“In this world, nothing can be said to be certain, except death and taxes.” Benjamin Franklin
Taxes are a significant part of today’s economy and trade is one of the most important sources of the economy tax income. Indeed, paying taxes is part of your daily life from the coffee you drink in the morning to the mortgage of your house. A tariff is a tax on imports that is levied by governments to generate revenues and protect infant industries against competition. Using tariffs has many other benefits that serve the interest of the country receiving the imported goods and services. The most direct reasons for using tariffs are protecting domestic employment and consumer, foster growth, national security and retaliation for trading partners. Hence, in this article, you will get an overall idea to better understand tariffs, reasons behind applying them, intra-Africa trade and benefit and ways to avoid costly mistakes.
What do tariffs really mean?
Tariffs are also called customs duties, import duties, or import fees. There are various types of tariffs on importing to Africa, the most important ones are:
- Specific tariffs are a fixed fee charged per unit of good import. The type of products imported changes the tariff value. For example, a specific country can levy $6 tariff on a box of chocolate imported, but levy a $500 tariff on each unit of digital camera imported.
- Ad valorem tariffs are a fixed percentage issued according to goods value. For example, Gabon imposes a customs tax of 30% on onions so 390€/ton is bought at 507€/ton. However, on paper ream, Gabon is issuing 10 % on A4 paper ream that’s cost 2$ per unit before taxes and 2.2€/ton after tax.
In addition to tariffs, there are similar restrictions placed on imported products.
Non-tariff barriers to trade include:
- Licenses which are an authorization by the government to specific companies to import products that are usually restricted.
- Import quotas are levied on the amount of the good imported to control the presence of the product in the country.
- Voluntary export restraints (VER) which are the agreed tariffs on a product between the countries of export and import in order to limit competition and protect some types of local industries.
- Local content requirements are a type of restriction imposed by governments that oblige some businesses to respect a percentage of domestic production in the making of the goods imported.
Why governments are imposing tariffs on import?
Overall, the trade operation involves costs as tariffs on import. The main reason why tariffs exist is to boost the economy especially the ones in the process of growth. In today’s Africa, there are serious actions taken to not only build the economy and ensure the development of the continent but to become independent from foreign investments and development aids. The global economic crisis didn’t leave the continent indifferent as the stagnation of developed countries aids left Africa in deep economic and social struggle.
On another hand, donations form the other side of the Pacific aimed to serve developed countries strategic interest and not Africa development priorities. Tax revenues in Africa represent a small portion of its GDP compared to developed countries. For instance, tax revenues on customs and other import duties in the most economically prosper African countries like South Africa and Morocco are respectively 4% and 7%, while in sub-Saharan Africa the revenues are a very mediocre percentage of its GDP as of 2008 (World Bank,2018). Therefore, African governments decided to build a tax system that will serve their agendas in terms of economic growth.
African governments are definitely facing a challenge to balance between imposing higher tariffs on imports to raise revenues and the danger of discouraging economic activities in the continents. To solve this dilemma, African tax administrations decided to work in synergy within the continent to create independent legal bodies.
Optimizing the tax system
In August 2008, the first African tax administration forum (ATAF) took place in Pretoria, South Africa. The ATAF has for a mission to improve tax systems through exchanges of expertise and know-how, capacity development, and active contribution to the regional and global tax agenda. Since its creation in 2008 till 2018, the ATAF works on aligning both a well thought strategic and operating plan. The ATAT strategy pillars on four objectives:
- Developing a sustainable, member-orientated African Organization on Tax Matters.
- Fostering efficient and effective African Tax Administration.
- Driving the Knowledge hub in African Tax Matters.
- Informing & influencing the regional and global dialogue as the African voice in the field of taxation. (Ataftax.org,2018)
However, shadow-economy along with other factors are heavily challenging those objectives. Unfortunately, Africa suffers from corruption and unemployment in addition to an absence of effective regulations and control which leaves a room for informal business activities to grow and create a significant shadow economy. According to a study made by the International Monetary Funds (IMF), the informal economy in Sub-Saharan Africa averages 40% of GDP in the region’s low-income countries and 35 % for its middle-income countries GDPs which is a big percentage of the economy.
Both unreported incomes generated either from big or small businesses or illegal activities as smuggling of counterfeit goods contribute in enlarging the size of the informal economy. Furthermore, wealthy individuals avoiding paying their taxes represent Africa greatest challenge. In effect, the estimation of loss of revenues exceed the developed countries donations by $100 billion annually (OECD Observer, 2010). This latter urges African governments not only to fight against corruption but also to develop tax planning and avoidance measures. Nevertheless, importing from outside Africa involves customs and import duty taxes.
Most African countries use CIF (Cost Insurance and Freight) as a valuation method. The customs duties added to the VAT (value added tax) are the main duties on import. The import taxes calculation is based on various parameters including the nature of the goods imported, quantity, country of origin, currency and insurance. Yet, the VAT differs from a country to another. Traders can have a primary idea of how much their imports duties can cost using online tax calculators like Simplyduty.com and customdutyfree.com.
