Tax expert offers SA easy way out of SACU
In the 2023/24 financial year, South Africa lost R54 billion due to the sharing of revenues from customs and excise duties as a part of the Southern African Customs Union (SACU).
This cost amounts to around 0.8% of the GDP and is equivalent to nearly a 2% increase in the VAT rate. From a different perspective, it amounted to more than 20% of the total social grants distributed that year and 60% more than the expenditure on the social relief of distress grant.
The actual cost to the local economy is likely to be higher due to additional costs in the form of customs duties foregone on intra-SACU imports that would have been collected in the absence of the agreement.
This is feedback from PwC partner Kyle Mandy, who outlined the SACU partnership in the financial services firm’s latest tax synopsis.
SACU was established in 1910 as an agreement between the Union of South Africa and the British territories Basutoland (Lesotho), Bechuanaland (Botswana), and Swaziland.
It is the world’s oldest customs union and has been revised multiple times, most notably in 2002, after some of its member states gained independence.
Under the 1910 agreement, a revenue-sharing formula was administered by the Union of South Africa. In terms of this formula, customs duties were effectively shared pro rata, based on each country’s imports.
Given South Africa’s economic dominance relative to the other member countries, South Africa enjoyed some 98.7% of the customs revenues collected in the customs union.
After Namibia’s independence and South Africa’s transition to democracy, a new agreement was negotiated in 2002.
Unlike the previous agreements, this introduced an entirely new method for each of the customs and excise revenue components.
In terms of this agreement, customs revenues are shared based on relative intra-SACU imports (imports from other member countries rather than nonmember countries).
The excise component is split into two parts, with 15% of revenues being allocated to a development component shared between the countries, considering their GDP per capita and weighted in favour of less developed nations.
The remaining 85% of excise revenues are shared based on each country’s share of total SACU GDP. This formula has seen South Africa’s share of the common revenue pool fall to around 46% on average.
Mandy explained that this new revenue-sharing formula has significantly impacted the share South Africa receives from customs duties on goods imported into the country.
South Africa averages around 82% of all imports from other countries but receives only around 20% of intra-SACU imports from trade between SACU member countries.
The opposite is true for the other member countries, which have a significantly greater proportionate share of intra-SACU imports than their proportionate shares of extra-SACU imports.
As a result, South Africa only receives around 25% of its proportionate share of customs duties relating to goods imported into the country, while other nations receive between three to five times their proportionate share.
Considering South Africa collected around R62 billion in customs duties in 2023/2024, the cost to the local fiscus of this redistribution of customs revenues for that year would have been around R47 billion.
Another major impact on the South African fiscus from this agreement is that it bears the entire cost of reallocating the 85% share of excise duties that do not go into the development component.
Even Botswana, which has a higher GDP per capita than South Africa, benefits from this arrangement as the formula is dependent on the definition of development defined in 2002.
In the 2023/24 financial year, South Africa collected R62 billion in excise taxes, making up the majority of that collected in SACU.
As a result, the sharing of the development component also negatively impacts South Africa, which came in at a cost of R7 billion to the country in the past financial year.
Overall, the cost to South Africa of SACU, with its current revenue-sharing formula through the sharing of customs and excise duties, is in the region of R54 billion for the 2023/24 financial year.
This is done through the transfer of taxes from South Africa to the other member nations which actually relates tot he consumption of these goods in South Africa.
Mandy said there are arguable additional costs in the form of customs duties being foregone on intra-SACU imports that would have been collected in the absence of the agreement.
Ignoring those additional costs, the R54 billion amounts to around 0.8% of GDP and is equivalent to nearly a 2% increase in the VAT rate.
From another point of view, it amounts to more than 20% of the total social grants distributed in the past financial year and 60% more than what the government spends on the SRD grant.
These funds would make a valuable contribution to the pressures faced by the South African fiscus.
Mandy said that the inevitable question to be asked is what the benefits of SACU to South Africa are for these significant costs that it incurs.
One is the benefit of duty-free access to member countries and their markets. In 2023, South Africa exported goods to the value of R194 billion to SACU members.
