Attachment_J_9_-_TFP_final_report.pdf

August 2013

This publication was produced for review by the United States Agency for International Development. It was prepared by Chemonics International Inc.

TRADE FACILITATION

PROJECT

FINAL REPORT

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

TRADE FACILITATION

PROJECT

FINAL REPORT

Contract No. EEM-I-00-07-00008-00

CONTENTS

Acronyms ............................................................................................................................ i

Executive Summary

Background

Component 1: Improve Border Management Efficiency

Component 2: Support Private Sector Entities

Component 3: Research and Information-Sharing

Conclusions

Annex

Project Performance Indicators

Photo Credit: All photos courtesy of the Trade Facilitation Project.

TRADE FACLITATION PROJECT FINAL REPORT i

ACRONYMS

ASYCUDA Automated System for Customs Data

COGAT Coordinator of Government Activities in the Territories

CPA Crossing Point Authority

DCL District Coordination Liaison

DTI Direct Trader Input

FY fiscal year

MONE Ministry of National Economy

PA Palestinian Authority

PalTrade Palestine Trade Center

PITA Palestinian Integrated Trade Arrangement

PPRI Palestinian Political Risk Insurance

TFP Trade Facilitation Project

TIC trade information center

VAT value-added tax

WCO World Customs Organization

WTO World Trade Organization

TRADE FACLITATION PROJECT FINAL REPORT 1

EXECUTIVE SUMMARY

Through the Trade Facilitation Project (TFP), Chemonics International Inc. assisted USAID’s West Bank/Gaza mission to support economic stability in the West Bank and Gaza through interventions with the public and private sectors. The project focused on three areas:

• Improving border management efficiency to reduce trade costs for business and increase the capacity of the Palestinian Authority (PA) to effectively manage trade and enhance customs revenue. TFP worked extensively with the PA Customs Department to increase revenue while reducing business compliance costs.

Additionally, the project focused on advancing programs for infrastructure improvements on the Palestinian side of crossings.

• Supporting private sector entities to advocate for improved trade facilitation measures with the Israeli border and crossings authorities. TFP worked with the private sector to formalize and prioritize its needs for trade facilitation measures and facilitated cooperation between the Israeli Crossing Point Authority (CPA) and the Civil Administration to increase trade.

• Research and information-sharing to provide cohesive information to the business community on trade regulations and procedures. Through a range of methods, including development of a trade portal and detailed trade studies, TFP increased the level of information available to the PA public and private sectors on trade procedures and constraints. Furthermore, TFP sought to monitor and publicize changes to movement and access restrictions into and out of the West Bank and within the West Bank.

Highlights of the project’s achievements include:

• More than 16,300 person-hours of training delivered to support capacity at PA

Customs. In addition to direct technical assistance, TFP’s support of PA Customs has been among TFP’s strongest components, resulting in $32.4 million in increased revenue and reductions in business compliance costs in fiscal years (FYs) 2012 and 2013 alone.

• Developed units and trained Customs personnel on risk management, post-clearance audits, and commercial compliance. These units have established capacity in PA Customs to provide services to the trade community and increase revenue to PA Customs. Because risk management and post-clearance audit activities are refined and increase when the data interface is operational, revenue implications will be substantial.

• Facilitated establishment of a data link between PA and Israeli Customs, which when fully operational in September 2013, has the potential to yield $4.2 million to $6.4

TRADE FACLITATION PROJECT FINAL REPORT 2

million each month in extra revenue and will cut business compliance costs 30 percent.

• Assisted PA Customs in managing the transition of post-clearance valuation and revenue collection for used car imports from Israel, the first transfer of valuation authority to the PA. As a result of a combination of training and direct technical support in 2010-2011, total revenue collections from vehicle imports rose more than 200 percent as a result of applying proper customs valuation and effective revenue collections. By 2012, revenue from adjustments to vehicle valuations had increased to nearly $3 million, up 33 percent from 2009.

• In conjunction with USAID’s Palestinian Integrated Trade Arrangement (PITA), TFP supported opening of the Jalameh vehicle crossing. By reconnecting Jenin with the large Arab-Israeli communities in Northern Israel, TFP estimates direct benefits to the Jenin economy at $120 million from 2009 through early 2012.

• Established the Known Trader Program at the Tarqumia crossing. By providing participating firms with a range of benefits, including extended operating hours, expedited registration, container drop-off, and circulating trailers, the program is generating an estimated $33.2 million to $45.3 million annually in benefits to the private sector in the West Bank and Israel.

• TFP served as a source for evidence-based analysis of trade constraints on a range of issues, including movement and access, standards compliance, and dual use. By bringing economic rigor to these issues, TFP and USAID were able to effectively engage Israeli trade and border authorities to improve trade facilitation.

