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What if? Another footnote to the demise of the SADC Tribunal: Henred Fruehauf Zambia Limited v Zambia Revenue Authority


What if? Another footnote to the demise of the SADC Tribunal: Henred Fruehauf Zambia Limited v Zambia Revenue Authority

What if? Another footnote to the demise of the SADC Tribunal: Henred Fruehauf Zambia Limited v Zambia Revenue Authority

When the leaders of the SADC member states decided in 2012 to scupper the SADC Tribunal instead of standing up to the instigator, Zimbabwe, they might not have foreseen the institutional harm to the integration ambitions of their regional organisation. The history of the demise of the Tribunal has been told many times over, including the hapless attempt to revive it with limited jurisdiction and private parties written out of the script. The SADCAT – SADC Administrative Tribunal – with jurisdiction to hear labour disputes in the Community is what remained of an institution with every promise to shine in the company of its peers on the Continent.

Then, along comes the Supreme Court of Zambia with a stark reminder of the stultifying effect of the missing Tribunal on the development of SADC community law and integration. In Henred Fruehauf Zambia Limited v Zambia Revenue Authority[1] the customs authorities, Tax Tribunal and Supreme Court of Zambia were faced with a contested interpretation of Zambian customs laws and the SADC Protocol on Trade, specifically Annex 1[2] on the rules of origin.

The facts were ordinary border-crossing stuff, with a twist. Sometime in 2019, Henred Fruehauf Zambia (‘Henred’), an offshoot of the parent company in South Africa,[3] arrived at the Zambian border with six second-hand (or ‘used’) trailers for its operations in Zambia. It produced the required SADC certificate of origin issued by the South African authorities and expected to qualify for the preferential or ‘Community’ treatment linked to the rules of origin in Annex 1 to the SADC Protocol on Trade. To Henred’s surprise, the ZRA officials at the border declared that the trailers did not comply with what they considered the applicable rules in Annex 1 and therefore did not qualify for preferential treatment.

Henred had reason to be unhappy with the decision. In 2016, after a similar incident, it had received a letter from the ZRA, informing it that the second-hand trailers it had imported at the time did qualify for preferential treatment, and it expected that decision to stand. Following its reversal, Henred unsuccessfully exhausted the internal remedies available to it, including an appeal to the Commissioner General of the ZRA. The Commissioner General upheld the decision of the officials that the trailers no longer qualified for preferential treatment, but as a gesture of ‘good will’ and for the last time, extended the preferential treatment on the basis of the letter of 2016.

This outcome prompted Henred to approach the Tax Appeals Tribunal, where its appeal was dismissed. From the Tribunal, the company appealed to the Supreme Court of Zambia. The Court reduced the dispute to two questions: on the one hand, whether there is uncertainty in the law relating to the importation of second-hand goods, and on the other, whether Henred had a legitimate expectation on the basis of the 2016 ruling that its goods qualified for preferential treatment.

For present purposes, it is not necessary to dwell on the legitimate expectation argument. Legitimate expectation is a principle of law grounded in the predictability and consistency of government action. Since the Court found that Henred based its expectation on what the ZRA, the Tax Appeals Tribunal and the Court considered to be an illegitimate decision, the expectation could not be legitimate. The situation might have been different had the Court not agreed with the ZRA and the Tax Appeals Tribunal.

The Court’s handling of the first question warrants closer scrutiny. It turned on the interpretation and application of three sets of legislation, namely the Zambian Customs and Excise Act, the Customs and Excise (General) Regulations made under the Act, and the SADC Protocol on Trade and its Annex 1.

The applicability of the Customs and Excise Act and the Regulations is beyond doubt. They are Zambian laws governing imports into Zambia. The Protocol on Trade comes into the picture for two reasons. The one is that both Zambia and South Africa are members of SADC that have ratified the Protocol on Trade, with its Annexes as an integral part.[4] The other is that Annex 1 and Appendix 1 of the Protocol are explicitly mentioned in regulation 69(c) of the Customs and Excise (General) Regulations as the criteria for the treatment of goods originating in SADC member states.[5] In other words, Zambia’s own law gives Annex 1 and its Appendix 1 legal force in Zambia.

Annex 1 is entitled ‘Rules of origin for products to be traded between member states of the Southern African Development Community’. Rules of origin are relevant because in terms of article 4 of the Protocol on Trade, member states undertook to work towards a phased reduction and eventual elimination of import duties on goods that originate in member states. Article 12 of the Protocol provides that such ‘originating goods’ qualify for preferential treatment in accordance with Annex 1.

