Customs Mechanisms to Protect Industry

Parliamentary Committee, August 16th 2016

2

Support economic

competitiveness

Protect our

economy and

society

Collect and

protect revenue

Our mandate for Customs & Excise

First-line of control over the movement of goods across our

country’s borders

3

Customs and excise value drivers and strategic focus

Risk Goods control prior to arrival /

departure

Audit

Facilitation of low-risk goods:

Fast, predictable service to

support RSA economy

Revenue coverage of known

commercial traders

Protect economy from P&R and

unfair competition

Protect society from safety and

security threats

Inspection

Critical Success factors

5. Quality Inspection of documents

6. Physical Inspection

• Professional staff

• Enabling tools, Dogs, scanners

7. Investigations and Sanctions

8. Audit capability

4. Customs Risk Management

• What to release vs. Stop?

• Feedback loop to improve risk

1. Client management

• Registration & Licensing

• Permits for P&R

2. Control goods at borders

• Control of cargo & supply chain

• Right cargo, 3rd party, OGA,

information for verification matching

3. Right information to collect revenue and

protect key industrial sectors:

- Customs Declaration:

Mandatary Value

Revenue coverage of unknown /

high risk trade

Investigations

4

Customs manages risks by overseeing the whole supply

chain, before the border, at the border, and post border

Customs Exit Port

Transit Custom

Entry Port

Customs Economic Operators

Economic Operators

ORIGIN DESTINATION

TRANSIT LEG EXPORT LEG IMPORT LEG

Risk evaluation of pre-arrival cargo information from supply chain

Management of registrants / licensees

Management of Permits

Customs Mutual Assistance agreements

Border control and anti-smuggling

Risk evaluation of Goods Declaration

Documentary and physical inspection

Coordinated border inspection with Government agencies

Targeted Inspections on specific P&R / goods

Post Clearance Audit & inspections

Integrated & complex audits

Investigations

5

Border

Mgt

Goods Control

Declaration

Processing

Documentary

Inspection

Physical Inspection

Enforcement

teams Audit Investigate

Risk and Intelligence Management

Customs mechanisms controlling borders and protecting

industry

Strategic Stakeholder Management

1. Industry engagement

2. IPR registration

3. Permits for P&R

7. Stakeholder Forum

8. Outreach & education

9. Customs Mutual Administrative Assistance

10. Border Cooperation & Coordination with Govt.

4. Registration

5. Licensing

6. Accreditation

Customs Operations

11. Customs Risk Engine

12. Manifest Processing, Matching, acquittal

13. Reference Pricing

13. Data and analytics (including 3rd party)

14. Case Selection

15. Customs Command and targeting Centre

23 16 17 18 19 20 21 22

6

SARS Compliance vision

• Make the Tax and Customs process less

labour intensive and cumbersome;

Risk Assessment

Effective Segmentation

Environmental Knowledge &

Understanding

Stakeholder Awareness

Education

• Make it simpler, quicker and

hassle free for clients;

• Improve the service offered to clients;

• But, ensure maximum compliance.

7

VOLUNTARY COMPLIANCE IS BASED ON TWO FUNDAMENTAL PRINCIPLES

Expedited Service

for legitimate Taxpayer & Traders

Interdict illegitimate

Taxpayer & Traders

Make it as easy as possible

for those trying to comply

1 Make it very hard for those

trying to avoid paying their fair share

2

Voluntary Compliance

Some taxpayers/traders will

always try to comply

whether effective

enforcement exists or not -

people who believe in doing

the right thing

The goal of voluntary compliance

is to influence the undecided

majority who will choose one way

or the other based upon how well

they are served and how easy it

is to comply

Some taxpayers/traders will

not comply whether

effective enforcement exists

or not – the criminals

Key to this approach is ensuring that taxpayers/traders understand their obligations!

8

SARS Compliance Programme

• The aim is to grow compliance with tax and customs legislation;

• Compliance refers to the degree to which taxpayers and traders, along

with intermediaries meet their legal obligation;

• Taxpayers and traders need to;

-Know what they have to do;

-Have the ability to do it; and

-Have the right motivation to take action.