TFP was implemented in a challenging environment. The project’s achievements were reached despite major challenges, including two Israeli/Gaza conflicts, Israeli elections, severe PA financial constraints, and public sector strikes in the PA. TFP navigated these crises and responded quickly to new opportunities. Throughout, TFP focused on building relationships with and between Israeli and Palestinian counterparts and the public and private sectors. Additionally, TFP coordinated with other projects and served as a resource for U.S. government agencies and the broader donor community. As a result, TFP achieved quantifiable results across all its indicators.

TRADE FACLITATION PROJECT FINAL REPORT 3

BACKGROUND

From June 2008 to August 2013, the principal objective of the USAID West Bank/Gaza Trade Facilitation Project was to facilitate the flow of goods and people in a manner that satisfied the principles and benchmarks of the 2005 Agreement on Movement and Access. The goal was to address the USAID mission’s strategic objective of supporting economic stability in the West Bank and Gaza through interventions with the public and private sectors.

TFP was implemented in a difficult and fluid political, economic, and security environment. The private sector, hence the Palestinian economy, was severely constrained by movement and access restrictions. Issues included numerous checkpoints and routing restrictions, causing delays and extra distance traveled; a requirement for back-to-back transfer of cargo; sudden closures; unpredictable waiting times and procedures; and poor treatment of traders and cargo. The Palestinian Authority struggled and continues to struggle under severe financial constraints; the ability to increase revenues was critical to maintaining government services and enhancing private sector competitiveness.

At the start of the project, TFP focused on three key components:

• Improve border management efficiency. A primary objective was to improve border management efficiency to reduce trade costs for business and increase the capacity of the PA to effectively manage trade and enhance customs revenue. TFP ran concurrently with USAID’s PITA, which had made significant investments in upgrading and securing crossings and borders with Israel. TFP’s work to improve border management and logistics efficiency was viewed as a necessary complement to those investments. As part of this work, TFP established a strong partnership with PA Customs to develop its capacity to increase revenue and reduce business compliance costs. Although not all initiatives were successful under this component, TFP responded quickly to opportunities and shifted the focus of the work toward PA Customs as some initial objectives — such as establishment of a PA presence at the border/crossings — stalled.

• Support private sector entities. TFP aimed to work with the private sector to mobilize incentives and energies among commercial interests in a manner that would respond to constraints on movement and access. Initially, TFP worked to increase dialogue among the Israeli CPA, Civil Administration, and Palestinian private sector to develop solutions to efficient movement of goods through the crossings. By addressing specific — often firm-level — issues, TFP targeted interventions that could benefit the broader trade community in the West Bank and Gaza.

TFP Contract

Duration: June 2008 - August 2013 Implementer: Chemonics International Budget: $17,646,934 Funding: Global Business, Trade and Investment II indefinite quantity contract

TRADE FACLITATION PROJECT FINAL REPORT 4

• Conduct research and information-sharing. At the start of the project, many trade facilitation information sources existed in the West Bank and Gaza, but the information was largely fragmented, not widely available, quickly outdated, and in some cases sensitive or vague. The project aimed to provide cohesive information to the business community on trade regulations and procedures. TFP also monitored and publicized changes to movement and access restrictions into and out of the West Bank and within the West Bank, providing solid analysis to proactively advocate for removal of restrictions and demonstrate success. In addition to its movement and access work, TFP brought cost-based economic analysis to a wide range of issues facing West Bank and Gaza traders. Through evidence-based analysis, TFP quantified issues that had only been examined anecdotally.

TFP adopted an adaptable approach to TFP implementation, integrating the public and private sectors on both sides of the crossings combined with high-quality collection, analysis, management, and dissemination of information. Clear, careful communications were essential, given the visibility of TFP and movement and access issues in the U.S.

mission and the international community. Two pillars underpinned the project’s approach:

• Building relationships. TFP began by building on relationships established under

PITA to achieve results, starting with the USAID Private Enterprise Office, and through that office to other U.S. players — embassy, Consulate General, Special Envoy for Middle East Peace, United States Security Coordinator for Israel — and the PA, Israeli government, and Palestinian and Israeli private sectors. TFP served as a reliable resource on a range of trade issues within the U.S. government and across the donor community working with other projects and donors, including the Office of the Quartet Representative.

• Working as an honest broker. TFP recognized Palestinian objectives and negotiating positions and Israeli limits and requirements. TFP built on PITA’s experience and established itself as a trusted mediator with the private and public sectors in the West Bank/Gaza and Israel.

Throughout the project, TFP maintained flexibility and strong communications with stakeholders and strengthened their relationships as well as relationships between PA and Israeli counterparts. The project’s achievements occurred despite major challenges, including two Israeli/Gaza conflicts, two Israeli elections, and severe financial constraints and public sector strikes in the PA. TFP navigated these crises and responded quickly to new opportunities. This report provides a summary of TFP’s main achievements, challenges, and lessons learned.

