SARS briefing on state and bonded warehouses at ports of entry into South Africa

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Finance Standing Committee

04 June 2013
Chairperson: Mr D van Rooyen (ANC) (Acting)
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Meeting Summary

The South African Revenue Service (SARS) briefed the Committee on the operation of the country’s bonded and state warehouses, and provided an update on the status of the One Stop Border Post (OSBP) agreement with Mozambique.

The difference between bonded and state warehouses was explained.  The main purpose of bonded warehouses, which were privately managed and licensed subject to certain conditions, was to allow imported goods to be stored temporarily in order to defer the payment of customs duties.  State warehouses, on the other hand, were managed by SARS for the safekeeping of uncleared, detained, seized or abandoned goods.

The role of SARS Customs in bonded warehouses covered the licensing process, the processing of declarations for the movement of goods in an out of warehouses, tracking and recording the movement of goods, and risk-based audits of bonded warehouses.  Inspections had to be carried out on a risk-assessment basis, as more than four million containers moved in an out of South Africa annually – apart from other forms of freight -- so it was impossible to carry out individual inspections.

Goods in a state warehouse were managed by a SARS-appointed warehouse keeper, and rent was payable.  Proper records had to be kept, with a list of all the goods in the warehouse being updated weekly.  The list was displayed at the warehouse and published on the SARS website, and this was deemed to be sufficient notification to the importer, or any other interested party, that unless the goods were duly entered, they would be disposed of.   Goods were normally allowed to remain for 60 days and if not collected – after fulfilling all the legal requirements – they could be sold, with the proceeds applied to any duties, expenses or other charges due.  Any surplus would be paid to the verified owner, but if it was not claimed, it would be paid into the national revenue fund. 

The annexes to the OSBP agreement with Mozambique had been signed by the Minister of Finance last September, and the indications were that they would be signed by the Mozambique Minister of Finance this week.  The benefit of the OSBP was that goods would be inspected and cleared by the authorities of both countries with only one stop, which would speed up the movement of goods in the interests of facilitating trade.

During discussion, the SARS delegation responded to Members’ questions about customs revenue, costs and losses, the disposal policy and responsibility for goods damaged in state warehouses, the use of scanners to improve inspections and save time, the prevalence of smuggling and corruption, and the choice of recipients of goods made available for emergency aid or indigent relief.  SARS also indicated that progress was being made in extending the OSBP concept to other neighbouring countries. 

Meeting report

Mr D van Rooyen (ANC) acted as chairperson, in the absence of Mr T Mufamadi (ANC), who was away on official business.  Apologies for absence had also been received from Mr E Mthethwa (ANC) and Dr Z Luyenge (ANC).

Briefing by South African Revenue Service (SARS) on Bonded and state warehouses
Mr Kosie Louw, Chief Legal Officer, SARS, introduced the briefing by explaining the difference between bonded and state warehouses. The main purpose of bonded warehouses, which were privately managed and licensed subject to certain conditions, was to allow imported goods to be stored temporarily in order to defer the payment of customs duties.   Duties and taxes were suspended for an approved period – generally two years – but had to be paid before the goods entered into the market or were exported.  The licensee bore full responsibility for the duty and taxes payable on the goods, which could be removed only after all the customs requirements had been met.

State warehouses, on the other hand, were managed by SARS for the safekeeping of uncleared, detained, seized or abandoned goods.  They provided a secure environment for the storage of goods in which the state had an interest.  Goods that had not been cleared within the specified timeframes, for instance, had to be removed to a state warehouse, otherwise the ports would become clogged up.  Counterfeit and dangerous or hazardous goods were moved to specialised warehouses, and were not stored in state warehouses.

The role of SARS Customs in bonded warehouses covered the licensing process, the processing of declarations for the movement of goods in an out of warehouses, tracking and recording the movement of goods, and risk-based audits of bonded warehouses.  Inspections had to be carried out on a risk-assessment basis, as more than four million containers moved in an out of South Africa annually – apart from other forms of freight -- so it was impossible to carry out individual inspections.

