UNCLASSIFIED

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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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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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294813v1 I N C O N F I D E N C E 2

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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