TRADE FACLITATION PROJECT FINAL REPORT 5

COMPONENT 1. IMPROVE BORDER MANAGEMENT

EFFICIENCY

A major goal for TFP was to improve border management efficiency, thereby reducing trade costs for business and increasing the capacity of the PA to effectively manage trade and enhance customs revenue. In the first years of the project, TFP ran concurrently with PITA, which had made significant investments into upgrading and securing crossings and borders with Israel. TFP’s work to improve border management and logistics efficiency was viewed as a necessary complement to those investments. The project focused on three initial activities:

Establishment of a Palestinian crossings and borders authority. In 2008, the PA was working to establish a new crossings and borders authority, which was intended to have overall control of all matters associated with imports and exports. This authority was envisioned to encompass and expand authorities and activities of the existing General Authority on Crossings and Borders. In the project’s first two years, it supported the PA in establishing the authority and a PA presence at borders/crossings. The main target was the Allenby Bridge crossing with Jordan, where such a presence had existed before 2001. Ultimately, the initiative did not proceed due to a variety of factors, including disagreement within the PA about roles and responsibilities of trade-related agencies at the borders/crossings, a lack of willingness by Israeli authorities to accept a PA presence at the borders/crossings, and differing views in the donor community on the scope of a PA presence. Faced with this challenge, TFP quickly shifted resources to other initiatives, particularly support to PA Customs.

Facility upgrades. USAID, through PITA, made substantial capital investments on the Israeli side of major crossing points, including infrastructure, mobile scanners, and container transfer areas. However, there were virtually no facilities on the Palestinian side of the crossing, which added to congestion, slowed movement through the crossing, and raised trade costs. TFP sought to upgrade facilities on the Palestinian side to complement the PITA investments. In addition to concept designs for improvements at the Sha’ar Ephraim and Jalameh crossings, TFP took advantage of opportunities to advance the opening of the vehicle crossing and import container transfer area at Jalameh.

Support to PA Customs. In the absence of a PA presence at the crossings/borders, TFP shifted its focus toward direct capacity support for PA Customs as it probably would play the strongest PA role in an eventual border setting. Additionally, our capacity building activities sought to achieve the aims of increasing revenue, decreasing compliance costs, and improving the PA’s capacity to manage trade. Institutional capacity support for PA Customs was among TFP’s strongest components, resulting in $32.4 million in increased revenue and reductions in business compliance costs in FY 2012 and FY 2013 alone.

Improving Capacity at Commercial Crossings

TFP tracked the change in capacity at commercial crossings through December 2011. Based on changes in turnaround times and volumes monitored by TFP, capacity improved dramatically, with a 50 percent improvement in FY 2010 and 15 percent increases in FY 2011 and FY 2012.

TRADE FACLITATION PROJECT FINAL REPORT 6

A. Support to PA Customs

Under the terms of the Paris Protocol, the PA and Israel form a single customs envelope.

Goods imported to the West Bank/Gaza enter through Israeli international borders, ports, and airports. Duties and fees are collected by Israeli Customs and transferred to the PA as part of a monthly clearance process. During this monthly clearance, limited information on import declarations is provided to the PA as part of the process. PA importers are required to submit a separate PA import declaration that can be checked against the Israeli declaration to some degree, but there is a substantial time lag.

At the start of the project, a lack of capacity in the PA on customs, as well as excise and value-added tax (VAT), was a strong concern. Building on relationships with PA Customs established under PITA, TFP’s focus throughout its work for PA Customs was to increase revenue while decreasing business compliance costs.

Additionally, this support was intended to improve the working relationship between PA and Israel Customs. Increased capacity enhanced trust between the two agencies. This increased the confidence of Israeli authorities to engage in joint activities, including the data interface, and to transfer responsibility as with the valuation of vehicles.

TFP’s interventions contributed to value-added from increases in customs revenue and reductions in business compliance costs in excess of $32.4 million during FY 2012 and 2013. Among two of the critical components of this success were:

• Use of regional expertise for training and capacity building activities. In TFP’s programs, the project built relationships with and among Israeli Customs, Jordanian Customs, and PA Customs for training and direct technical assistance. In the case of Israeli Customs, this not only established enhanced relationships between the Israeli and PA customs organizations, but also established transparency in the application of customs regulations for imports into the West Bank. The use of experts from Jordanian Customs allowed for Arabic-language training and provided insights into the application of Jordanian Customs regulations on which many regulations in the PA are based.

• Focus on improved information flow. The lack of timely information on imports into the West Bank and Gaza significantly hampers the ability of the PA to engage in effective risk management and post-clearance audits to address fraudulent declarations and undervaluation. Throughout its work with PA Customs, the project focused on improving the quality of information available, including developing a data link with Israeli Customs to provide nearly real-time data on imports and improving the capacity of PA Customs to process import data to enhance revenue and reduce compliance costs.

