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October 14, 2025
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The imposition of broad-based import duties on goods into the United States of America by President Donald Trump has placed pressure on manufacturers of goods impacted by the duties. South Africa did not escape the onslaught with duties of 30% being imposed on goods imported from South Africa. This is the first of two articles dealing with the impact of the duties on toll manufacturing arrangements in an attempt to soften the impact of the duties.
Introduction
Toll manufacturing is an arrangement by which one party supplies the raw materials for a product to be manufactured and the other party performs the actual manufacturing activities.
Internationally this arrangement is aimed at utilising the benefits of low cost manufacturing facilities situated in a country other than the country with whom the supply agreement is concluded.
With the introduction of the punitive duties by Trump certain supply arrangement are being renegotiated. An example is where South Africa previously supplied final manufactured goods, the arrangement is renegotiated whereby South Africa in future will only performs the toll manufacturing portion of the supplier arrangement and the foreign entity will supply the finished goods to the US.
This article deals with the broad framework within which toll manufacturing arrangements are governed in South Africa. The second article will deal with some practical challenges.
Who pays the import VAT and Customs duty?
The supplier of the raw materials for the toll manufacturing services will normally not conduct an enterprise for VAT purposes in South Africa and will therefore not be eligible to register as VAT vendor in South Africa.
The above will result in duty and VAT being payable on the importation of the goods into South Africa without a mechanism to recover the duty and VAT from SARS.
The above outcome is clearly undesirable.
The solution
The Customs and Excise Act allows for goods imported into South Africa by a non-resident to be imported under rebate of duty and VAT. For the technically inclined, this is done in terms of Rebate Item 470.03.
The above means that no VAT or duty is payable when the goods are imported. As you could well imagine, the relief comes subject to stringent terms and conditions.
What are the terms and conditions?
While the goods are imported under the customs procedure Home Use, it is subject to the rules governing imports under rebate. The goods are accordingly not in free circulation to be dealt with in any way the importer desires as would normally be the case of goods imported under the Home Use customs procedure.
What are the rules?
To clear goods under Rebate Item 470.03, a certificate is required from ITAC before the goods may be imported under rebate of duty and VAT. The application for the ITAC certificate must reflect the nature of the goods and the specific products that will be manufactured with the materials imported.
The goods must furthermore be stored in a rebate warehouse (not to be confused with goods imported under the Customs Warehousing Procedure into a Customs Warehouse). The storage facility must be secured and must be exclusively used for the manufacture or storing of the goods for manufacture.
SARS will inspect the facility before any imports will be allowed under Rebate Item 470.03.
The rebate item also requires that the goods must be exported within a specified period of time and that a declaration must be made that the goods exported have been manufactured from the materials imported under the rebate item.
Consequences of non-compliance
Recent judgements dealing with Customs rebates have all held that the law and rules must be applied strictly according to the wording of the law and that there is no scope for interpretation or deviation. This is based on the fact that a rebate is an exception to the general rules and must therefore be applied strictly.
The Customs and Excise Act determines that any non-compliance with the requirements of Rebate Item 470.03 will result in the initial import of the goods being treated as not having been made under the rebate item. Duty and VAT will accordingly be payable from the time of the original import exposing the importer not only to the VAT and duty payable, but to penalties and interest on the late or non-payment of the duty and VAT.
To add insult to injury …
As the importer will be the non-resident and not registered as a VAT vendor in South Africa, the importer will not be entitled to an input tax deduction of the VAT paid, and the VAT will therefore become an irrecoverable cost of manufacturing the goods.
It also does not assist if the supplier of the toll manufacturing services is declared on the importation documentation as the importer of record.
Summary
This article sets out the broad framework within which toll manufacturing and Rebate Item 470.03 operate. In the next article we shall deal with some of the practical challenges that are often overlooked and may result in significant exposure to participants.
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