Also, it is always a good idea to consider the landed cost charges along with product prices and shipping fees before making any trade operation or before choosing the country of import. You can make a quick calculation of DPV (Duty Paying Value) and CAP (Composite Assessable Price) by using the methods below:
The following formulas show the calculation method of DPV and CAP:
DPV = Cost of goods + Transportation cost + Cargo insurance
Import duty = DPV x Tariff rate
CAP = DPV + Import duty = DPV x (1+tariff rate)
VAT = CAP x VAT rate.
Tariffs on import from China, Africa largest trading partner.
The top countries that the African continent tends to import from are China, Germany, Turkey, the United States, India, and the United Kingdom. However, with US$94.74 billion dollars’ worth of goods exported, China remains the biggest trading partner to Africa. This number is leaning toward increasing dramatically especially with the USA-China trade war. The partnership between Africa and China is vital to both economies. Consequently, in October 2000, the FOCAC (Forum on China-Africa Cooperation) was created to discuss the evaluation of the corporation between the partners and set actions for consistent development. The 2018 Beijing Summit of the Forum on China-Africa Cooperation (FOCAC) resulted in three main points concerning trade:
- The Chinese government presented 50 trade facilitation programs to improve Africa’s customs management including cooperation on market regulation and customs procedures.
- The commitment of the Chinese government to help Africa fighting against the informal business activities as smuggling of counterfeit products.
- Continuous negotiations to implement a free trade agreement between China and African partners.
You can as well check our blog for more detailed information on how to import from China, which explains not only the process of importing step by step but shows you how WaystoCap can help you import Chinese goods into Africa. However, a better way to get rid of the calculation headache is to consider the intra-Africa trade.
How can you benefit from the Continental Free Trade Area Agreement?
In addition to the creation of African tax administration forum (ATAF), the latest action in 2018 was the signature of Forty-four African countries the Continental Free Trade Area agreement. Consequently, the intra-African trade will benefit from facilitation and exemptions. Free trade means free tariff area. An ecosystem where African traders can benefit from minimum taxes to zero charges on a vast selection of goods traded between African countries. Moreover, not paying tariffs automatically leads to fewer constraints in terms of excessive paperwork. Also, the synergy between African customs authorities will facilitate the understanding and the application of the requirements in the markets of operation and also the flow of transit and transport of goods in the continent.
At this point, you can get an overall idea of import tariffs in Africa. Indeed, importing journey is full of challenges and hardships. Yet, there are common mistakes in the trade activities that cost traders extra tariffs charges.
What are the top tricky situations that traders can avoid?
1: Expecting consistency between countries
In the world of trade, there are countries who have similar regulations and tariffs. Either because they belong to the same continent or to the same political and economic unions. However, assumptions are never a good idea. Each country has its own independent taxation system. A system developed according to trade agreements signed with its trade partners and to its political and economic agenda. Thus, for the same quantity, value, or nature of the goods imported, the rates, rules, and forms are different.
2: Shifting responsibility and using outdated data
In order to maximize the profit from a trade operation, traders should avoid paying extra taxes resulting from inaccurate information or calculations. Many traders can assume import tariffs to be static rates all over the years. Hence, unexpected charges and policies can surprise traders for relying on old data. Rates are changeable variables. In effect, the taxation system structure involves various parameters. Also, shifting responsibility down in the supply chain to a third party that offers order fulfillment services can be tricky. Those companies hold no responsibility in getting the calculations right as the importer is the only party paying the extra fees in case of inaccuracy.
3: Abusing the system unintentionally
Newcomers to the trade business can sometimes make some lethal mistakes that can result in heavy penalties and fines. Usually, those mistakes are coming from the lack of acquaintance with the system formalities like undervaluing goods or unfitted paperwork. Incorrect declaration of items can be tempting to traders. For, to avoid high taxes and sneaking under duty-free or low-value customs policies. Nowadays, governments developed advanced techniques that detect the misevaluation of items easily. And, in case of violation, it can consequence in revoking the merchandise. Also, it is important to hold all the required documents and make sure the forms are filled correctly especially tariff codes.
4: Underestimating the weight of partners
International trade is a complicated journey. It can get even more complex when there is a last minute change or an overcharge of workload. Trade is full of surprises. Especially on an international level, therefore, you should trust third parties to handle part of the supply chain. Choosing partners is a very delicate process that requires a lot of devotion. You should choose carefully a trustworthy supplier and convenient means of transport. Fortunately, there are low-cost, reliable alternatives. Nowadays, you can get charged with a small percentage on the value of goods sold only after the operation is completed.
How WaystoCap can help you navigate tariffs?
Companies like WaystoCap help traders avoid hardships of trade on different levels. If you are a trader who wants to buy goods from Africa or elsewhere, you can benefit from WaystoCap services. Waystocap helps you find not only the best prices and quality products but also verified suppliers on a global level. Moreover, you can benefit from WaystoCap Payments that secure payments and allows you to pay in your currency and locally. The company can assist traders with verifying taxes and tariffs in its domestic offices in Africa. So, hurry up and Sign up to WaystoCap platform and benefit from all its services and products.