A1. Training

TFP-sponsored training programs with PA Customs and other trade-related ministries have established strong capacity in the PA to manage and enhance customs and VAT

TRADE FACLITATION PROJECT FINAL REPORT 7

collections and provide services to the business and public sectors on trade-related information and customs procedures. TFP provided more than 16,300 person-hours of training on a range of customs issues. Additionally, through focused, in-country training using regional expertise, TFP established functional Post-Clearance Audit, Risk Management, and Commercial Compliance units in PA Customs. To support the private sector, TFP’s landmark customs broker training has provided nearly 9,000 hours of training to 66 participants, which included private customs brokers and PA Customs officers, upgrading the skills of local customs brokers to support PA businesses and reduce compliance costs.

The project relied almost exclusively on in-country training provided by regional (Israeli and Jordanian) and international experts. Its training programs were a mix of on-the-job training, informal workshops, and extended training on topics ranging from basic customs principles to advanced techniques.

In many areas, our training programs focused on multiple levels: broad-based training for a wide range of staff, advanced training for specific practitioners, and follow-up training focused on a specific objective. As one example, in March-May 2013, TFP planned training with the goal of developing a National Risk Plan for the Post-Clearance Audit Unit. The initial four-day training event was on modern post-clearance audit techniques and participants and included staff from the Post-Clearance Audit Unit and senior staff from PA Customs and regional offices. The second phase of the training was for five participants and included advanced training with Jordan Customs. In the final phase, held in conjunction with our advanced General Agreement on Tariffs and Trade training, participants from training in Jordan worked with senior staff to develop a timeline for formation of the National Risk Plan. For substantial initiatives, such as the transfer of car valuation, TFP training followed this same plan: broad-based training for a wide range of staff and hands-on training for specific staff in Jordan (October 2012) finalized with PA-based training to disseminate the knowledge received in the Jordan-based training.

Additionally, throughout, TFP provided a range of training on general customs practices as staffing changed and the responsibilities for customs was transferred between departments. The exhibit below provides a selection of the range of programs provided that supported the primary initiatives described below.

TRADE FACLITATION PROJECT FINAL REPORT 8

Exhibit 1. Selected Training Programs

Training Subject Date Description Classification and Tariffs March 1-25, 2009 TFP joint training program with Israeli Customs for 27 PA Customs employees on classification and tariffs. The program covered all aspects of classification of merchandise and application of the Harmonized Commodity Description and Coding System of tariff nomenclature.

Customs Clearance Process October 18-29, 2009 10-day training program for 25 Palestinian Customs officers on customs clearance in cooperation with Israeli Customs. Training included lectures from Israeli and Palestinian experts and a field trip to Ashdod Port. The objective of the course was to acquire knowledge of export and import procedures, preparation of import/export documents, standards requirements, labeling, marking, and packaging and clearance procedures.

Food Classification January 25, 2010 Half-day session with Israeli Customs for eight members of PA Customs and the Automated System for Customs Data (ASYCUDA) to learn about changes to European Union import and export quotas for agricultural and food products (Chapters 1-24 of the Harmonized System Code). This gave participants an opportunity to understand the new quotas, exemption rules, and time limits and, in turn, make these available to Palestinian traders, who often are unaware of the availability and limitations of quotas.

Explanatory Reading of the Declaration Form

April 8, 2010 One-day workshop for 10 PA Customs officers on customs clearance and the customs declaration form. The session built on an earlier two-week course on customs clearance, but focused on proper calculation of customs duties and taxes for select regional department heads.

Evaluation of Imported Used Vehicles and Vehicles Imported for Display and Exhibitions

April 22, 2010 Full-day session for eight PA Customs officers at Ashdod Port on valuation methods and customs duty/tax calculation on imported used cars. Function was transferred from Israeli Customs to PA Customs, which is now responsible for applying proper value, calculating customs duties and taxes, and collecting any difference from the declared value. An important step in building capacity to take more responsibility for imports and revenue collection.

Customs Control in a Border Setting

July 5-22, 2010 Two one-week courses conducted by Jordan Customs for 12 PA customs officers to learn first-hand customs control procedures in a border setting that included passenger, baggage, and cargo processing (imports and exports), examination procedures, risk management, anti-smuggling, transit, and ethics and professionalism.

Advanced VAT March 6-17, 2011 With TFP support, 24 senior officers from PA VAT received specialized training from Israeli experts on VAT treatment of services. This intense two-week program was customized to address VAT treatment in new high-growth sectors like financial services, TV and radio, Internet services, and non-profits. The material provided will be used to train other VAT personnel and the private sector and was expected to lead to improvements in the VAT law and additional revenue.

VAT Procedures Manual March-April 2011 TFP conducted four training sessions in Jerusalem, Ramallah, Northern West Bank, and Southern West Bank on the VAT Procedures Manual that was produced by TFP.

Customs Procedures Manual March 2011 TFP conducted two training sessions in Jerusalem, Ramallah, Northern West Bank, and Southern West Bank on the Customs Procedures Manual produced by TFP.

Risk Management July 2011 Two individual programmers from PA’s ASYCUDA team have the capacity to develop criteria for a comprehensive risk management plan.

