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Customs Territory to pave the way for the next phase of integration
The way to the realisation of a Customs Union in the East African Community has been one filled with roadblocks. It took four years from the conception of the EAC to set up the legal framework that paved the way for the establishment of a Customs Union.
Through the enactment and adoption of the EAC Customs Management Act, the wheels of economic integration began rolling in 2005.
Since 2004, the EAC has marked several milestones on the way towards the achievement of a fully fledged Customs Union. The most recent one of these was the Single Customs Territory (SCT), which was agreed upon during the EAC Summit held in April 2012.
In November 2013, the EAC published the framework for the attainment of the EAC-SCT. However, the adoption of the SCT was phased and on a pilot basis, with Uganda being the first country to implement it in 2014.
The SCT is a Customs system aimed at leveraging on the efficiencies derived from the adoption of the destination principle. It aims at strengthening the Customs Union, reducing the cost of business and increasing trade within the EAC.
Revenue in real time
The SCT has also solved the problem of revenue sharing among member states, as each will receive their Customs revenue in real time.
The destination principle is an international taxation concept most commonly applied in value added tax, but also applied for Customs duty.
Under this system, tax is ultimately borne by the final consumer. The fundamental purpose of this principle is to ensure that all revenue accrues to the jurisdiction where the supply to the final consumer occurs.
The EAC-SCT regime borrows heavily from this destination principle in the administration of Customs duties among the member states. Under the EAC-SCT, the destination country is responsible for the declaration of the goods entering the EAC into their Customs system.
This is a shift
But verification of imports is done by the country or port through which the goods enter the EAC. This is a shift from the previous Customs regime in which multiple declaration points existed for goods imported for consumption within the EAC.
An importer was required to declare the goods-in-transit at various border points and deposit a security bond for the same. This system increased the costs and hampered the free flow of goods within the EAC.
The centralisation of the declaration and verification of the goods under the SCT has led to the collapse of the Port Transfer, Transit and Warehouse Bonds into one General Guarantee Bond. The General Guarantee Bond is expected to translate into reduced financing cost and transport time and ease the administration of the bonds by the various revenue authorities.
Once the goods are verified by the originating country, a movement document (C2) is generated and they are ready for transport to the consignee. Although transit bonds and shipping documents are no longer required for member-state transfers, the revenue authorities plan to institute various checks along the transport route to authenticate the release documents.
In Uganda and Rwanda, for instance, all trucks carrying goods-in-transit will be monitored online using a unique number or seal.
These checks are designed to test whether the clearance procedures were observed at the port of entry and that no revenue authority is robbed of its rightful income.
In Kenya, the SCT was adopted on a pilot basis on September 15 and a notice issued by the Kenya Revenue Authority.
The goods that will be cleared under the SCT are divided into intra-trade products between Kenya and Tanzania and maritime products between Kenya, Uganda and Tanzania.
Intra-trade products include rice, maize, sugar, alcoholic products and cigarettes.
Maritime products are goods originating outside the SCT, including motor vehicles, textiles and fabrics, electronics and beverages.
The verification of the imports is done at the ports of Mombasa and Dar es Salaam and duty paid in the destination country.
In the selection of the products for the pilot clearance through the SCT, the revenue authorities may have considered the frequency of trade or import of the goods.
Critical interface
For a trading bloc to gain from the SCT, it is critical that the interface between the various revenue authorities’ information technology infrastructure runs without hitches.
In recent years, some of the Customs IT systems in place have experienced significant downtime that has hampered trade within the region.
Thus, it is important to ensure a smooth integration of the IT systems of the various revenue authorities.
It is also paramount to ensure that proper security controls are put in place to guard against fraud by unscrupulous traders.
The SCT regime, if well implemented, will result in increased trade within the EAC as well as bolster the Customs Union, paving the way for the next stage of economic integration.
Titus Nguhiu is a senior tax advisor at KPMG Kenya. The views expressed here do not necessarily represent those of KPMG.
