Proposed customs penalty system too harsh?

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Polity Article by: Eleanor Seggie Published: 07 May 2010
Proposed customs penalty system too harsh?
The draft Customs Administrative Monetary Penalty System and the Excise Administrative Monetary Penalty System are more comprehensive and aggressive than previous guidelines, says auditing, tax and advisory services firm KPMG director for indirect tax, trade and customs practice Venter Labuschagne. The South African Revenue Service (Sars) recently collected comments on the two draft customs bills. While customs penalty regimes are usually quite harsh internationally, Labuschagne believes that Sars’ penalties may be too severe. “There seems to be little correlation between the potential loss for the fiscus and the value of a penalty that could be imposed if a discrepancy happens,” he says. He explains that a number of fairly administrative-type actions have been categorised as serious offences. In terms of penalty guidelines, Sars could levy penalties of three times the value of the goods, if tariffs are inaccurately declared. Tariff classification is complex and there is constant litigation on what the correct classification should be, says Labuschagne. A technologically advanced cellphone, for example, could potentially be classified as a phone, a camera, a video recorder or data processor, each of which has a different classification and rate of duty. While customs clients might misdeclare goods unintentionally, if the mistake happens more than once, this will result in three times the value of their consignment being levied as a penalty, he explains. However, companies may choose not to pay the penalties and face criminal proceedings. He says that, in this case, the State needs to prove criminal intent and criminal capacity. Labuschagne believes that companies might be more inclined to allow Sars to proceed with criminal proceedings in which, he says, they are unlikely to be convicted, than pay severe penalties. Interestingly, penalties imposed by Sars get paid directly to Sars, whereas if companies choose to face criminal proceedings and are convicted, the penalties go to the Department of Justice and Constitutional Development’s coffers, he says. Potential Relief for Foreign Investors Meanwhile, a local law firm reported that the Treasury was considering granting relief from exchange control and taxation for various foreign headquarter companies, in order to enhance and encourage South Africa’s role as a gateway into Africa. KPMG tax and legal MD Alan Field believes that, while no legislation is being promulgated at present, it will be intro- duced in the future. “It is necessary because, if South Africa is to be the gateway into Africa, it needs to have a headquarter regime, where foreign companies can invest through a tax-neutral company. The investment into Africa would also be relatively free of exchange control impedi- ments and South Africa is regarded as a more stable political regime,” he says. The theory is that investors would be able to take out foreign gains without a dividends withholding tax (currently the secondary tax on companies), capital gains tax or exchange control restrictions using the headquarter companies, he explains. Draft Customs Bills Meanwhile, Labuschagne says that the legislation in the Customs and Excise Act No 91, of 1964, was designed to deal with practical commercial issues and there was a definite need to modernise the legislation to keep pace with new trends and a much more complex commerce system. He believes that, while the draft Customs Control Bill and the Customs Duty Bill still require some changes, they have been generally positively received Based on deductions from the draft Customs Control Bill and the Customs Duty Bill, and the current policy, Labuschagne believes that Sars intends to create a regime where foreign companies will not be allowed to register as importers in South Africa without also registering as companies. Currently, offshore entities can register as customs importers, solely for the purpose of importing goods into the country. This allows them to do business without creating a permanent establishment in the country and without attracting corporate tax liability. “It appears that Sars is moving in a direction where only registered entities in the country will be allowed to register as importers. This will create some confusion for many existing structures and companies if it does become a practical application of the legislation,” he concludes.