TRADE FACLITATION PROJECT FINAL REPORT 9

Training Subject Date Description Classification and Tariffs February 26-29, 2012 A major tariff and classification training provided to 16 PA Customs staff working at regional offices, in particular, staff at post-clearance audit centers. The course lasted four days and focused on the classification according to the Harmonized System for Products and Goods. Practical applications and cases were illustrated.

Post-audits - Jordan June 30-July 3, 2012 The introduction of the post-clearance audit techniques benefits Customs and the trading community.

For customs, post-clearance audits can help protect revenue, improve traders’ compliance, detect and prevent fraud, and increase the efficiency of customs control. For the trading community, post-clearance audits can expedite clearance of goods.

Risk Management - Jordan July 14-18, 2012 Applying knowledge and learned techniques in post-clearance audits and compliance audits at PA Customs’ Post-Clearance Audit Unit and Risk Management Unit.

Hebrew Language June 26-September 26, 2012

Hebrew-language training for PA Customs officials. Focused on technical language skills necessary to translate updates to the Israeli Customs Code.

Risk Management October/November

Applying knowledge and learned techniques in post-clearance audits and compliance audits at PA Customs’ Post-Clearance Audit Unit and Risk Management Unit at Ramallah and regional Customs offices.

Car Valuation - Jordan October 21-24, 2012 Applying knowledge and learned techniques in vehicle examinations/inspections and valuation at the new vehicle valuation system at PA Customs.

Car Valuation December 17, 2012 Follow-up on Jordan training.

Regional Workshop December 5, 2012 Development of workshop for regional customs and VAT directors.

Post-clearance Audits - I March 24-28, 2013 The focus was on modern post-clearance audit techniques to educate PA Customs staff on how to organize and conduct a post-clearance audit by enabling them to describe the audit process (risk assessment and planning, conducting, and reporting on an audit), understand the concepts on which is it based, and ensure that the audits are conducted in a uniform, efficient, business-friendly, and comprehensive manner while adhering to stipulated principles, policies, and processes.

Post-clearance Audits - II April 21-25, 2013 Focused on improving skills and knowledge of PA senior customs officers, enhancing staff capacity in this field. Participants explored channels and tools of data flow between the Post-Clearance Audit Unit and the Risk Management Unit and the link between the units

General Agreement on Tariffs and Trade

May 19-21, 2013 Trainees gained an up-to-date understanding of recent developments at the World Trade Organization (WTO) and World Customs Organization (WCO), which will be applied to increase the efficiency of customs control and trade facilitation in the PA. Where appropriate, they developed simplified materials for the trading community and other customs staff. Trainees developed knowledge and skills that can be applied to advise traders and officers on complex matters concerning post-clearance audit activity, design ASYCUDA reports, and advise traders (importers and exporters) on complex questions and disputes over valuation, origin (free trade area eligibility), and other customs-relevant areas of trade.

Advanced Technical Hebrew Language

June 2, July 3, 2013 Advanced technical Hebrew-language training as a follow-up to the 2012 program.

Ministry of National Economy

(MONE)

June 23-26, 2013 Four-day training on classifications and origin for 22 MONE employees to provide them with an understanding of the structure and limitations of WTO and WCO agreements and treaties.

TRADE FACLITATION PROJECT FINAL REPORT 10

A2. Data Interface

From the start of the project, TFP recognized the importance of a data link between PA and Israeli Customs as essential to the ability of the PA to accurately track imports and exports and to increase revenues. Currently, as part of the revenue transfer process, PA Customs receives data on a monthly basis from Israeli Customs. For each declaration, the data transferred contain only four fields of information, and given that the data are often received weeks after the shipment has been imported into the West Bank, it is impractical for the PA to check the declaration because the goods are typically already in the marketplace.

Throughout the project, TFP worked with PA and Israeli Customs to advance the data interface.

The parties eventually agreed to a data transfer that will provide more than 40 fields of data for each declaration on goods being imported daily by the West Bank. The implications for PA Customs and revenue are substantial. The data can be used by the Risk Management Unit to construct models to profile and identify suspect declarations. This information can then be used by the Post-Clearance Audit Unit to investigate problematic declarations and, given the daily receipt of data, it will be able to follow-up in a timely manner. As a result, TFP estimates that when fully operational, the interface can yield $4.2 million to $6.4 million a month in extra revenue and will reduce business compliance costs by 30 percent.

In later phases of implementation, the data interface can be used to automatically transform Israeli Customs declarations into PA Customs declarations, saving significantly on business compliance costs, reducing errors, and preserving government resources. Combined with upgrades to a Direct Trader Input (DTI) Program described below, TFP estimates that implementation of the data interface system can save $3.2 million to $4.3 million a year in compliance costs, even if no more than 35 percent of businesses adopt the facilitated system.

