Imported Goods from a BLNS Country

It is an open secret that National Treasury is under severe pressure to manage the limited funds available in South Africa. This situation has essentially been caused by low tax collections by SARS and very high levels of State debt. Covid-19 provides a convenient scape goat for the situation South Africa finds itself in. But there is hope; SARS have just identified an area where VAT has been underpaid by importers in the past and are pouncing on the opportunity! 

Introduction 

The VAT Act contains a formula to determine how the value of imported goods must be computed. Importation VAT is then payable on this value.

The formula used for goods imported from the BLNS Countries (Botswana, Lesotho, Swaziland (now eSwatini) and Namibia) is different from that used for other countries. The BLNS formula essentially provides for a lower value to be placed on goods imported from a BLNS country, hence a lower amount of VAT becomes payable on such imports.

In the past all goods imported from BLNS countries have been treated as qualifying for the favourable valuation method. It has now transpired that only goods having their origin in the BLNS countries qualify for the beneficial VAT treatment. This article deals with the nature of the problem and the potential impact on importers. 

The formula applicable to non-BLNS Countries

For imports from countries other than the BLNS countries (e.g. the United Kingdom), the value on which VAT is payable is computed as the value for Customs duty purposes, plus 10% of the Customs value plus any Customs duty payable on the importation of the goods.

The 10% added to the Customs value is referred to as the upliftment charge.

So far, so good …

The formula used for imports from BLNS countries

The BLNS countries and South Africa form part of the South African Customs Union, more commonly known as SACU.

Being part of SACU, movements of goods among SACU member countries are not subject to Customs duty. The same exception does not apply to VAT. VAT is payable on the movement of goods among SACU member countries. 

For imports of goods from BLNS countries into South Africa, the value of the goods is determined as the value for Customs Duty purposes plus certain adjustments. As no Customs duty is payable on movement of goods among SACU member countries, there is no Customs duty to be added to the value of the imported goods from BLNS countries. 

As far as the upliftment charge is concerned (the 10% charge), the 10% upliftment charge applies to all goods imported from BLNS countries where the origin of the goods is not the relevant  BLNS country.

And this is where the issue arises.

What is the issue?

Historically the value of all goods imported from BLNS countries have been computed as not being subject to the 10% upliftment fee. In other words the value of the imported goods for VAT purposes has been determined without having regard to the origin of the goods. This practice has been going on unabated for a number of years.

The above treatment resulted in the value of imported goods with its origin in countries other than the relevant BLNS countries being understated and importation VAT being under-declared.

How does one determine the origin of goods?

The Customs legislation contains detailed rules as to how the origin of goods must be established. As a rule of thumb, one can accept that the origin of goods is the country in which the majority of the value of the goods has been added to the final goods. 

How does this impact me?

For imports by VAT vendors who will be entitled to an input tax deduction of the importation VAT, the only exposure is the potential imposition of penalties and interest. SARS can go back 5 years to re-assess the VAT. This may therefore expose impacted importers to a significant liability for interest.

For importers that would not be entitled to input tax deductions, the importation VAT, penalties and interest would represent an additional cost of importing the goods. 

What should I be on the lookout for?

As far as historic imports are concerned, there is not much to be done. 

With regards to future imports it is as simple as getting your house in order. This will entail ensuring that you are in possession of a certificate of origin for all imports (for imports from BLNS and other countries) and that the valuation of goods imported from BLNS countries takes the origin rules into consideration. 

Furthermore, if goods are exported temporarily to BLNS countries to subsequently be re-imported into South Africa, the goods must be exported under the Temporary Export Customs Procedure. This will ensure that when the goods are re-imported no VAT challenges arise.

Summary 

While this issue may not impact your business directly, there is a very strong message in this. SARS is scrambling for every cent they can collect. Now is the time to ensure that there are no hidden skeletons in your tax closet.