Rule 2 of Annex 1 determines the ‘origin criteria’ for goods. Subrule (1) sets out the general requirements for goods to be identified as originating in a member state and therefore eligible for preferential treatment. Such goods must either be ‘wholly produced’ in a member state as described in rule 4 (‘Goods wholly produced in the member states’), or they must have been acquired in a member state and incorporate materials that were not ‘wholly produced’ there, as long as the materials underwent ‘sufficient working or processing’ in any member state as described in subrule 2 (entitled ‘Sufficiently worked or processed products’).

The content of Rule 2 of Annex 1 echoes section 73(1) of the Zambian Customs and Excise Act, except that according to the latter, in the case of goods that are not wholly produced in an exporting country, ‘the value added to the goods as a result of the process of production accounts for at least thirty-five per centum of the ex-factory cost’. (section 73(1)(b)). It should be borne in mind that section 73 applies to goods imported from anywhere in the world, while Annex 1 is confined to the preferential treatment of goods originating in and imported from SADC countries. The following observation by the Court later in its judgment should perhaps be taken with a pinch of salt, namely that rule 2 ‘is enhanced by our section 73(1) of the Customs and Excise Act which is … a domestication of the rule by our local legislation. It specifically states the percentage of value addition which will make goods eligible for preferential treatment on the basis of being partially produced in a Member State’.[6]

The question before the Court was whether the trailers Henred wanted to import fell into the category of ‘wholly produced’ (in South Africa) or not. On the strength of the certificate of origin, Henred argued that they did not and that rule 4 was inapplicable. The ZRA was of the view that the trailers did fall in the ‘wholly produced’ category and accordingly were subject to rule 4. Among the goods considered to be ‘wholly produced’ in a member state, subrule (1)(h) lists ‘Used articles collected there fit only for the recovery of raw materials’ (author’s italics). This, according to the ZRA, put paid to Henred’s claim, because by its own admission, the used trailers were going to employed in its transport operations and not for the recovery of raw materials.

It becomes clear, although not expressed in so many words, that the point in contention was the relevance and importance of the word ‘used’ in the interpretation and application of Annex 1. Ancillary to this was a question about the value of the certificate of origin.

After recapping the arguments by Henred and the ZRA respectively, the Court started its ruling with the latter issue by saying that it wanted to dispel the notion that the ZRA was obliged to accept the confirmation that the trailers were partially produced in South Africa without question. It referred to rule 9 that deals with certificates of origin, and in particular rule 9(3) that, in the words of the Court, ‘does permit an importing Member State, in exceptional circumstances or in case of doubt, to verify the nature of the goods against the certificate of origin’.[7] The Court then quoted rule 9(3):[8]

The competent authority designated by an importing Member State may in exceptional circumstances and notwithstanding the presentation of a certificate issued in accordance with the provisions of this rule, require, in case of doubt, further verification of the statement contained in the certificate. Member States, through their competent authorities, shall assist each other in this process. Such further verification should be within three months of the request being made by a competent authority designated by the importing Member State.

That the ZRA was competent to require further verification of the contents of Henred’s certificate of origin is not in doubt. What is doubtful is the Court’s reading that ‘exceptional circumstances’ and ‘in case of doubt’ are alternatives, while a plain reading of rule 9(3) makes it clear that ‘in case of doubt’ is linked to ‘exceptional circumstances’ and must be read together. There is nothing in the judgment that suggests the presence or consideration of ‘exceptional circumstances’ in Henred’s case. Likewise, the judgment is silent on whether the member states, Zambia and South Africa in this case, assisted each other in the process of verification.

The Court’s interpretation of rule 9 appears questionable or at least arguable. By questioning the certificate or origin, the Zambian authority is not doubting the importer’s integrity, it has reservations about the correctness of a fellow member state’s interpretation and application of the Protocol on Trade and its Annex which is reflected in the certificate of origin under its official stamp. Hence the need for mutual assistance.

Turning to the interpretation of rule 2(1) and rule 4, the Court made two opening observations. The one was that rule 2(1), like section 73(1) of the Customs and Excise Act, does not say what goods are wholly or partially produced. It merely sets ‘the parameters for acquisition of originating status by goods imported from another member state’.[9] For clarity it should be added that rule 2(1)(a) refers to rule 4 to find what counts as ‘wholly produced’ goods, while rule 2(1)(b) indicates that rule 2(2) determines what would qualify as partially produced goods under the heading ‘Sufficiently worked or processed goods’. The other observation was that neither rule 2(1) nor section 73(1) spells out what happens to used or second-hand goods.