Another aspect of the data interface is that it provides PA Customs with the same information on Palestinian imports as Israel Customs. This information exchange helps to build a partnership between the two in jointly managing trade, reducing fraud and smuggling, and addressing other areas of joint concern. Accordingly, this activity is an important first step in building a more equal partnership in trade management.

After several years of discussion, in September 2012, PA Customs and the Malam Company signed a contract with the input of Israeli Customs to develop the data interface. TFP’s Jordanian Customs advisors worked with the ASYCUDA, Risk Management, and Post-Clearance Audit units at PA Customs to prepare the system and design reporting mechanisms to use the data from an operational system. Work proceeded well throughout the development phase from September 2012 to late January 2013. At that time, the data interface was successfully tested, with PA Customs processing the initial test data. Following completion of the data interface, Israeli Customs had initially agreed to send five years of historical data — invaluable in setting up a database for risk management — in addition to beginning regular data transmissions. However, political developments in autumn 2012, including an upgrade of the PA status at the United Nations and the November 2012 Gaza conflict, placed a hold on the data interface and other PA/Israeli initiatives, and Israeli Customs did not begin the transmissions. The interface remained on hold from the end of January 2012 through mid-July 2013.

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In July 2013, at a meeting of the joint PA/Israeli finance committee, which includes representatives of PA and Israeli Customs, it was agreed that an initial two-week test of the initiative would begin immediately, followed by regular transmission of data beginning September 1, 2013. Test transmissions began July 15, 2013 and are expected to continue without interruption. Although TFP worked with PA Customs teams to prepare for the database throughout 2012-2013, substantial development remains to be completed once the system is operational if it is to bring about the forecast reduced compliance costs and increased revenue.

A3. Car Valuation

Used vehicles account for 35 percent of imports by value by the PA. In 2009, more than 15,000 used vehicles were imported into the PA, generating more than $108 million in revenue.

Accurate and timely valuation of these imports is a critical component of PA Customs revenue.

In early 2009, Israeli Customs agreed to transfer to the PA the functions of post-clearance valuation and revenue collection for used car imports. This represented the first such transfer of valuation responsibility to the PA.

To effectively manage the valuation, PA Customs needed to be able to properly apply value, calculate customs duties and taxes, and collect any difference between the determined value and the declared value. Additionally, it needed to be able to exercise full authority in relation to authorizing Palestinian bank guarantees when importing new vehicles for exhibition. From 2009 to 2013, TFP worked with PA Customs to effectively manage this process, establish lasting capacity, and generate increased revenue with low compliance costs.

Initially, TFP supported training for PA Customs officers on valuation and duty calculations delivered by Israeli experts and incorporated valuation procedures into the TFP-supported PA Customs Procedures Manual. Combined with additional technical support, in FY 2010 and FY 2011, TFP calculated the percentage change in total revenue collections from vehicle imports as a result of applying proper customs valuation and effective revenue collections at more than 200 percent. By 2012, revenue from adjustments to vehicle valuation had risen to nearly $3 million, a 33 percent increase from 2009.

Following the initial period of operation, TFP fielded a Jordanian valuation expert to assess the system. Despite strong revenue increases, significant deficiencies were identified and in 2011, TFP estimated that these issues resulted in $3 million to $4 million of revenue losses annually.

During the subsequent two years, TFP advisors worked directly with the valuation team to introduce a new approach to valuation that would use a database and automated valuation system to reduce losses due to undervaluation. In conjunction with development of the database, TFP funded and installed hardware and software for the system at PA Customs, which provided a direct source of data. TFP structured and provided extensive training to staff on application of the system. To further enhance revenue, TFP advisors worked with staff on entering vehicle price data in conjunction with local car dealers. Staff were trained on the valuation of car accessories in the West Bank and through off-site training at Jordanian Customs. (Accessories refer to features beyond those offered on base models that tend to increase the value of the car, e.g., leather seats, sun roof, sport wheels, and top-of-the-line stereo.) The full car valuation database became operational in January 2013.

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From the combination of increased capacity for assessment and the automated database, TFP estimates that the car valuation information technology system adjustment revenues should rise another 20 percent, resulting in an additional $2.5 million annually in revenue for the PA. The automation of the valuation process also provides for substantial decreases — estimated at nearly $1 million per year — in business compliance costs.

A4. Direct Trader Input Program

The success of risk management depends largely on the availability of timely import declaration data. In the absence of the data interface, it is essential that import declaration data are received and entered into the ASYCUDA system as soon as possible. For this reason, TFP promoted the development and expansion of the DTI features of ASYCUDA. This feature allows select importers and their agents to enter declaration data into ASYCUDA from their premises and to receive electronic acceptance of the declaration if deemed compliant by the risk management system.

To develop the system, TFP worked with PA Customs to put in place the necessary regulations and procedures. Following approval of the system by the prime minister in 2012, TFP advisors worked with the ASYCUDA and risk management teams to implement the system.

