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UNCLASSIFIED
1
In Confidence
Office of the Minister of Customs
Chair, COVID-19 Ministerial Group
COVID-19: HARDSHIP ASSISTANCE FOR DUTY PAYMENTS
Proposal
1. This paper seeks the Ad Hoc Cabinet Committee on COVID-19’s (the Committee)
agreement to make regulations providing for compensatory interest and late payment
penalties on late duty payments1 to be remitted or refunded for importers, customs
brokers2 and excise manufacturers whose ability to pay duty on time has been
significantly affected by the COVID-19 outbreak.
Relation to government priorities
2. This proposal relates to the Government’s objective to support business
sustainability given the overall economic position importers, customs brokers and
excise manufacturers are facing due to COVID-19. It is directed at facilitating
business continuity for affected businesses and complements wider government
work in response to the COVID-19 outbreak.
Executive Summary
3. Customs has received a number of enquiries from importers, customs brokers and
excise manufacturers to defer duty payments since the Government declared a state
of national emergency on 25 March 2020 due to the impact of COVID-19. Some of
these duty payers are having difficulty making their duty payments in full as they
want to pay their employees full wages and their cash flow is significantly reduced
due to COVID-19. The number of duty payers in this situation is expected to grow
significantly as the impacts of COVID-19 continue and their duty becomes payable.
4. Customs is working closely with importers, customs brokers and excise
manufacturers who are experiencing issues related to COVID-19. Where they can
show cash flow issues due to the impact of COVID-19, Customs is negotiating
instalment payment plans for those that are unable to pay their duty on time in the
short-term.
5. Customs is also remitting late payment penalties under section 168 of the Customs
and Excise Act 2018, which allows remission for late payment where a duty payer
1 Excise and excise-equivalent duty, GST, tariff duty and associated levies. 2 Customs brokers clear imported goods on behalf of their clients and pay the duty charged on the goods to Customs.
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has complied with payment timeframes over the previous two years. Section 168 is
intended to address “one-off” late payments and cannot be used on an on-going
basis in response to COVID-19 issues, as it does not allow interest to be remitted,
nor could it be used where an instalment plan is used over a longer term.
6. The late payment and interest penalties may impact on the ability of businesses to
meet their financial commitments while responding to and recovering from
COVID-19.
7. The Customs and Excise Act 2018 allows for remission of compensatory interest
under an emergency, but only if regulations are passed. I consider regulations are
needed to support duty payers. I propose to make regulations to enable the
remission or refund of interest and late payment penalties for businesses who make
late duty payments as their ability to pay duty on time has been significantly affected
by COVID-19.
8. Customs’ approach will be aligned as much as practicable with that taken by Inland
Revenue in remitting use of money interest related to COVID-19, to ensure a
consistent approach where practicable is taken to waiving interest charges across
agencies.
9. The regulations are required immediately as it is critical for importers, customs
brokers and excise manufacturers to know now if they will incur interest and late
payment penalties on their debt repayment plan. It impacts on decisions they need to
make now on whether to keep trading, or cease trading and go into liquidation to
stop incurring debt. The regulations would apply to duty payments due on or after
25 March 2020.
Background
10. Since the declaration of a state of national emergency owing to the impact of
COVID -19, Customs has received a number of enquiries from importers, customs
brokers and excise manufacturers to defer payments. Some are having difficulty
making their duty payments in full as they want to pay their employees full wages
and their cash flow is significantly reduced due to COVID-19.
11. Excise manufacturers pay duty monthly, six monthly or annually3, with
31 March 2020 being the first key payment date after the declaration of a state of
national emergency owing to the impact of COVID-19. For those who pay six
monthly or annually, their payment is due on 31 July 2020. For importers and
customs brokers on Customs monthly deferred payment system, 20 April 20204 is
the first key payment date.
12. The deferred payments system allows GST-registered businesses to delay multiple
duty payments on imported goods by one to seven weeks. This variation depends on
3 Excise payment dates are determined by their annual excise duty liability. 4 Customs brokers pay fortnightly. Their next payment dates are 15 and 29 April.
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when the goods are imported and whether the importer is a business or customs
broker. Duty is paid through a single direct debit and the goods are automatically
released at the border, unless there are biosecurity or other concerns. Customs
brokers are on a fortnightly payment system. If brokers have not been reimbursed by
their clients for the duty costs that have to be paid for in the fortnightly payment, then
the broker may not have enough cash to cover the duty.