• SARS acts to manage and measure compliance by:

-Working with trade to achieve demonstrated voluntary compliance;

-Reviewing international trends and good practice treatment options;

-Identifying specific cases for intervention;

-Conducting random audits to deepen understanding of industry practices;

-Tracing flow of funds around the world through a multi-agency approach;

• SARS uses enforcement action against incorrigibles, through focused

integrated multi-tax audits, investigations, and through seizures and

destruction of goods. Note: Compliance program initiated 2012/13, running in 2016/17

9

Prohibited and Restricted Goods

• Customs assist other government agencies and parastatals with the

enforcement of legislation administered by them prohibiting or restricting

the import, export or transit of goods through RSA;

• Custom legislation (Section 113) provides for the detention or seizure of

goods which do not comply with the legislative requirements;

• Various Customs Systems interphases with the Customs Declaration

Process to indicate such requirements captured thereon, such as the

Tariff Master and import permit system;

• Prohibitions and restrictions are captured in a list which is posted on the

SARS website and is available for both internal and external use;

• Most of these P&R requirements are administered electronically via the

SARS systems – a few permits or certificates are manually presented in

for verification or to be written off.

10

Prohibited and Restricted Goods

• Customs also identify contraventions of other legislation whilst enforcing

the requirements of the Customs and Excise Act, where they detain

specific goods and notify the relevant authority.

• Examples of such enforcement actions are:-

-second hand vehicles imported without the necessary permits from the

International Trade Administration Commission;

-medicaments imported out of regulatory control ;

-habit forming drugs which are not declared;

-counterfeit goods;

- and goods imported or exported in contravention of CITES restrictions or

prohibitions.

• Sometimes such detentions made by Customs can create problems of

their own in the sense that the relative authorities does not take the

actions required by them which leaves Customs with the decision

whether to detain or lease such goods.

11

Engagement: Customs proactively partners with industry

to support its mandate to protect the economy

Key Industries Relationship

• Clothing Textiles, leather and footwear industries

• Tyre industry • Tobacco industry • Alcoholic industries • Poultry industry • Scrap Metal industry • Plastics industry • Other

Confectionary

• Formal Industry forum with Terms of Reference including: manufacturers, industry groups, Government (DTI, ITAC, Econ Devt.), trade unions, retail stakeholders

• Sub-working groups / task teams tackle specific issues

• Peer review mechanism to address trade anomalies

• Clear SARS working instructions • Memorandum of cooperation with

individuals acting as experts

Coordinated strategy to optimise protection of Industry Expert industry assistance on reference prices, tariff & valuation. Tip-offs

12

Reference Pricing mechanism

• Reference pricing is a scientific approach to understanding the

underlying costs of key products within industries that are protected;

• Reference price provides a platform to consider the risk parameters

within the automated Customs risk engine rules;

• Customs Risk engine identifies high risk transactions of specific products

- identified by their Customs tariff code;

• Customs challenges potentially undervalued transactions and their

associated invoices through documentary inspection, physical inspection,

sample taking, and audit as required;

• Industry supports Customs with expert knowledge to verify product

classification, valuation and origin;

• Reference pricing is a guideline to detect possible valuation fraud, It is

not minimum pricing.

13

Reference Price formulation

• The Reference price is based on the absolute cheapest price that can

be found in the international market – price excludes: -The costs of labour,

-Trimmings,

-Overheads,

-Transport costs,

-Royalties.

• For goods where classification is based on kilograms (kg) the

reference price is based on the international price of the constituent

material (excluding: costs of labour, trimmings, overheads, transport

cost, royalties etc.)

14

Customs response to non-Compliant behaviour

Attitude to

Compliance

Behaviour Manifested Compliance

Action

Category

Trying to

comply, but

doesn't

always

succeed

0.01% – 25% difference of

value from reference price

Case dealt

with by

Processing

Hubs

1

Don’t want to

comply

25.01% to 60% difference of

value from reference price

Post

Clearance

Audit

2

Have

decided not

to comply

60.01% and above in

difference of value from

reference price

Hard

Enforcement

action

3

15

Clothing and textile Case study: Introducing reference prices

into risk rules yielded immediate changes in behaviour

Clothing Blankets Terry Toweling Bed Linen Textiles

Average Unit Prices Apr-12 R 3.31 R 6.51 R 12.49 R 9.20 R 14.08

Average Unit Prices May-12 R 3.93 R 6.50 R 13.26 R 9.32 R 24.96

Average Unit Prices Jun-12 R 5.68 R 15.56 R 17.94 R 17.06 R 19.79

R 0.00

R 5.00

R 10.00

R 15.00

R 20.00

R 25.00U

nit

Pri

ces

Average Clothing and Textile Unit Prices

Note: June 2012 average prices compared to April 2012 baseline, Source: Customs Risk engine analysis

Ave prices rise: 72% 44% 85% : 41%

16

Clothing and textile case study: Number of tariff headings

subject to Reference Pricing, 2011 - 2016

Nov-11 April &

May 2012

June &

July 2012

Sept.

