Customs duty - Ep2

Transcript

Titus Mukora

Welcome again to this ongoing podcast, where we’re looking at the Finance Act. Very happy to have with me here a very esteemed guest, Corazon Ongoro. Corazon, I’m going to ask you to introduce yourself. 

Corazon Ongoro

All right, Titus. So I’m Corazon Ongoro. I work at PwC. I’m a senior manager within the Customs and International Trade practice at PwC Kenya. I have been with PwC now for about 11 years. And most of that time has been spent doing a bit of VAT, excise duty and now customs. 

Titus Mukora

Okay, excellent. Anything in the Finance Act around customs?

Corazon Ongoro

I think there’s a lot in the Finance Act that we probably wouldn’t think affects customs, but it does. So let me give you an example: do you like fish? 

Titus Mukora

I love fish.

Corazon Ongoro

So fish is now going to be subject to excise duty — imported fish, that is. So if you like that kind, then the moment the fish comes through, then you’re going to have some import duty — which, by the way, is going to go higher. Maybe I’ll talk about that a little later, but it’s going to be import duty. And then on top of that, you’ll have the excise, and then on top of that, you’ll have some VAT potentially. Maybe the VAT people would know whether fish will attract VAT, actually. But that’s going to be the impact for anything that is now going to have a higher transactional tax on it. 

Titus Mukora

Okay. 

Corazon Ongoro

So everything that is touching on VAT, or excise will have a — yeah.

Titus Mukora

Understood. So you're recommending me to go look for another diet? No, I'm joking.

One of the things that really strikes me — and this is something I want you to clarify to me, Corazon, is that I find that every country in the East African community tends to ask for stay of applications on custom duty rates.

And I just wonder — I always wonder — do we really have an East African customs union with all these stays of applications?

Corazon Ongoro

I think we’ve made strides as far as putting together the customs union. It’s not perfect, but you do raise a valid point — and here’s why. So since 2016, 2017 thereabouts, the East Africa Community Common External Tariff, which is like our harmonised system for tariff classification, has been going through a comprehensive review, and that was completed last year, so much so that we had a new version of the CET in 21st July 2022.

But in this year’s Gazette Notice, there are so many changes that are touching on the CET. There are rates that are going higher. But even with those rates being as high at 35% — because we used to be at three bands. We were at 0%, 10% and 25%. And one of the key changes was that we went to 0%, 10%, 25%, and then a higher rate of 35%.

But even with that 35%, would you believe that countries are still asking for a stay so that they can either get a 35% or some duty rate, a specific duty rate that gives a higher yield of duty? So it’s still so prevalent these days. And one of the things that was touted as an advantage for the comprehensive review was that we would have much fewer stays.

So I think that’s something that countries should think about.

Titus Mukora

Okay. Interesting. Was there anything interesting or unique that you saw in the EAC Gazette? 

Corazon Ongoro

There are some unique things. I think for Kenya, one of the unique ones is that we’ll now have a higher duty rate on a lot of motor vehicles. Motor vehicles that we’ve traditionally brought in at 25% of duty are now going to go up to 35%.

Titus Mukora

Okay. 

Corazon Ongoro

And I think over the last few months, you’ve seen how people selling motor vehicles have been saying they’re struggling. So the units are not being taken up as much as before. That’s going to be a problem for sure. Any other thing that’s of interest that I would point out…? Perhaps: across the EAC, we are seeing Uganda, Rwanda and Burundi have decided to ask for a stay of application of the CET rate on anything that they will import for a project which is going to be carried out under a special operating framework arrangement with the government. So, no duty on anything that’s for such a project.

Titus Mukora

And we’re starting to hear that term, I mean it’s a term that I think I started seeing in the Finance Act a year or so ago: the special operating framework arrangement. Is that what we’re going to be seeing now, going forward, special operating framework agreements and exemptions for special operating framework agreements? 

Corazon Ongoro

I don’t know, because of course we’ve been tinkering with that for the last maybe three, four years now, because it surfaced even before COVID.

But what I haven’t seen Kenya do is to attempt to give the duty-free provisions that, say, Uganda, Rwanda and Burundi have sought. So that’s something that perhaps Kenya needs to think about, not just exempting the local taxes, but also the taxes on imports. 

Titus Mukora

And then maybe one other question that I have is around manufacturing, because customs, I think, is either used as a tool to try and promote domestic manufacturing. And I'm not sure how successful that custom visas are a tool for that. But sometimes there are also some negative aspects of tax policy that affect manufacturing. So, if you were advising manufacturers on what they should be doing for this fiscal year 23, 24, what would you be telling them? 

Corazon Ongoro

So I think the partner states have done a decent job of trying to protect their own industries here. And that’s how come we have remissions that are granted for inputs and raw materials so that people don’t have to pay the full duty — or even don’t have to pay any duty at all. 

But I think the trouble usually is that manufacturers then tend to get very comfortable. Because as long as you get those incentives and you are focused on the local market, then you’re happy. You’re being protected; all you need to do is service the local market. 

And I think the losers become consumers. But what businesses should be thinking about is to try and make themselves competitive for markets outside of Kenya. And if you think about it, all of these incentives that you have under the East African community, or even COMESA — and now what we are expecting under the Africa Continental Free Trade Area — if businesses could take those incentives and use them to their advantage and grow so that they can service a wider market, I think it would be really good for business.

But beyond that, if you think about the environment within which you are operating, businesses want to recognise that we are going to have a very, very aggressive customs authority. That’s what I reckon. And because of all of the revenue considerations. So businesses want to make sure that they are compliant. Prioritise compliance is what I would say, because you don’t want to be caught out and have to pay some very nasty interest and penalties.

Later this year, we’re expecting changes to the customs law and its regulations, and some of the driving reasons behind that change is that fines will go up to take care of inflation and the economic environment. So you don’t want to pay more. 

Titus Mukora

Excellent. I’m just going to throw you one last question, because you mentioned about these sort of ‘interlapping’ or overlapping trade agreements and businesses taking…are businesses aware of all these agreements and how to take advantage of all these trade agreements that we are part of now?

Corazon Ongoro

I think to some extent they are, but I think a lot of work still needs to be done to let people know and make people aware — and especially micro-, small- and medium-sized enterprises. I think there are efforts towards that. Just trying to get people to understand what’s available for them. But a lot of effort also needs to go into businesses being part of the formulation of these agreements, because then you’re able to contribute to what the agreement looks like in the end.

Titus Mukora

Excellent, Corazon. Thank you very much. I’m going to close it here, Corazon, but I really did enjoy this discussion. I think you’ve cleared up quite a few things for me, and I really do welcome you back to keep on talking to us about customs. Thank you very much Corazon. 

Corazon Ongoro

Thank you.

Titus Mukora

Thank you.