13. The debt to the Crown is often incurred before the importer or excise manufacturer
gets paid by their customers. For example, most import entries are lodged before
delivery, duty deferral generally allows them to recover the GST on delivery of the
imported goods to their customers and pay Customs by the due date. For some,
payment on delivery is not occurring due to the lockdown or cash flow pressures
experienced by their customers.
Customs has implemented a package of responses to support business
14. To preserve business continuity, Customs has the power to renegotiate the duty
payment terms over a specified period, if it is considered undue hardship would
result from paying on the due date.
15. Customs is working closely with importers, customs brokers and excise
manufacturers who are experiencing issues related to COVID-19. Where they can
show cash flow issues due to the impact of COVID-19, Customs is negotiating
instalment payment plans for those that are unable to pay in the short-term.
16. As at 9 April 2020, Customs had agreed, or was in discussion to agree, an
instalment plan with 230 importers, customs brokers and excise manufacturers for
duty totalling $56.6 million. This is a small number of the approximately 10,000
deferred payment accounts Customs operates for importers, Customs brokers and
the 9345 licensed excise manufacturers. The $56.6 million represents around five per
cent of the total duty Customs collected in March 2019.
17. This is an evolving situation and the number of duty payers in this situation is
expected to grow significantly as the impacts of COVID-19 continue and their duty
becomes payable. The agreed instalment plans range from one to 12 months
depending on each duty payers financial commitments. Table 1 shows the number of
duty payers that have agreed to an instalment plan and those yet to determine the
time frame for their instalment plan. Some duty payers will need to apply for an
extension of their instalment plan if business activity is significantly curtailed by any
COVID-19 measures.
5 Includes licensed off-site storage areas, some of whom pay excise.
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Table 1: Duty payers unable to pay duty as at 9 April 2020
Duty payers Original due
date Number of
duty payers Total debt*
Deferred payment clients unable to pay duty
Entered into an instalment payment plan 20 April 29 $1.6m
Delayed payment one month to 20 May 20 April 15 $1.2m
Delayed payment to a later date 20 April 113 $29.8m
Excise-equivalent duty 1 April 1 $10.1m
Customs brokers 1 April 5 $2.9m
Total 163 $45.6m
Excise manufacturers
Unable to pay on 31 March 31 March 66 $11.0m
Unable to pay on 30 April 30 April 1 $0.007m
Total excise 67 $11.0m
TOTAL 230 $56.6m
* Total debt includes excise, excise-equivalent duty, GST, tariff duty and associated levies.
18. In addition to the amounts agreed for instalment payments or further deferral, some
significant duty payers have been seeking to defer very large amounts of duty owed
on imports of motor vehicles, and excise and excise-equivalent duty on fuel and
alcohol to balance loss of revenue. These duty payers have not always been able to
provide evidence of the need for an instalment arrangement or further deferral at this
stage. Customs is working through the issues with them.
Current regulations are not sufficient to address COVID-19 issues
19. The Customs and Excise Act 2018 provides for compensatory interest and late
payment penalties to be applied where duty is not paid on time. The purpose of
compensatory interest is to compensate the Government for the loss of use of
money from duty payers underpaying their duty.
20. There are some legislative mechanisms that allow for interest and penalties to be
remitted and refunded, however, these are not fit for purpose to respond to the
nature of the economic shock caused by COVID-19. Compensatory interest was
introduced in the Customs and Excise Act in 2018, with the legislation envisaging
that remission could be provided under an emergency situation. This is the first time
Customs has sought this authority.
21. Customs is remitting late payment penalties under section 168 of the Customs and
Excise Act 2018, which allows remission for late payment where a duty payer has
complied with payment timeframes over the previous two years. This section is
intended to address “one-off” late payments and cannot be used on an on-going
basis in response to COVID-19 issues, as it does not allow interest to be remitted,
nor could it be used where an instalment plan is used over a longer term.
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22. Section 165 of the Customs and Excise Act 2018 contains a power to remit or refund
interest in emergency events where a duty payer is “physically unable” to pay
because of an emergency event. An emergency event must be declared through
regulations and must fit within the definition of ‘emergency’ in the Civil Defence
Emergency Management Act 2006. Section 171 of the Customs and Excise Act 2018
provides for regulations to be made on the recommendation of the Minister. These
may be for remissions and refunds of interest and penalties in prescribed
circumstances, provided these are consistent with promoting voluntary compliance
by duty-payers.
Comment
I propose to make changes to Customs’ Regulations
23. I propose regulations are made under sections 165 and 171 of the Customs and
Excise Act 2018 to provide for the remission or refund of interest and late payment
penalties for importers, customs brokers and excise manufacturers who have had
their ability to pay duty on time significantly affected by COVID-19.
