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Shift in approach to customs valuations could result in resistance, warns Deloitte.

Johannesburg, 14 January 2013 - A proposal to shift the basis for calculating customs duty to include product cost, insurance and freight presently being considered by government could result in resistance spurred on primarily by the fact that it could increase the costs of imports, whilst only marginally increasing tax income, warns Deloitte.

“It is evident from a perusal of the latest SARS annual report that the growth of the customs revenue, as a percentage of the total tax revenue, has historically been subdued. These duties have for the past six years accounted on average for only 4.15% of total tax revenues,” say Senior Manager Olebogeng Ramatlhodi, and Consultant Lindsey Ludike, from Tax at Deloitte

“These customs duties are presently still calculated using the Free on Board (FOB) principle. The basis of this valuation is as a percentage of the customs value of the imported goods in the country of export, plus any other costs and charges that are specifically required by customs legislation to be included or excluded in calculating the customs value of goods. The cost of insurance for the imports and their freight is excluded, however,” say Ramatlhodi and Ludike.

The proposal under consideration, however, would see the FOB method being replaced by the Cost, Insurance and Freight (CIF) valuation point.

“With this option the cost of the item, insurance and freight charges are included in calculating the value of imported goods.”  In countries such as Zimbabwe and Angola with a CIF valuation point, customs duties are calculated on a higher customs value compared to countries such as Botswana or Tanzania where the FOB point of valuation rules.

“We suspect that the rationale behind the proposed shift is to increase customs revenue - a move that could be met with severe resistance because of the compliance challenges it will produce in relation to South Africa’s commitments under the General Agreement on Tariff and Trade of 1994 (the GATT Agreement).”

“The textile and automotive industries will be amongst the few hardest hit by the shift due to the cost raising effect of a move to include international transport and insurance in calculating the customs value of imported goods for customs duty and Value Added Tax (“VAT”) purposes.”

“Most significant, however, is the fact that it will increase the cost of doing business in South Africa for many importers and future investors. Ironically, the country originally adopted the FOB calculation as its valuation point to minimise the cost of trading with South Africa and to encourage foreign direct investment,” say Ramatlhodi and Ludike.

Although the Department of Trade and Industry’s (DTI’s) Industrial Policy Action Plan for 2011/12 – 2013/14 indicated that South Africa was investigating the advantages and disadvantages of shifting the customs valuation point from FOB to CIF, it should be noted that preliminary investigations had revealed that the shift would not be feasible due to South Africa’s current commitment under the GATT Agreement, specifically:

  • Ninety-seven percent of the tariff lines bound by South Africa under the GATT Agreement are on FOB ad valorem terms;
  • South Africa has notified the World Trade Organisation (WTO) that FOB would be used as the point of valuation on imports into the Republic;
  • That there is no GATT Agreement for the shift from FOB to CIF;
  • Article II of the GATT Agreement prohibits any change in the method of determining the dutiable value which impairs the value of concessions granted under the Agreement;
  • To determine the Article II impact, there will have to be an investigation into the historic freight and insurance cost in order to develop an appropriate conversion formula for each tariff line to determine the market access value of the specific tariff line; and the shift should not result in an additional tariff protection.

“We understand that DTI investigations are underway on how the shift from FOB to CIF can be achieved. We anticipate that this matter could be mentioned during the next budget speech by Minister Pravin Gordhan,” conclude Ramatlhodi and Ludike.

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