Companies are identified as potential candidates for the DTI Program based on the number of declarations made and the amount of customs revenue collected. To join the program, compliance audits are conducted to assess the quality of internal systems and controls and ensure they promote accuracy and compliance. TFP advisors worked directly with the ASYCUDA and risk management teams to develop and train personnel on completion of the audits.

Most importantly, the DTI Program allowed development of the risk management red/yellow/ green risk rating system in the ASYCUDA system. With the system coming online in 2012, this allowed a major increase in trader facilitation.

• Yellow Lane is applied to all declarations not identified as Red Lane or Green Lane. These traders must still lodge paper declarations, but processes have been extensively streamlined, with post-clearance audits for most verifications. This process saves the business community $1.2 million annually.

• Green Lane allows DTI for declarations from low-risk businesses to be completed electronically and cleared without Customs intervention, saving these traders $1.7 million $2.7 million annually.

• Red Lane is for high-risk goods targeted for immediate examination. This process will become operational with the data interface.

After information becomes available through the data interface, Phase Two of the Green Lane DTI Program will make it possible for traders to convert their Israeli Customs declarations automatically into PA Customs declarations, further reducing costs for businesses and PA Customs.

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As of July 2013, 41 companies were participating in the DTI Program; an additional 28 companies are expected to join by the end of August 2013. In July 2013, faced with an obstacle to adding companies to the system due to a constraint on the number of users for the ASYCUDA system, TFP purchased additional user licenses, which would triple the number of simultaneous users, to 300. Combined with a time-out mechanism for idle users, with this USAID-funded purchase, the current system should be able to support up to 600 users and be sufficient to support PA Customs activities for at least the next five years.

Exhibit 2. DTI Program Status as of August 2013

Total compliance audits performed 86 Companies approved and using DTI 41 (69) Companies approved for DTI, awaiting training 28 (0) Companies recommended for DTI privilege, awaiting application forms 10 Companies requiring additional assistance/compliance 5 Companies recommended but refusing DTI 2

A5. Financial VAT Training

Following discussions with the Israeli Tax Authority, the Director General of PA Customs, Excise, and VAT requested training for its staff on advanced collection procedures that had been implemented in Israel. These changes moved the local VAT from a tax mainly on goods to a tax on goods and services, as originally intended. Because Israel and the West Bank share common VAT legislation and collect VAT on behalf of one another, the new laws and regulations in Israel were also applicable in the West Bank.

TFP coordinated with the Israeli Tax Authority to facilitate a 10-day training course in March 2011 that focused on areas where the Israeli Tax Authority had developed new VAT collection techniques for financial and service institutions, including banks and insurance and telephone companies. The course also resulted in creation of information on VAT changes that were disseminated to taxpayers throughout the West Bank and in an update of the PA Customs VAT Procedures Manual.

As a result of the course, VAT collections rose from $16.5 million in 2009 to $102.6 million in 2012. Collections in the financial sector rose fourfold from $1.1 million/month to $4.3 million/month. It is estimated that this training, which cost $80,000, has generated $6 million to $7 million in annual VAT collections. The initial training also led to subsequent VAT training by the USAID Investment Climate Improvement Project, which led to additional VAT revenue of $99.7 million in 2012. The

A Palestinian VAT official trainee listens as training material, conducted by the Israeli Tax Authority, is translated into Arabic in March 2011. TFP fostered a successful partnership with Israeli Customs, resulting in several training sessions for PA VAT officials to help increase revenue, improve compliance, and foster a collaborative relationship between the two entities.

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VAT training considerably enhanced the PA’s source of revenue, as well as the communication and relationships of technical staffs of the Israeli Tax Authority and PA Customs.

A6. Risk Management

False declaration and undervaluation of imports into the West Bank cannot be fully addressed by the Israeli government at the ports of entry or by the PA internally without development of a national risk plan that guides cost-effective audits and examination and enforcement strategies.

An operational risk management unit is essential to efficiently target interventions by Customs Post-Clearance Audit and Enforcement units. It also enables implementation of facilitation programs like DTI for low-risk businesses and customs brokers. Through extensive training and the provision of direct technical support by Jordanian advisors, TFP developed a Risk Management Unit at PA Customs, which became fully operational in January 2012 with three full-time staff. Staff at the unit were extensively trained in modern risk management procedures.

Milestones in this process included:

• Development of the first National Risk Plan, which enabled the introduction of an automated red/yellow/green risk system in ASYCUDA. This allowed for implementation of the DTI Program, institution of compliance audits designed to reduce costs for low-risk businesses, and development of targeted audits by post-clearance audits that reduce disruptions to compliant traders.

• The automation of risk management procedures by updating the ASYCUDA system with current pricing data on primary imports. These data were gathered through a combination of pricing data provided from Jordan and working directly with West Bank firms to receive current pricing information.

• Extensive internal and off-site training for staff at the Customs head office in Ramallah and in regional offices.

