Emerging issues in global customs

One of the enduring legacies of the latter part of the 20th century, with respect to customs and international trade, is the substantial reduction of tariff and non-tariff barriers to trade and movement of factors of production across national boundaries.

These developments continue to define the agenda of international trade and customs.

A key feature is the increased speed of entry into the domestic markets by international corporate players, and capital, leading to fierce market contestability.

BUSINESS MODELS
Multinational corporations (MNCs) fundamentally reconfigure the way business is operated in the host countries.

They introduce advanced information and communication technology (ICT)-based management platforms, new cultures, unique business practices, global networks, and synergies.

Of great concern to the host countries is the MNCs’ ability to leverage on their international trade logistics and networks in ways that not only threaten global security and safety, but also significantly undermine their tax liability.

To survive in the new dispensation, domestic market players are forced to make drastic adjustments to their business models.

TAX LIABILITY

Customs must also be alive to these developments to protect society from harmful substances and people and collect revenue.

As the domestic players embark on a new learning curve occasioned by the changing business environment, the more experienced international players encroach onto their market.

Over time, there emerges a shift in economic fortunes from domestic to international firms, “throwing a spanner in the works” for tax and customs authorities who are often ill-prepared to deal with this new reality.

One of the key concerns in less advanced economies is how to rein in MNCs to fully declare their global activities and incomes to enable accurate determination of equitable share of tax liability.

PRICING SCHEMES

MNCs design different strategies for executing their transfer pricing schemes depending on, among other things, the desired outcomes and specific features of tax and customs jurisdictions.

A case scenario involves a multinational firm ‘A’, based in London, which might want to take advantage of low labour costs in Myanmar for its export-oriented manufacturing.

It chooses to establish a subsidiary in Rangoon.

Once the costs of manufacturing are determined, they are distributed to other affiliates in different tax jurisdictions through a carefully designed and executed scheme aimed at reducing net tax liability for its global operations.

With this creative accounting done, and possible loopholes and audit trails carefully sealed, the goods are then exported to a third country, say, Kenya.

TECHNOLOGY

The documentation will indicate a fraction of the actual value of goods, on which basis a customs valuation is done.

Traditionally, customs has relied on various valuation methods, key being ‘market survey’ to obtain comparable values.

This approach has worked well, especially with goods that are common in that market.

However, with advanced technology, the market survey approach presents real challenges to customs authorities.
REVENUE COLLECTIONS
Imported goods attract the attention of customs, and tax authorities in different ways, but for the same purpose of revenue collection.

Whereas customs is keen on uplifting the value of the imported goods in order to raise more duty, tax administration is more interested in lower input costs.

When input costs are lower for the same amount of sales, profits are higher, and hence more taxes.

Where intelligent taxing approaches are used, such rivalries are easily obliterated by balancing out the losses and gains between customs and tax revenues.

The challenge however is the “silo effect”, where each department has to account for its own revenue collections.

INVESTMENT POLICIES

The Eastern and Southern African region has made an effort to create a tripartite mechanism for cooperation among Comesa, Sadc and EAC.

This arrangement will facilitate the partners’ development and implementation of superior trade, and foreign investment policies.

Better policies will give traction to the region’s desire to access world markets, technologies and foreign direct investments.

With such potential benefits, the nagging issue of loss of customs revenue as a result of deepening cooperation should not arise.

The revenue reduction in the short-run will be taken care of through enhanced market, and economic support from regional cooperation.

Dr Ongore is head of post-graduate studies at the Regional Training Centre, Eastern and Southern Africa Region–Kenya; [email protected]. Ms Matundura is a KRA customs officer and instructor at the centre; Antonina.Matundura.kra.go.ke