of the administration of alcohol excise duty was negatively influenced by the existing legislation. Taxable entities were insufficiently inspected by the Customs Administration and sales of risky or untaxed alcoholic drinks could not be prevented by implementation of inadequate measures after so-called “methanol affair”, which included mandatory uses of new check bands, video-cameras in the marking areas, and concession sales of alcohol.
In 2005, new check bands were introduced in an attempt to increase efficiency of alcohol sales’ inspections. The data collected by the Customs Administration indicated that out of 16.5 million sample amount of check bands, some 3.9 million were either lost or accidentally destroyed. Auditors concluded that the number of “lost” check bands represented a great risk as they could be used for sales of products, which were made from untaxed ethyl alcohol. In the end of 2013, another tool was introduced: a new format of check bands. However, the existing legislation did not require from taxable entities to register individual codes of the check bands. It makes no sense to keep the records in the current ways.
Another improving tool that the SAO does not consider as meaningful is denaturation of ethyl alcohol, so that it cannot be used in food production. Such processed alcohol is not subject to excise duty. Insufficient checking creates a risk that such alcohol could be used for illegal production of alcoholic drinks.
Custom administration authorities only have limited possibilities to control alcohol transports. For example, according to customs officers the period given to taxable subjects to notify authorities that the transported alcohol reached its final destination is too long as during the five-day period the alcohol can be further processed so that nothing can be inspected. The transport times cannot be shortened by customs officers, which makes it possible for the entities to transfer the alcohol repeatedly using only one invoice.
As for the obligation to install video cameras into alcohol marking areas, the measure had not helped to improve the control either. Within the statutory time limit of three months, only 5 % taxable persons were able to meet this obligation. At least at six customs administration offices, auditors found defective records, which could only be used with difficulties. Another negative influence on control resulted from insufficient and delayed information about alcohol transportation. Custom offices cannot fully use the data from various informational systems, which are available, as the systems are not interconnected. Moreover, the internal control practices at the Customs Administration were not able to reveal serious shortcomings in the tax administration system before 2014.
Auditors also scrutinized the collection of excise duty on tobacco. The duty rates changed nine (!) times in the period from 2004 to 2014. There were four ways of dealing with the problem that sellers frontloaded with cigarettes that charged the previous (smaller) tax rate. The amendment to the law, which actually prevented this phenomenon, became effective as late as in December 2014. The auditors estimated that because of this problem, the excise duty collection reduced by CZK 1,400 million from 2012 to 2014. Moreover, custom authorities failed to control whether the “old” tax rate was applied in compliance with applicable legislation.
Auditors also warned that staffing of the Customs Administration is insufficient. In spite number of tasks performed at the Customs Administration increased over the years, there was a significant downsizing of the staff, which reduced by 20 % from 2007 to 2014. After the “methanol affair”, customs authorities improved the inspection system, which has become more effective, but the work has been difficult due to existing legal regulations as well as other factors. The Ministry of Finance has repeatedly been informed about the situation by the Customs Administration.
Communication Department
Supreme Audit Office