Taxes on importation: a trap for the unwary?

You want to import a good, and understand that the tax consequences are straightforward - as in you apply the relevant import tax to the value of the good. Simple! Or is it?

But simple it is not.  Key pitfalls can include (i) not understanding all the taxes and charges applied at the point of import, (ii) complexities in determining the applicable customs tariff rate (including classification of goods (tariff codes), and rules of origin, (iii) valuation and (iv) documentation.

As regards taxes and charges apart from the relevant customs tariff (0%, 10% or 25%), it is important to note that VAT (18%) will normally apply and in certain cases excise duty also.  Aside from these explicit tax costs are a number of other costs including railway development levy (1.5%) and customs processing fee (o.6%).

Identification of the correct tariff code(s) for your goods is critical as this will determine the applicable rate of customs duty. The East African Community (EAC) Common External Tariff (“CET”) handbook provides a list of goods with their respective tariff codes (HS Codes) and import duty rates. However, this handbook should be read together with other relevant reference materials such as the Explanatory Notes, General Interpretative Rules (GIRs) so as to ensure an accurate classification.

If the import originates from within the EAC or SADC, then in addition to reviewing the rates set out in the handbook, consideration is also required of potential eligibility for a preferential duty rate. But any such preferential rate depends on satisfying the “rules of origin” as set out in regulations, which provide guidance on establishing the origin of goods. While the origin of certain goods is not difficult to establish, for others it is not so straightforward.

Once you have accurately classified your goods, and considered relevance (if any) of preferential rates, the next step is to determine the customs value for duty purposes. Customs valuation is the determination of the economic value of goods declared for importation, and is achieved by reference to six methods of determining the customs value as well as procedures of administering the methods. Since most import tariffs are on an ad valorem basis, the declared value directly affects the duty payable. Common situations where value may be under declared can include: (i) when customs value does not reflect future payment obligations, pre-payments, and indirect payments, and (ii) transactions with related parties if not at arms-length. In such cases, the TRA may seek to uplift the customs value and so assess additional duties and (if raised, as part of a post clearance audit (“PCA”)) then interest as well.

The final risk area is documentation. How sure are you that you have evidence in place to demonstrate that you have settled your duties? If your business has ever been through a PCA, you will be aware that significant issues tend to arise due to lack of documentation to support either the importation itself or duty payments. Also, increasingly the TRA has been performing reconciliations between imports in TANCIS and the corresponding line items in the financial statements. So, there is a need to be proactive in ensuring that all relevant documentation (including appropriate reconciliations) is in place.  

Besides legislation, your business should also consider administrative issues involved in customs. This is a wide area; however, a lot of trouble can be avoided where your team is well trained and up-to-date with these aspects.  Last but not least, you should ensure that your clearing and forwarding agent is reliable. Overall the aim is to ensure that non-tax issues (such as delay in delivery of goods, demurrage costs) are also properly controlled.

By Annasia Tarimo is a Senior Associate at PwC.