Goods in a state warehouse were managed by a SARS-appointed warehouse keeper, and rent was payable on commercial goods at a rate of between R10 and R30 a freight ton.  Proper records had to be kept, with a list of all the goods in the warehouse being updated weekly.  The list was displayed at the warehouse and published on the SARS website, and this was deemed to be sufficient notification to the importer, or any other interested party, that unless the goods were duly entered, they would be disposed of.   Goods were normally allowed to remain for 60 days and if not collected – after fulfilling all the legal requirements – they could be sold, with the proceeds applied to any duties, expenses or other charges due.  Any surplus would be paid to the verified owner, but if it was not claimed, it would be paid into the national revenue fund.  Goods that were appropriated to the state, or that were condemned and forfeited, could be sold, destroyed, transferred to another state organ, or made available for disaster relief, basic human necessities for indigent people, or for donation to any country in need of aid in such circumstances.  

Applicants tendering for the provision of auctioneering services had to furnish a R2 million guarantee, and SARS would enter into service level agreements with those who were successful.  Auctions took place in Johannesburg, Polokwane, Durban, Port Elizabeth, Cape Town, Upington and Bloemfontein, because the bigger centres provided better markets and higher prices.  Under certain circumstances, goods could be sold by tender, but this was a cumbersome process and did not happen often.

One Stop Border Post agreement with Mozambique
Mr Louw provided the Committee with an update on the One Stop Border Post (OSBP) agreement, which was signed between South African and Mozambique on 18 September 2007.  Since then, consensus on annexes to the agreement had been reached between the two countries, covering all the departments affected by cross-border issues.  Three annexes had been needed to deal with the various issues, and this had required agreement among seven or eight departments in South Africa, as well as in Mozambique.  The annexes had been signed by the Minister of Finance last September, and the indications were that they would be signed by the Mozambique Minister of Finance this week.  The benefit of the OSBP was that goods would be inspected and cleared by the authorities of both countries with only one stop, which would speed up the movement of goods in the interests of facilitating trade.

Discussion
Mr D Ross (DA) asked if SARS could give an indication of the cost of running state warehouses, and whether the privatisation of these warehouses should be considered.  What income was generated by customs annually, and how much was lost by customs duties not being paid?   Running the warehouses must be a massive operation, and the Committee would benefit from visiting both a bonded and state warehouse, and assessing the inter-connection between the two.

Ms Z Dlamini-Dubazana (ANC) asked about the customs disposal policy.  She was concerned that inspections were carried out only on a risk-assessment basis.  Durban had an expensive container scanner – could this not scan all the containers to avoid some not being inspected?  Now that the OSBP agreement with Mozambique was close to finalisation, it would be appreciated by the Committee if a similar facility for the SA-Zimbabwe border was considered.

Ms J Tshabalala (ANC) asked who had to accept responsibility for damaged goods.  When goods were made available for disaster relief or humanitarian assistance, how was it determined which needy cause should be supported?  Were any other OSBP agreements with neighbouring countries in the pipeline?

Mr T Harris (DA) asked whether it was possible for SARS, in the interests of enhancing trade, to assist other African countries to set up bonded warehouses along similar lines to South Africa.  He asked for details of how the OSBP process would actually work.  It had taken over six years for the Mozambique agreement to be finalised, so would it be possible, with the experience gained, to reduce this period if South Africa started to negotiate with other countries?

Mr Louw said that although he was unable to supply figures on the cost of running the state warehouses, he could assure Members that all costs were recovered – rentals were charged, and unclaimed goods sold to cover outstanding amounts. In terms of the current customs laws, it was not possible to privatise the state warehouses, although a new Bill was in the process of being brought to Parliament and, if approved, might allow for the possibility of privatisation.

It was not just customs duty that was recovered from customs, because the import side of value-added tax (VAT) “piggy-backed” on the customs system, and there was a whole string of other smaller taxes that were collected, such as environmental taxes, export and departure taxes.  Between R15bn and R20bn a year was generated by customs alone, while import VAT was well over R100bn, and the overall income generated annual was more than R150bn.  A substantial amount of the VAT income was refunded, however, because of the input-output system.

It would be very difficult to provide an overall figure of the amount lost by customs not being paid. The amount varied from country to country, and could be anything from 10% to 30%, depending on whether it was a developed or developing country.  Some of the major losses would be among the smaller businesses, where there was difficulty in getting them into the system.