South Africa has tried to renegotiate the SACU agreement since 2011, but these efforts have since stalled.-DAILY INVESTOR
This cost amounts to around 0.8% of the GDP and is equivalent to nearly a 2% increase in the VAT rate. From a different perspective, it amounted to more than 20% of the total social grants distributed that year and 60% more than the expenditure on the social relief of distress grant.
The actual cost to the local economy is likely to be higher due to additional costs in the form of customs duties foregone on intra-SACU imports that would have been collected in the absence of the agreement.
This is feedback from PwC partner Kyle Mandy, who outlined the SACU partnership in the financial services firm’s latest tax synopsis.
SACU was established in 1910 as an agreement between the Union of South Africa and the British territories Basutoland (Lesotho), Bechuanaland (Botswana), and Swaziland.
It is the world’s oldest customs union and has been revised multiple times, most notably in 2002, after some of its member states gained independence.
Under the 1910 agreement, a revenue-sharing formula was administered by the Union of South Africa. In terms of this formula, customs duties were effectively shared pro rata, based on each country’s imports.
Given South Africa’s economic dominance relative to the other member countries, South Africa enjoyed some 98.7% of the customs revenues collected in the customs union.
After Namibia’s independence and South Africa’s transition to democracy, a new agreement was negotiated in 2002.
Unlike the previous agreements, this introduced an entirely new method for each of the customs and excise revenue components.
In terms of this agreement, customs revenues are shared based on relative intra-SACU imports (imports from other member countries rather than nonmember countries).
The excise component is split into two parts, with 15% of revenues being allocated to a development component shared between the countries, considering their GDP per capita and weighted in favour of less developed nations.
The remaining 85% of excise revenues are shared based on each country’s share of total SACU GDP. This formula has seen South Africa’s share of the common revenue pool fall to around 46% on average.
Mandy explained that this new revenue-sharing formula has significantly impacted the share South Africa receives from customs duties on goods imported into the country.
South Africa averages around 82% of all imports from other countries but receives only around 20% of intra-SACU imports from trade between SACU member countries.
The opposite is true for the other member countries, which have a significantly greater proportionate share of intra-SACU imports than their proportionate shares of extra-SACU imports.
As a result, South Africa only receives around 25% of its proportionate share of customs duties relating to goods imported into the country, while other nations receive between three to five times their proportionate share.
Considering South Africa collected around R62 billion in customs duties in 2023/2024, the cost to the local fiscus of this redistribution of customs revenues for that year would have been around R47 billion.
Another major impact on the South African fiscus from this agreement is that it bears the entire cost of reallocating the 85% share of excise duties that do not go into the development component.
Even Botswana, which has a higher GDP per capita than South Africa, benefits from this arrangement as the formula is dependent on the definition of development defined in 2002.
In the 2023/24 financial year, South Africa collected R62 billion in excise taxes, making up the majority of that collected in SACU.
As a result, the sharing of the development component also negatively impacts South Africa, which came in at a cost of R7 billion to the country in the past financial year.
Overall, the cost to South Africa of SACU, with its current revenue-sharing formula through the sharing of customs and excise duties, is in the region of R54 billion for the 2023/24 financial year.
This is done through the transfer of taxes from South Africa to the other member nations which actually relates tot he consumption of these goods in South Africa.
Mandy said there are arguable additional costs in the form of customs duties being foregone on intra-SACU imports that would have been collected in the absence of the agreement.
Ignoring those additional costs, the R54 billion amounts to around 0.8% of GDP and is equivalent to nearly a 2% increase in the VAT rate.
From another point of view, it amounts to more than 20% of the total social grants distributed in the past financial year and 60% more than what the government spends on the SRD grant.
These funds would make a valuable contribution to the pressures faced by the South African fiscus.
Mandy said that the inevitable question to be asked is what the benefits of SACU to South Africa are for these significant costs that it incurs.
One is the benefit of duty-free access to member countries and their markets. In 2023, South Africa exported goods to the value of R194 billion to SACU members.
South Africa has tried to renegotiate the SACU agreement since 2011, but these efforts have since stalled.-DAILY INVESTOR
