The importance of customs duties
We continually warn clients about the risks associated with international trade transactions and advise on the numerous ways to mitigate these risks. Often clients are only concerned with certain issues relating to relationship between the two parties, being the importer and the exporter. In this context clients ask advice on the best method of securing payment, which Incoterm (payment and risk terms) should be applied and what the most appropriate method of dispute resolution should be.
These are very important considerations and should not neglected, however clients often omit to consider customs duties.
Customs duties (or tariffs) could have a major influence on your revenue and could possibly even make importation or exportation economically unfeasible. However, it may well be that no customs duty is payable or that a lesser duty is levied or even that you may obtain a refund (or rebate) of the customs duty paid. Unfortunately clients often commit grave mistakes in determining which customs duty is applicable to their products. Determining which customs duty is applicable to a product is a complex exercise and expert advice should be sought. Often clients make use of clearing agents or freight forwarders (or worse still they decide for themselves) in advising them on which customs duty will be applicable. Unfortunately there are very few persons experienced in customs determinations and this leads to massive erroneous determinations which have very real financial implications. The incorrect determination of a customs duty does not only lead to the retrospective imposition of the correct duty, but could lead to a substantial financial fine or imprisonment. In addition the goods are impounded until the outstanding duties and fines have been paid. As we have seen in recent case law, the importer's or exporter's ignorance or intention is also an irrelevant consideration in minimizing retrospective imposition of the correct duty as well as fine or imprisonment.
The incorrect declaration could also imply that you do not have any history in importing or exporting a particular product. This could, in certain circumstances, prevent you from further importing or exporting that product. An example hereof was seen in the recent quotas imposed on clothing and textiles being imported from China. All of a sudden many importers could not receive a quota, because they have been importing under the incorrect tariff heading. Any such hassle may be avoided by obtaining a prior legal opinion on the matter, which cost would mostly be negligible in comparison with any loss which the business has now suffered as a result of not seeking such advice.\
Customs duties are not however only about determining what tax is applicable to a product. It may even be used to strategically position your business. A thorough knowledge of customs duties will show you that there are various ways to claim a refund (also referred to a as rebate or drawback) on the tax you pay for your imports. Such knowledge could therefore be used to position your business as an exporter for example. Such ?tax-free' imports relate to amongst other things the following:
- imports of goods used in the manufacture of other goods for local consumption,
- imports of goods used in the manufacture of other goods for export,
- imports of goods which are only temporarily in the country for adjustments, repair, etc which is then re-exported, and
- imports of goods for local consumption.
There are vast differences in the rules that apply to each of these refunds and importers will not automatically receive the refunds. Instead importers have to apply for these refunds, preferably before the goods were imported, in order to receive these refunds. The importer will also have to comply with certain legal requirements, which varies between the purposes for which the goods are imported, before such an application will be approved. It will be worthwhile to request a comprehensive review of your business' customs exposure. Such a review may save your business a great deal of money.
Some businesses may be tempted to approach the South Africa Revenue Services (SARS) for a customs determination (at a fee of course), but be weary of the fact that SARS is not bound by such determinations and may, and it has happened, decide to reverse its determinations. In such cases it would have been best to have obtained an objective legal opinion which could be defended should the need ever arise. For any further information about customs duties or risks in international trade transactions, kindly contact Rian Geldenhuys.