2012 to

Jan. 2013

Feb. to

April 2013

Sept.

2013

Oct. and

Nov. 2013

Dec 2013

to April

2014

May - Oct

14

Nov 2014

to Feb

2015

March-

April 2015

May -

Sept 2015

Oct - Dec

2015

Jan -

March

2016

Number of active High Risk rules 17 32 86 95 104 115 116 117 126 130 99 99 100 103

Number of active Medium Risk Rules 31 31 34

0

20

40

60

80

100

120

140

Number of Tariff Headings under Reference pricing

Change in risk

based strategy

17

Clothing and textile Case study: Average Prices declared

BabyClothing

Bed linen Blankets Clothing Curtains TextilesToilet &kitchen

linen

Underwear& socks

2014/2015 R 153.92 R 86.54 R 36.46 R 44.58 R 74.65 R 56.93 R 77.73 R 166.71

2015/2016 R 193.76 R 90.78 R 52.86 R 50.86 R 81.70 R 70.54 R 82.01 R 202.85

% Increase 25.9% 2.8% 10.7% 4.1% 4.6% 8.8% 2.8% 23.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

R 0.00

R 50.00

R 100.00

R 150.00

R 200.00

R 250.00

Average prices during and percentage increase

18

Clothing and textile Case study: 2015/16 compared to

2011/12

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Clothing and textile Case study: Achievements to-date

• With the introduction of the reference pricing tool in November 2011, there has

been an improvement in the declaration of clothing and textile imports.

• The modernisation of the Customs systems has enabled Customs detect those

importers who are shifting their ports of entry in order to avoid their under-declared

consignments being detected by our risk systems. The tighter controls have also

prompted unscrupulous traders to miss-declare their clothing and textile imports as

other products. Our systems again are able to detect this.

• Customs in collaboration with Industry requested the creation of additional Tariff

Subheadings to “ring fence” problematic products.

-There are now two specific tariff headings for denim jeans (women / men’s) which

allow customs to deal with the undervaluation of these commodities more effectively.

-The same was also done for bedding, curtains and towels where additional

subheading were created for embellished and embroidered goods.

• With the new high-tech scanners in Durban, Cape Town and Beit Bridge SARS is

doing end-to-end integrated cargo scanning on selected containers.

• Our risk engine‚ case management system and scanner software is now integrated

into one solution that is automated and real-time‚ with the whole process recorded

on the SARS system from beginning to end

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Customs results in Counterfeit, clothing and textiles, illicit

alcohol and tobacco

Type

Quantity

FY15-16

Value ZAR

FY15-16

Quantity

YTD 2016-17

(up to 07 Aug)

Value ZAR

YTD 2016-17

(Up to 07 Aug)

Counterfeit

Clothing 88 584 items R 161 222 163 38 358 items R 48 527 055

Counterfeit

Footwear 70 529 items R 230 960 482 21 378 items R 41 715 455

Counterfeit (Other) N/A R 801 161 449 N/A R 378 602 773

Alcohol 45 500 litres R 321 945 1 621 litres R 165 440

Cigarettes

49 759 095

sticks R 48 453 507

25 978 837

sticks R 25 256 729

Clothing & textiles 156 891 items R 3 999 031

TOTAL R 1 242 119 546 R 472 302 844

Source: Customs operations and TIU dashboard 2016

21

Customs Seizure results 2016/17 Year to date

YTD 31 July 2016 YTD 31 July 2015

TYPE No. Of Busts Weight / Quantity No. Of Busts Weight / Quantity

Narcotics 511 2920 kg 191 1 431 kg

Viagra / Viagra

Generics 120 68 102 pills 106 504 269 pills

CITES 30 128 kg 25 467 kg

Currency 4 ZAR 7 969 200 and

USD 296 200 1 19 100 USD

Precious Metals 2 23.136 kg 0 0

Total 733 422

Note: Customs seizures are up 47% YTD in comparison to 2015/16 same period

Source: Customs operations and TIU dashboard 2016

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Making use of an Industry Experts

The assistance of an industry experts are also called upon

to assist officers with tariff determinations, valuation as

well as other aspects

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IPR and Counterfeit: Area of Operation

• Customs is empowered to seize and detain counterfeit or suspected counterfeit

goods whilst performing their duties under provisions of Sections (6) and (7) of

Section 15 of the CGA.

