By Nikolas Kontozis, Indirect Tax Advisory, PwC Cyprus
As a result of the economic disruptions caused by the pandemic, international trade declined significantly during 2020, with some sectors such as the energy, oil and gas sector being more severely affected than others.
Although international trade recovered sharply in 2021 resulting in higher total volumes than the pre-pandemic levels, certain sectors, supply chains and companies have not yet recovered their cumulative losses.
In recent years, it became clear that customs authorities in certain Member States are struggling to perform their responsibilities, including customs controls. This imbalance between Member States creates concerns that goods may be diverted towards the weakest entry and exit points of the EU to avoid payment of customs duties and VAT or detection of unsafe goods. The Covid-19 pandemic highlighted the importance of the EU Customs Union in ensuring the safety and integrity of supply chains, as well as safeguarding the EU’s revenues. In addition, changing business models, like e-commerce, increase the need for strengthening customs controls. According to customs data from Member States, the volume of parcels imported currently in a month will be imported in a single day in five years.
Dealing with the consequences of the pandemic
The United Nations conference on trade and development issued a report in 2022 with suggested responses to the consequences of the pandemic. It highlights the importance of risk management and continuous preparedness to create a more resilient, inclusive and sustainable future. It emphasises the role of digital technologies, data analytics and forecasting models for better planning across the supply chain. The significance of technology for crisis management has been widely recognised because of Covid-19, resulting in acceleration of the growth of many emerging technologies.
The role of emerging technologies
The importance of emerging technologies on cross-border trade and customs processes to facilitate the quick and efficient processing of data was also discussed in a paper issued recently by the World Trade Organisation (WTO) and World Customs Organisation (WCO). Specifically, three emerging technologies were identified as the most important for customs modernisation and trade facilitation: (i) blockchain, (ii) internet of things and (iii) big data.
The most common use cases of blockchain are currently found in cryptocurrencies. However, companies and governments are experimenting with the technology to create solutions that will help them to strengthen and streamline their operations. EU governments are experimenting with blockchain to create solutions for sharing information between tax and customs authorities. Blockchain can be used to automate VAT payments and refunds via smart contracts, thus simplifying and accelerating VAT collection. Some customs authorities such as Argentina’s and Uruguay’s have already deployed the blockchain technology successfully but most customs authorities are still testing blockchain through proofs of concepts and pilot projects, using mainly private blockchains. Currently, the main obstacles to blockchain adoption are the lack of expertise, the cost of implementation and the limited adoption by other stakeholders as blockchain requires simultaneous adoption of multiple stakeholders to maximise its benefits.
According to WTO and WCO, blockchain has the potential to transform international trade by increasing the transparency, accessibility and immutability of information shared among stakeholders throughout global supply chains and officials in borders.
Internet of things
Customs authorities are also experimenting with the use of the internet of things (IoT) to automate customs procedures. Currently, IoT has a much higher deployment rate than blockchain and the use of IoT is widespread in Europe. IoT allows companies and authorities to perform better risk management, increase efficiency of customs clearance processes and improve data analytics by collecting useful data.
Further to the cost and lack of expertise, the main challenge in IoT adoption is the integration of IoT with customs operating systems, as well as the compatibility and interoperability of different IoT devices.
Big data, data analytics, artificial intelligence (AI) and machine learning play a crucial role in the digital transformation of companies and governmental agencies. Around half of customs authorities worldwide are already using a combination of advanced analytical technologies and those that are not using them have plans to use them in the future. The most important benefits of these technologies relate to better risk management, more efficient classification of tariffs, fraud detection, identification of outliers and anomalies in valuations, prediction of future trends and facilitation of audits and controls to increase compliance. In addition, they can be combined with other technologies such as IoT to gain valuable insights. For example, AI-based models can be used for interpretation of X-ray images.
It is important for all private and public organisations to establish a data strategy to unlock the potential of advanced analytical technologies on their operations. The biggest challenges to the implementation of these technologies are again cost and lack of expertise, as well as data protection laws such as the General Data Protection Regulation (GDPR), which impose limitations on how data can be used.
Risk or opportunity
Apparently customs authorities are starting to embrace the potential of technology in the simplification and harmonisation of customs processes. The ultimate aims driving this change are trade facilitation, fraud detection and revenue collection. Investment in the implementation of advanced technologies is important to overcome the lack of trust, knowledge and expertise towards these technologies. With the use of technology, tax and customs authorities will soon be able to get more detailed insights from tax returns and customs declarations and identify instances of non-compliance more easily. This increases the need for companies to invest in technology and compliance in order to be prepared in advance and avoid future penalties or delays in the transportation of their goods. Companies should start investing gradually to avoid costly restructurings of their systems and operations once the use of these technologies becomes necessary.
Technology provides the means to build innovative solutions and achieve improved access to data, improved insights, improved agility, improved profitability and improved customer loyalty. Following our recent experience with Covid-19, the use of advanced technologies in basic supply chain operations and customs management to mitigate disruptions and unexpected costs is not anymore a matter of “if” but a matter of “how”.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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