The ever restless Ethiopian Revenues & Customs Authority (ERCA) is again about to come under the spotlight of public scrutiny. This time, the cause is in its latest desperate effort to collect and funnel cash into the insatiable purse of the public treasury. Arguably, it is using its legal fist, pulling back the pedal of a new directive bike wheel, backpedaling at the fastest possible pace.
Recently, the so-called Post Clearance Audit (PCA) work units in various branch offices of the Awtority, have been busy examining closed declarations to embark on a fishing expedition, allegedly for short paid duties and taxes, primarily targeting private businesses that have been importing goods. The efforts of these work units have now culminated in issuing several notices, demanding the prompt payment of “underpaid” duties and taxes, along with the usual interest and penalties for delay. The sum of these duties has reached the mark of hundreds of millions Birr and has become the subject of intense, but silent panic, debate, outrage, uproar and frustration.
I happen to have come across some of this uproar and have been dragged in to investigate what laws or factors might have prompted such measures. Initial and cursory examination of some of the complaints strikingly revealed that the duties and taxes payment notification issued to several importers, is related to supposedly underpaid taxes that should have been paid in accordance with the Customs Proclamation. But this has not been enforced due to the absence of other and additional implementation regulations, directives, guidelines and procedures that could put in to effect the provisions of respective proclamations.
In Ethiopia, the Duty Paying Value (DPV) is based on cost, insurance & freight (CIF) value as a requirement for the payment customs duties and taxes. Although the legislative framework, past or present, clearly provided CIF as a basis for DPV, at least since the adoption of the Customs Proclamation of 1997, for reasons not clearly understood, no implementation laws or even guidelines have been put into effect. The manner and method of incorporating the cost components for goods imported via neighbouring seaports are therefore not clear. Obviously, there is a plethora of costs incurred by each importer in each seaport. these include port services, loading, unloading, storage or warehousing, demurrage, transit fees and so on.
Until Ethiopia relinquished its possession of Massawa and Assab, huge port related costs, reportedly now over two million dollars in daily expenditure, according to the Ministry of Finance & Economic Cooperation (MoFEC), it was not an issue for an importer to pay duties and taxes. This is because the ports were Ethiopian and all costs incurred within the Customs territory of Ethiopia were not considered for DPV. In fact, port services and related costs until the first entry port of the Ethiopian Customs territory did not pose a serious issue even after Eritrea’s initial de facto secession and subsequently, de jure independence.
When war broke out between Eritrea and Ethiopia, the ensuing escalation of hostility suddenly resulted in the immediate decision of the Ethiopian government to cease and abandon the use of Massawa and Assab ports, and use the Djibouti Port. Imported goods were then directed to and started to flood the Djibouti Port, initially making the quick clearance of these goods a nightmare. Government tried to tackle the imminent chaos by setting up a task force comprising pertinent officials, including the Customs Authority.
However, the government decision to use Djibouti as the major gateway for import and export goods, replacing Massawa and Assab, was not accompanied by a concomitant regulatory framework to tackle the maze of administrative and financial problems. Challenges mainly arose from port services and valuation of new costs for the payment of Customs duties and taxes. Of course, the government attempted to adress some of these problems by issuing, among others, a Council of Ministers Regulation on Freight Forwarding & Ship Agency License in 1998 during the early months of the war, thereby opening up and engaging the private sector in such activities. It is also recalled that the government further empowered the National Bank of Ethiopia (NBE) under the regulation “to issue directives with respect to the control of foreign currency transactions by the freight forwarding and shipping agency services.”
Although all costs incurred in Djibouti’s territory must be incorporated within the DPV of all import goods, no directive was issued and put into effect for more than a decade and half. There was no sideline on the manner and method of assessing costs, except freight costs from the Djibouti port up to the first customs entry port of Ethiopia – Galafi or Dewele.
As a result, no other costs incurred in Djibouti before the arrival of import goods at the first Customs entry gate of Ethiopia were never included in the DPV. They were not declared to the Customs, nor did the Authority require such declaration to be made to it. In fact, there was no implementation law or rule, until January 2014, on the manner and method of incorporating costs incurred at Djibouti Port. Undeniably, numerous and necessary port services were provided before import goods obtained final clearance to transit to Ethiopia, and the payment for such services would have to be made in foreign currency as they were provided in a foreign land.