Ms Rae Cruickshank, Group Executive, Customs Operations: SARS, said losses occurred through customs avoidance and evasion.  Avoidance was easier to quantify, while evasion --   which involved the smuggling of goods such as narcotics, or copper – could be quantified only on the basis of what had been seized.  Although SARS had 3 000 customs officers and 72 dogs, the prevalence of smuggling was very high.  It was not unusual to apprehend up to 10 kg of cocaine a weekend.

Mr Louw said the Committee would be welcome to visit a state and bonded warehouse, and suggested Cape Town as a suitable venue, as these facilities existed at the harbour.

Regarding the disposal policy, it was now possible for goods to be disposed of both locally and through export. This was done after consultation with sister departments, where the impact of selling goods into the domestic market on local industry and employment had to be considered.   The motor manufacturing and clothing and textile industries were sensitive examples of this.

Ms Cruickshank said it was impossible to process all of the containers – more than 4 million a year – through scanners.  A scanner’s maximum capacity was to scan six containers an hour, and this translated into 52 416 containers a year. More scanners were being considered for Durban, Cape Town and Beit Bridge, where cigarette smuggling was a serious concern.  

Mr Louw said South Africa was looking at the establishment of other One Stop Border Posts, and had already had two discussions with Zimbabwe.  It was hoped it would take less time to reach an agreement, as many lessons had been learnt through the Mozambique experience.  Because an OSBP involved South Africa and a foreign country operating in a specific area, the main issue was ensuring that South African law applied in the foreign country.  This was a tricky area, and explained why the Mozambique process had been so time consuming.

Mr William Mpye, Group Executive, Border Management: SARS, said two initiatives would help to fast-track the OSBP process.  National Treasury had been instructed by the Minister to establish a policy for border posts, while SARS was developing a universal OSBP policy, so the process did not have to start from scratch.

Mr Louw responded on the issue of goods damaged in a state warehouse, and said there was a provision in the law that the customs department would not be responsible, but if it were proved in a court of law that SARS had acted negligently or unreasonably, it could be held liable.

If goods were not claimed from state warehouses within 60 days, SARS could start the disposal process.

Ms Cruickshank said the decisions on who would receive goods donated to provide for disaster relief on indigent aid, were generally driven by the Department of Social Welfare.  She gave examples of clothing being provided after floods, blankets often being needed in winter, and clothing being supplied to refugee camps after xenophobic attacks.

The licensing of bonded warehouse involved close scrutiny of applicants’ tax compliance and financial standing, any criminal record, and issues such as the operation’s infrastructural security.  It was a comprehensive process, because a lot of goods were being placed in their hands, which placed emphasis on trustworthiness and compliance.

The Chairperson referred to the smuggling of illicit substances, and pointed out that where drugs were involved, corrupt activities flourished.  How did customs manage to insulate its unit against corruption?
Mr Louw said SARS had a “no tolerance” policy.  Those suspected of corruption were suspended and, if found guilty, dismissed.  The department tried to rotate staff as much as possible, without causing too much disruption to its employees’ family life.  Camera surveillance equipment was also being installed so that activity could be monitored on a 24-hour basis.

Ms Cruickshank added that corruption was a matter of concern, taking into account the amount of money which could be made through smuggling.  This meant that everything done by SARS had to be on the automated risk system which had been rolled out at all 36 border posts. The system eliminated the subjective choice of which goods would be stopped and checked. Mini-iPads were used to provide real-time feedback of what was happening, with photographs, so that the performance of officials could be monitored.   X-ray body scanners also removed the subjective element when searching for concealed narcotics.  All customs officers were vetted to ensure they were financially stable and did not have criminal records.

The Chairperson said that to assist with its oversight responsibility, the Committee would appreciate receiving a breakdown of corruption cases currently being dealt with, as it was evident that the environment was very conducive to corruption.

He closed the meeting by commenting that customs operated in a “delicate” area in terms of revenue collection, the development of trade and the prevention of trade, and as the current Committee neared the end of its term of office, it needed to ensure it left a strong legacy for its successors.
 

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