24. Regulations are required to be made under section 165 of the Customs and Excise
Act 2018 in case any importers, customs brokers or excise manufacturers advise
Customs they are ‘physically’ unable to make payments due to COVID-19 issues.
Customs has not been approached with any issues relating to problems with
‘physically’ paying compared with not having the cash flow to pay, but, it is not clear
whether some will have an issue when their payment is due.
25. The discretion would apply both when an importer, customs broker or excise
manufacturer is able to satisfy Customs that they are unable to physically make a
duty payment on time and when they are financially unable to make a duty payment
on time because of the economic nature of the event. I consider that the proposed
regulations to be made under section 171 of the Customs and Excise Act 2018 are
consistent with promoting voluntary compliance by duty payers. I propose that the
regulations made under section 171 of the Customs and Excise Act 2018 would
apply for a period of two years only.
26. I consider that the discretion under section 165 of the Customs and Excise Act 2018
only needs to apply for a period of six months only as this should be sufficient time
for any businesses physically unable to make payment to have contacted Customs
for the interest to be remitted. In case a need does arise to go beyond six months, I
propose the six months could be extended by an Order in Council if required.
27. These timeframes will ensure that remission and refund of interest and penalties on
late duty payments is targeted at importers, customs brokers and excise
manufacturers affected by the current COVID-19 outbreak.
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28. Any remission and refund of penalties and interest on late duty payments would be
subject to the duty payer meeting the necessary requirements. This will include:
importers, customs brokers and excise manufacturers’ ability to make a duty payment, including associated levies, on time having been significantly adversely affected by the COVID-19 outbreak
the duty payer had made contact as soon as reasonably practicable
the duty payer has agreed an instalment plan with Customs or paid the duty in full (late payment)
would apply only to interest and penalties arising on or after 25 March 2020, and for payments due for up to the following two years. However, the duration would be contingent on the hardship being suffered by the duty payer and would be negotiated between Customs and the duty payer.
29. While this would enable Customs to remit and refund interest and penalties on late
duty payments, the importer or excise manufacturer would still be required to pay the
late core duty as agreed with Customs.
30. Duty payers would need to set out the circumstances particular to their issue in
writing to Customs, and Customs would consider the application on a case by case
basis to determine if they met the criteria.
31. For example, an importer or excise manufacturer’s business being seriously affected
by COVID-19 would not be sufficient grounds for remittance or refund if they still had
the ability to make a duty payment on time. They will need to satisfy Customs they
do not have the financial capability and cash reserves to make a duty payment on
the due date.
32. The assessment to remit or refund interest and penalties would be made on a case
by case basis. It would include consideration of the business reasons for the
instalment plan and remittance or refund of interest and whether the request is in line
with normal importing and business activity.
33. Customs’ approach will be aligned as much as practicable with that taken by Inland
Revenue in remitting use of money interest related to COVID-19, to ensure a
consistent approach where practicable is taken to waiving interest charges across
agencies.
34. The proposed regulations are required immediately as it is critical for importers,
customs brokers and excise manufacturers to know now if they will incur interest
charges on their debt repayment plan. This impacts on decisions they need to make
now on whether to keep trading, or cease trading and go into liquidation to stop
incurring debt. For example, two large excise manufacturers have advised they are
experiencing a 75 per cent drop in revenue, as many businesses they supply are not
trading due to the introduction of COVID-19 Alert Level 4.
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Application date
35. I recommend that the proposed discretion for the Chief Executive of Customs to
remit or refund interest and late payment penalties in response to the COVID-19
outbreak apply only for duty payments due on or after 25 March 2020, as this is the
date the government declared a state of national emergency owing to the impact of
COVID-19.
Risks
36. If interest and penalties are not remitted or refunded, the charges may impact on the
ability of importers, customs brokers and excise manufacturers to meet their financial
commitments.
37. The Ministry of Business, Innovation and Employment has advised if penalties are
not applied to payments to Customs there is a risk that they will remain unpaid for
longer and that the amount of unpaid duty could increase over time as businesses
seek to defer multiple duty payments. This creates a risk that if businesses with the
obligation to pay duty fail, this will potentially magnify the losses suffered by other
creditors because of the priority available to Customs under the Companies Act
1993.
38. While there is some risk, there is also risk if no action was taken. To mitigate these
risks as much as possible, Customs when approving an instalment plan with a client
will ask for financial statements (cash flow statements or statements of financial
position) to ensure that the company is not insolvent and there is a reasonable
likelihood they will be able to repay the debt.