For quite some time and in a some cases even now, the payment for the services procured on most import and export goods in Djibouti, has been a thorny issue. It has not been addressed by the NBE, and it seems to have been left to individual mutual understanding, special arrangement and trust based transactions between Ethiopian and Djiboutian partners engaged in port and customs clearance activities.
Recently, payment notices have been issued to several individuals, enterprises and companies that are importing goods. Reportedly, there are even tax complaint cases tabled at the Tax Review Committee of various branches of ERCA, protesting the decision. The notices issued for the recovery and collection of “short paid duties,” notoriously by the Kality Branch Office of ERCA, was prompted with the adoption of a new directive. Its purported retroactive application has introduced the hitherto nonexistent assessment, procedure, and method of valuation for expenses and costs incurred at Djibouti Port, that “should have been be built up and incorporated” within the dutiable value of goods for the assessment and payment of duties.
The “Assessment of Duty & Tax Paying Value of Import Goods Directive No 94/2006,” was issued ostensibly, in accordance with the Customs Proclamation of 2009 that has been repealed and replaced by yet another new proclamation. The Directive became enforceable on January 23, 2014.
One article of this Directive requires the addition and incorporation into the DPV of all imported goods, a transport cost (five per cent of the declared and accepted FOB value of the goods up to the first port of entry of the Ethiopian Customs Territory). Loading, unloading and storage (handling) costs (five per cent of the declared and accepted FOB value of the goods up to the first port of entry of the Ethiopian Customs Territory) are also included. So are insurance costs (two per cent of the declared and accepted FOB value of the goods up to the first port of entry of the Ethiopian Customs Territory).
Upon its introduction, various issues, confusion and questions were raised that shrouded even Customs officers understanding regarding its implementation. The Authority was required to issue clarification, further explaining and outlining the transport corridors and the distance between each destination city to various ports of entry for the purpose of assessing transport costs incurred. This clarification came two weeks letter, instructing all branch offices of the Authority, to implement the directive commencing from its declared application date of January 23, 2014. It additionally required the recovery and collection of unpaid duties and taxes, if any, through Post Clearance Audit Control sections. In all fairness, the Directive and its clarification are very clear and unequivocal on the enforcement date.
Following the adoption and enforcement of this Directive, it is believed that immediate measures to comply with its rules and the clarification, were made by all importers and their clearing agents. Accordingly, it is highly probable that underpaid tax or arrears occurred on such a huge scale, that the Authority has had to notify taxpayers.
The tax Authority had never issued such law or directive in the past, particularly on loading, unloading and storage (handling) costs, that could oblige, require and even force importers in assessing their costs for DPV. Although prior to the new directive, the assessment of inland transport costs from Djibouti port up to Galafi or Dewele was made by adding-in 0.09944/kg, the new directive and its clarification have also brought a new method of assessment based on the regularly updated price documents obtained from Federal Transport Authority (FTA).
Customs proclamations, old and new, provide specific rules on the incorporation within the DPV of import goods, costs for loading, unloading, storage, goods handling and related port services up to the entry port of the Ethiopian Customs territory. However, until the issuance of the new Directive, no assessment guideline, methods or procedures had been put in place. As a result, neither Customs officers nor clearing agents had any guidance, instructions and methods to make and accept declarations incorporating such costs within the DPV of goods.
Neither can the declarant substantiate such costs by legal nor acceptable invoices since payments for such costs are made by means other than legally accepted settlement of payment for foreign services. With the issuance of the mandatory directive since 2014, declaration and payment of taxes have been uniformly applied in accordance with its requirement, although the ordeal of importers using unimodal transport and relying on individual Customs clearing agents, has not been fully addressed.
Even though the new directive has introduced a new manner and methods of valuation of costs, the Kality Branch Office of the Authority, and presumably all other branches, have retroactively and wrongly applied it far beyond its date of application or enforcement. The Authority has notified several companies importing industrial raw materials, finished or consumer goods to pay what they claimed to be underpaid arrears of duties and taxes that were supposed to be paid in accordance with the manner and methods of valuation provided under the new directive for the duration of import goods before the Directive was ever prescribed, issued, applied and enforced. In a nutshell, putting the cart before the wheel.