The Court then went straight to rule 4, the one linked to ‘wholly produced’ goods. In the Court’s own words:[10]

Our understanding of the foregoing rule is that it defines what goods are to be considered as ‘wholly produced” in a Member State. It is, therefore, an extension of rule 2(1)(a) of the Annex which prescribes the criteria for qualification of originating status. The reference, therefore, to rule 2(1)(a) in the rule is not intended to limit its operation exclusively to that rule and not any other rules, but an indication of where the phrase ‘wholly produced” which is being defined originates from. Therefore, in their proper or correct appreciation the two rules must, as argued by the Respondent and held by the Tribunal, be read together.

As for rule 4(1)(h) the interpretation we have given it is that second hand or used articles or goods, irrespective of where they were manufactured, are categorized as wholly produced in a Member State for as long as they are exported from a Member State into a Member State. Further, to be entitled to preferential treatment such goods should be imported into a Member State for the sole purpose of recovery of raw material. Consequently, since the trailers were imported for purposes of use in the consignment of goods, they do not qualify for preferential treatment.

This interpretation by the Court can also be questioned. Rule 4(1)(h) refers to ‘used articles collected there fit only for the recovery of raw materials’. This looks like an objective description with no reference to the intention of the importer. It can equally be argued that a used article – like a trailer – that can be used for more or something else than the recovery of raw materials is not covered by rule 4(1)(h), in which event it could fall in the category of partially produced goods and the requirements of rule 2(2).

Be that as it may, this was the Supreme Court’s ruling and it stands as the Zambian interpretation of Annex 1 of the SADC Protocol on Trade. In effect, it upholds a barrier to the free trade SADC is professing to promote. The possibility exists that the court of another member state may come to a different conclusion on the same issue, the effect of which would be the antithesis of regional integration. And this is where the lack of a SADC Tribunal or Court of Justice shows up starkly. Had the original SADC Protocol on the Tribunal still been in force, the Zambian Tax Appeals Tribunal or the Supreme Court could have referred the interpretation of Annex 1 to the Tribunal under article 16 of the Protocol for a preliminary ruling. In turn, this would have become part of the ‘Community jurisprudence’ envisaged by article 21(b). The Tribunal’s decision or ruling would have been final and binding as provided in article 24(3) and subject to enforcement and execution in terms of article 32. Moreover, Henred would have qualified to take its complaint to the Tribunal under article 16, which allowed natural and legal persons standing before the Tribunal. And it would have met the requirement of article 16(2), namely that it had exhausted its domestic remedies. And so on, one may say.

There is ample evidence that despite criticism and shortcomings, functioning regional courts in Africa are playing a crucial role in strengthening the institutional, regulatory and governance framework of their Communities. The time is ripe for SADC to rethink its position. Henred Fruehauf Zambia Limited v Zambia Revenue Authority is a good reminder.

[1] [2021] ZMSC 152 (15 December 2021) (https://zambialii.org/zm/judgment/supreme-court-zambia/2021/152).

[2] https://www.tralac.org/documents/resources/sadc/1314-annex-i-to-the-sadc-protocol-on-trade-on-rules-of-origin-consolidated-text-revised-2008/file.html.

[3] Henred Fruehauf was established in South Africa in 1981. It refers to itself as ‘the most well-known certified trailer and allied product manufacturer in Southern Africa’ with ‘parts depots’ in many African countries (https://www.henredfruehauf.co.za/about-us.html).

[4] Definition of ‘Annex’ in art 1 of the Protocol on Trade.

[5] Regulation 69(c) is quoted in para 52 of the judgment as follows: ‘The origin of goods shall be determined in accordance with the rules of origin set out in Annex 1 and Appendix 1 of Annex 1 of the SADC Trade Protocol and an importer of qualifying goods who wishes to claim such suspended duty rates shall lodge, with the entry, a certificate of origin.’

[6] Paragraph 51 of the judgment.

[7] Paragraph 49 of the judgment. Author’s italics.

[8] Paragraph 49.

[9] Paragraph 52.

[10] Paragraphs 54 and 55.

About the Author(s)

Dawid van Wyk

Dawid van Wyk is a retired Professor of Law. He taught public law at the University of South Africa. In retirement he keeps himself busy with ad hoc research and editing.

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