39. Customs considers that waiving compensatory interest and late payment penalties
on late duty payments is aimed at resulting in fewer duty paying businesses failing
and should result in the smallest losses to creditors overall.
40. There may be a negative financial implication for the Crown, as this policy change
would result in foregone use of money interest revenue ie compensatory interest.
However, this proposal is aimed at protecting the revenue base by keeping duty
payers in business and paying core duty, meaning over time more revenue will be
collected than if they go into liquidation in the coming months.
41. Notwithstanding this proposed change, it is still highly uncertain that this proposal will
be sufficient for all duty payers to remain in business. There is still a risk of an
increase in payment defaults and bad debts coming through.
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Implementation
42. Customs will develop internal policies and guidelines for their staff so that
businesses are treated evenly, and in a like manner. It is likely Customs may need to
deal with a considerable number of requests in a short period of time. Some of them
will be complicated and resource intensive to work through. To address this and to
keep compliance costs for duty payers to a minimum, if duty payers can show
Customs they are unable to pay their duty on time due to the impact of COVID-19,
Customs will normally consider this to be sufficient evidence of hardship for remitting
compensatory interest.
Financial Implications
43. There is no direct fiscal cost from the proposal to give the Chief Executive of Customs discretion to remit or refund interest and late payment penalties in response to COVID-19. The core duty would still be collected, albeit later than forecast.
44. There would be a negative financial implication for the Crown due to the foregone use of money. This is difficult to estimate as the situation is evolving daily as more importers, customs brokers and excise manufacturers make contact with Customs. The data in Table 1 indicates the government would forego $0.39 million compensatory interest in April 2020 on $56.6m million late duty payments.
45. There are some risks that would impact on the Crown’s fiscal position albeit unquantifiable if they materialise:
core duty not being recoverable. Decreasing the incentive to pay duty when it
falls due in smaller instalments could result in some importers and excise
manufacturers not being able to pay their larger duty payments at a later date
delays in paying the core duty could potentially cross fiscal years. Remitting or
refunding interest and penalty charges could lead to the deliberate
underpayment of duty in situations where the duty would have ordinarily been
paid in full and on time
interest and penalty charges on late duty payments related to non-COVID-19
drivers could be remitted or refunded if these duty payers go onto an
instalment plan due to issues from COVID-19.
46. Customs will mitigate these risks by requesting supporting financial information to back any claim. Many of the approximately 10,000 importer and customs broker deferred payment accounts have a long history, and this enables Customs to assess whether requests for an instalment plan are in line with normal importing and business activity. Customs can also request supplementary information from third parties such as customs agents (with permission) and liaise with Inland Revenue. Customs will make contact with duty payers to gain a better understanding of their requirements.
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Legislative Implications
47. Implementing the proposal requires regulations to be made under sections 165 and 171 of the Customs and Excise Act 2018. I propose that the regulations are made as soon as practicable in order to give importers, customs brokers and excise manufacturers certainty.
Impact Analysis
Regulatory Impact Statement
48. The Treasury has determined that this is a direct Covid-19 response and has suspended the RIA requirements in accordance with (CAB-20-MIN-0138). The Treasury has worked with Customs to ensure appropriate available analysis is included in this paper.
Climate Implications of Policy Assessment
49. The Ministry for the Environment has been consulted and has yet to confirm that the Climate Implications of Policy Assessment requirements do or do not apply, to this proposal. The Inland Revenue’s similar proposal on remitting use of money interest did not meet the Ministry for the Environment’s threshold for significance.
Human Rights and Population Implications
50. There are no population implications from this proposal.
51. No inconsistencies have been identified with the New Zealand Bill of Rights Act 1990 or the Human Rights Act 1993.
Consultation
52. Due to the short timeframe for developing a policy response to address the problem faced by businesses who have had their ability to pay duty on time significantly affected by COVID-19, there has been no public consultation on the proposal. Some affected importers, customs brokers and excise manufacturers and businesses working on behalf of some of their affected clients, have approached Customs requesting that interest and penalties on late duty payments be remitted.
53. The Treasury, Ministry of Business, Innovation and Employment, Ministry for the Environment and Inland Revenue have been consulted on this paper. The Department of Prime Minister and Cabinet has been informed.
Communications
54. I will advise importers, customs brokers and excise manufacturers of Cabinet’s decision. Customs will develop communications to support the proposal, if approved.
Proactive Release
55. I intend to proactively release this Cabinet paper and associated documents, subject to any redactions that would be justified if the information had been requested under the Official Information Act 1982.