-This limits Customs operations to the time of importation / exportation / removal in transit

and on goods that are under Customs Control in a Customs and Excise Warehouse.

-Should Customs Officers become aware of, or detect any suspected counterfeit goods

outside of these defined Customs areas, Customs may detain such goods and inform a DTI

or SAPS.

• Customs Officers must apply for a warrant, as contemplated in Section 6 CGA

-If no warrant is applied for prior to the acts performed by an inspector, such acts must be

confirmed by a Judge or Magistrate within 10 days from the day on which those acts were

performed, or the officer must return all goods and make good all damages caused.

• In order for Customs Officers to perform the functions of an inspector in any other

manner under the CGA they must be appointed or designated in terms of Section 22

thereof.

24

Counterfeit Goods Act, Section 15 provides Customs power

to sanction counterfeit goods and protect IPR holders

• Section 15(1) provides for the owner of an intellectual popery right (IRP) to apply

to the Commissioner of SARS to seize and detain all goods that are suspected to

be counterfeit and which are imported;

• Section 15(2) provides for an applicant to furnish the Commissioner with

specimens of the protected goods, sufficient information and particulars as to the

substance and extent of the IRP and the title to that right;

• Section 15(3) provides for the Commissioner to approve applications if satisfied

that the goods are prima facie protected goods, that the prima facie subsist, and

the applicant is prima facie the owner of the IRP;

• Section 15(4) provides for Customs to seize and detain counterfeit goods, or

suspect counterfeit goods;

• Section 15(5) provides for the Commissioner to notify the (IPR) applicant in writing

of the approval of their application and the period for which the provisions of

Section 15(4) will be applied, or if refused, give the reasons the refusal.

• Section 15(7) provides for the owner of the IPR to furnish the Commissioner with

an indemnity against claims arising from the seizure or detention of goods in terms

of this Section and to cover expenses incurred in effecting the seizure or detention.

25

Customs and Excise Act 91 of 1964 supports execution of

CGA to protect IPR holders

• Section 18(1A) provides that goods in transit through RSA are included;

• Section 43(5) (a) excludes the disposal of goods detained under Section 113A for

the purposes of the CGA from the provisions of that Section;

• Section 43(6) provides for the disposal of goods seized and detained under the

CGA where the importer is not known, or cannot despite reasonable efforts be

located and where no proceedings are instituted or where no instruction for the

release of the goods is received;

• Section 88(1)(a) provides for the detention of goods for the purposes of the Act;

• Section 89(4) provides for goods seized for the purposes of the Act to be

condemned and forfeited in certain circumstances;

• Section 90 provides for the disposal of goods seized for the purposes of the Act;

• Section 113A(1) provides for officers to detain and seize goods for CGA purposes;

• Section 113A(2) provides for a Customs Officer to refuse a request for detention if it

is not in compliance with the CGA and the Commissioner has not been indemnified;

• Section 113A(5) provides for the Commissioner to make rules for procedures to be

followed by Officers, the forms that may be required to be completed and any other

matter for the purpose of administering the provisions of this Section.

26

Strategic initiatives to Strengthen mechanisms

Register Cargo Control

Declare Assess Inspect Enforce Release Audit

New Customs Act

-Manifest processing, and

-Reporting & Control of

Goods

-Provisional payments

-Registration and Licensing

-Declaration Processing

Professional

Organisation

- Customs competency

- Customs uniforms

- Reporting & performance

- CTL training

- Modernise & align Excise

Risk and Intelligence Management

Customs Risk

Management

- Risk strategy & SOPs

- Inspection quality

- Workflow tools

- Customs Risk Engine

- 3rd Party data sources

Goods

Control

- Goods control Pilots

- Command centre

- Goods tracking system

- State Warehouses

- National Drug Plan

Commercial

Compliance

- Preferred Trader

- Audit capacity

- Revenue projects

Governance

-Stakeholder Forum

-Reporting and

performance improvement

-Internal audit

Infrastructure

-Facilities plan

-Detector Dog expansion

-Scanner procurement

-State warehouse

upgrade

Excise

- Tobacco Marker

- Audit capacity