Textiles and clothing are a key focus of scams to exploit loopholes in EU customs and VAT controls

Textiles and clothing are a key focus of scams to exploit loopholes in EU customs and VAT controls

The European Union (EU) financial watchdog has highlighted concerns about how Chinese clothing and footwear exporters may be exploiting loopholes in EU customs and VAT controls to evade paying proper amounts of these taxes.

In a report on shortcomings in EU import procedures, the Court of Auditors noted how Chinese traders were abusing EU customs procedure CP42, which allows an importer to bring goods into one EU member state without paying VAT, because they will be sold in another EU country. That tax would be payable at this destination state.

In theory the customs authorities of the first member state are supposed to get information from the second, to make sure that the actual money being paid by the final purchaser is the same as that on the invoice presented at the port. That way, if the invoice was undervalued, the customs duty paid on the goods in the country where the goods entered the EU would be correct.

But in reality the chain of communication often breaks down at this point – and the importing country customs teams charge duty on undervalued goods because they do not secure information on the final retailer in another EU country.

"This can be time consuming or unsuccessful because the declared acquirer can be different to the final recipient of the goods or be a missing trader," the court's report notes.

The result is that Chinese exporters often pay much less 'ad valorem' duty than they should. And with Britain specifically not insisting on guarantees for the release of goods declared with a potentially undervalued customs value, the UK has been the target of much of this tax evasion, the court says.

"Fake invoices were 5 to 10 times undervalued. Between 2013 and 2016, the UK should have made available nearly EUR2 billion more in customs duties than it did," said a statement from the watchdog.

According to EU anti-fraud unit OLAF, textiles and clothing are a key focus of these scams, with around 57% of all suspected undervalued imports from China of textiles and footwear cleared under CP42, even though only 16% of all EU imports use this procedure.

The problem is compounded, warns the court, by the fact that with information on the final purchaser not secured by the importing state's customs teams, cargos disappear onto the black market, where no VAT is paid either.