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Recommendations
The Minister of Customs recommends that the Committee:
1. note that Section 165 of the Customs and Excise Act 2018 contains a power to remit or refund late payment interest in emergency events where a duty payer is “physically unable” to pay because of an emergency event. An emergency event must be declared through regulations and must fit within the definition of ‘emergency’ in the Civil Defence Emergency Management Act 2006;
2. note that Section 171 of the Customs and Excise Act 2018 provides for regulations to be made prescribing circumstances in which refund or remission of interest and/or penalties must be made, provided the Minister considers these are consistent with promoting voluntary compliance by duty payers;
3. agree that the Chief Executive of Customs be required to remit or refund compensatory interest and late payment penalties for importers, customs brokers and excise manufacturers who have had their ability to pay duty on time significantly adversely affected by COVID-19;
4. agree that the Chief Executive of Customs’ requirement to remit or refund compensatory interest and late payment penalties in response to COVID-19 would apply only to interest and penalties arising on or after 25 March 2020;
5. agree that the Chief Executive of Customs’ requirement to remit or refund late payment interest in response to COVID-19 would apply for a period of six months only for regulations made under section 165 of the Customs and Excise Act 2018, unless extended by an Order in Council;
6. agree that the Chief Executive of Customs requirement to remit or refund compensatory interest and late payment penalties in response to COVID-19 would apply for a period of two years only for regulations made under section 171 of the Customs and Excise Act 2018;
7. note that requiring the Chief Executive of Customs to remit or refund compensatory interest and late payment penalties in response to COVID-19 would not have any fiscal cost as the core duty would be paid in full;
8. invite the Minister of Customs to issue drafting instructions to the Parliamentary Counsel Office to give effect to the above decisions;
9. authorise the Minister of Customs to make decisions, consistent with the overall policy decisions in this paper, on any minor or technical matters that arise during the drafting process.
Authorised for lodgement
Hon Jenny Salesa
Minister of Customs
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294813v1 I N C O N F I D E N C E 1
Meeting of the COVID-19 Ministerial Group
Minute of Decision
This document contains information for the New Zealand Cabinet. It must be treated in confidence and handled in accordance with any security classification, or other endorsement. The information can only be released, including under the Official Information Act 1982, by persons with the appropriate authority.
COVID-19: Hardship Assistance for Duty Payments
The group of Ministers with Power to Act on COVID-19 matters [CAB-20-MIN-0130] convened
on 23 April 2020 at 10.30am, and in accordance with their Power to Act:
1 noted that:
1.1 section 165 of the Customs and Excise Act 2018 contains a power to remit or refund
late payment interest in emergency events where a duty payer is ‘physically unable’
to pay because of an emergency event;
1.2 an emergency event must be declared through regulations, and must fit within the
definition of ‘emergency’ in the Civil Defence Emergency Management Act 2006;
2 noted that section 171 of the Customs and Excise Act 2018 provides for regulations to be
made prescribing circumstances in which refund or remission of interest and/or penalties
must be made, provided the Minister considers these are consistent with promoting
voluntary compliance by duty payers;
3 agreed that the Chief Executive of Customs be required to remit or refund compensatory
interest and late payment penalties for importers, customs brokers and excise manufacturers
who have had their ability to pay duty on time significantly adversely affected by
COVID-19;
4 agreed that the Chief Executive of Customs’ requirement to remit or refund compensatory
interest and late payment penalties in response to COVID-19 would apply only to interest
and penalties arising on or after 25 March 2020;
5 agreed that the Chief Executive of Customs’ requirement to remit or refund late payment
interest in response to COVID-19 would apply for a period of six months only for
regulations made under section 165 of the Customs and Excise Act 2018, unless extended
by an Order in Council;
6 agreed that the Chief Executive of Customs’ requirement to remit or refund compensatory
interest and late payment penalties in response to COVID-19 would apply for a period of
two years only for regulations made under section 171 of the Customs and Excise Act 2018;
7 noted that requiring the Chief Executive of Customs to remit or refund compensatory
interest and late payment penalties in response to COVID-19 would not have any fiscal cost
as the core duty would be paid in full;
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8 invited the Minister of Customs to issue drafting instructions to the Parliamentary Counsel
Office to give effect to the above decisions;
9 authorised the Minister of Customs to make decisions, consistent with the overall policy
decisions in this paper, on any minor or technical matters that arise during the drafting
process.
Rachel Hayward
for Secretary of the Cabinet
Distribution: The Cabinet
Hon James Shaw
Copied to officials via email
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