• Development of standard operating procedures for risk management that were incorporated into a revised Customs Procedures Manual developed by TFP with PA Customs. When VAT was added to Customs’ responsibilities in late 2012, the principles were extended to VAT activities.

• Use of updated pricing information, TFP and PA Customs reactivated the automated selectivity criteria in January 2013. This decentralized system allows for input from regional Customs offices to enhance the ability of risk management to flag suspect declarations.

Based on these improvements, TFP estimates the annual benefit from risk management at $4.5 million annually in increased revenues. In addition to the benefits from Green Lane/DTI described above, effects include:

• Increased revenue through identification of high-risk companies, commodities, origins, values, etc. Based on performance to date, the current Yellow Line program will yield $0.7

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million to $1.2 million in 2013, with collections doubling in each of the three subsequent years.

• Reduced business costs. For businesses dealing with Customs, costs are reduced by at least

10 percent with the implementation of the Yellow Lane. This step reduced business compliance costs $1.4 million to $3.2 million in 2012-2013.

• Extension of risk management concept. Following its early success in Customs, from January

2013, risk management’s role was extended to support VAT audits and in July 2013, it was announced that the procedure would be gradually adopted for all tax lines, creating a single risk management unit.

The next critical step for risk management will be to incorporate the information received from the data interface so that declaration data can be filtered and automatically sent to other stakeholders attached to the ASYCUDA system. In the interim, risk management will continue to use data received from Jordan and West Bank traders to enhance their capacity. The data interface combined with risk management activities is estimated to be able to generate $27 million annually in additional revenue and reduce business compliance costs by $3 million.

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A7. Post-clearance Audit

The post-clearance audit is an essential part of the customs compliance system, because it carries out formal audit and compliance work identified by the Risk Management Unit. It deals with businesses on a day-to-day basis to ensure adequate levels of compliance in all customs activities. In late 2012, TFP expanded its support for post-clearance audit activities following a request by PA Customs to establish WCO-compliant systems. After an assessment of systems and training needs, TFP fielded an expert from Jordanian Customs to conduct capacity building activities. Key activities included:

• Establishment of a systematic link between the Risk Management and Post-Clearance Audit units to replace the previous manual system. TFP put in place formal procedures and established the link so Risk Management can feed information to the Post-Clearance Audit Unit and collaboration between the units is automatic.

• Extensive training and capacity upgrading of Post-Clearance Audit Unit staff through on-site training by a Jordanian Customs expert.

• Beyond the car valuation database, TFP established a secure risk management/audit case management system that automates the National Risk Plan, automatically collects intervention reports, updates the Risk Plan, and provides management information to Customs managers and field teams. This work will be enhanced once the data interface is operational. A fully functional system could increase revenue $4 million to $5 million per year by better targeting and reducing business compliance costs by up to $1 million per year by allowing more transactional/Yellow Line activity to be moved into the business-friendly Post-Clearance Audit/Green Lane area.

Based on existing work, these activities are generating $0.5 million in additional revenue annually. This impact will be substantially increased with the advent of the data interface, which will allow Post-Clearance Audit to conduct activities before the goods are in the marketplace.

A8. Commercial Compliance Unit

A substantial problem faced by Palestinian traders is the necessity of working at arm’s length with Israeli Customs and trade-related agencies to clear and ship their goods. Having identified a lack of capacity in PA Customs on a variety of trade-related issues, TFP worked to put in place and develop the capacity of the Commercial Compliance Unit.

Located in the PA Customs Head Office in Ramallah, the Commercial Compliance Unit is responsible for professional operational matters related to the WTO agreements. It provides a center of technical excellence that will offer binding advice and technical training on a wide range of customs commercial matters to Customs staff, other government agencies, and the trading public on Customs tariff classification, valuation, and origin, including free trade areas and preferential arrangements; intellectual property rights; and WTO agreements on technical barriers to trade, dumping, subsidies, and countervailing duties if these issues arise. The unit will also maintain, update, and distribute the Customs Procedures Manual, tariff information, and other reference materials.

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TFP worked with the Commercial Compliance Unit to consolidate relevant documentation from Israel, Jordan, and PA Customs and, where appropriate, has translated the information into Arabic, making it widely available to PA Customs staff and the trade community. TFP has developed a system to provide formal written advice to importers so they can confirm and guarantee duties and other requirements for prospective imports before conducting commercial activities. In September 2012, TFP completed translation of the Israeli Tariff Book into Arabic, the first such translation since 2004. Combined with the two TFP-sponsored Hebrew-language courses, Commercial Compliance Unit officers will be able to maintain an up-to-date Arabic version of the Tariff Book for the public sector and the private business community.

Although still in its initial phases, the Commercial Compliance Unit is expected to have a substantial impact by reducing business compliance costs by allowing traders to seek expert, binding advice in the West Bank rather than relying on intermediaries in Israel.

A9. Bonded Warehouse

In August 2012, the ministers of finance for the PA and Israel signed an agreement on a variety of customs and revenue issues.