Apart from the serious legal pitfalls on the retroactive application of the Directive to claim supposedly underpaid duties and taxes, a new rate of five per cent has been introduced on the FOB value of all imported goods as costs for loading, unloading storage, which in most cases, is tantamount to introducing new unfair and unjust method of assessment duties and taxes for services that are normally rendered and paid on the basis of the weight of a truck, train wagon, and 20 or 40 feet of containers.
Arguably, FOB value of the goods, which is instructed to be the basis for the assessment of costs associated with sea port handling, loading and unloading, and transit to incorporate on duty paying values of goods is entirely ill-advised, incorrect and inappropriate. The ideological underpinnings behind the directive seems to squeeze as much money as possible, from the demonized service-oriented members of the business sector, so often branded by officials and cadres of the incumbent as rent-seekers. This is because such costs are incurred in almost all places providing port related service on the basis of the aggregate weight irrespective of the value of imported goods.
The “miraculous discovery” of the post clearance audit sections of the Authority, which came out after several days or even months of labour, is evidently and entirely a wasteful exercise that lacks the slightest legal basis to support the demand for the recovery of supposed underpayment. The reason is very clear and simple. The activities of the post clearance audit sections and officers is to augment the trade facilitation activities of Customs and recover any lost or foregone duties and taxes after the clearance of goods on the basis of the post audit control. This is in accordance with “the provisions governing Customs formalities” in force at the time of the importation of goods. Where violation or breach is discovered, the Authority is justified and legally empowered to initiate civil and criminal proceedings under applicable laws along with its claim for the recovery of underpaid duties and taxes, currently within five years.
However, no law in the Ethiopian legal system provides any power to the Authority or its officers to apply a new directive to situations that have occurred before it was enacted and enforced, on previously imported goods whose cases and declarations are appropriately closed, and claim arbitrary, unfair, brutal and unjust duties and tax payments. Paradoxically, this is the impending challenge facing many of the businesses already notified to effect payment.
While one cannot establish any default on the part of the declarant that can actually result in the conduct of taxpayer, in accordance with the Customs Proclamation, “a penalty of 10pc and bank interest thereof… in addition to the duties and taxes”, the request under each notice threatens the settlement with penalty and interest.
Internationally, the issuance and enforcement of all laws, including tax laws are meant to be apply, govern and regulate current and future social relations. The same is true for the imposition, levy and collection of duties and taxes. No duties and taxes are allowed to be imposed or collected without the adoption of specific laws, duly issued and prescribe the manner and application of the method of valuation.
The revised Kyoto Convention also requires that the rates of duties and taxes should be set out in official publications, the specification of the method that may be used to pay duties and taxes, and where errors in the goods declaration or in the assessment of duties and taxes will cause and have caused the collection or recovery of an amount of duties and taxes less than the legally chargeable, shall correct the errors and collect the amount underpaid. In many jurisdictions, there are several situations where even Customs are barred from the recovery and collection of underpaid import goods when particular the error is the customs itself or if in the case of India, certain acts have been a general practice by the Customs and importers or Customs house brokers.
Most issues that have necessitated the new directive to regulate the manner and method of assessment of costs on loading, unloading, goods handling, port services are mostly applicable in limited areas not covered by the legal regime on multimodal transport. However, the notice of payment that has recently started to be issued by the Authority might have created sudden shock to each importer addressed and could have created anxiety that is still not yet settled.
Some even might have conceded to effect payment of the requested amount and forced to make such arrangement with the Authority to be allowed to settle over an extended period of time. So long as duties and taxes requested are fair, just and legitimate, they must be complied with and paid.
In this regard, I take this opportunity to salute my former colleagues who have laboured to introduce the new directive in a bid to safeguard duties and tax interests of the government and regularize the messes created by failing to incorporate add-in costs within the DPV. That is perplexing to all self respecting citizens, despite the numerous legal and conceptual pitfalls that exist in the Directive. However, it will be a great disservice to try to understand and cause the Directive to be understood or enforced in such a way as to apply to periods before it ever existed. It is important that law enforcement, customs and tax officers alike to maintain honesty and loyalty to bona fide taxpayers.
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