East Africa has lowered the bar for traders to access the regional market duty-free, by allowing the cost of delivery to be included in determining how much value has been added in a member state.
Under the revised Rules of Origin adopted by East African Community ministers, finished products are required to have at least 30 per cent of the ex-works value added in the exporting member state, down from 35 per cent of the ex-factory price.
Ex-works price includes distribution costs like transport and logistics to the shop yard — which increases the local input that is required for finished products to be considered community goods — while ex-factory price looks at value added on the factory floor. Such goods access the member states markets duty-free under the East African Community Common Market Protocol.
This effectively opens the door for goods that previously did not qualify for unfettered access to any of the five East African Community member states — Burundi, Kenya, Rwanda, Tanzania and Uganda.
“The purpose of these rules is to ensure that there is uniformity among partner states in the application of Rules of Origin and that to the extent possible, the process is transparent, accountable, fair, predictable and consistent with the provisions of the Customs Union Protocol,” said Andrew Luzze, the East African Business Council’s executive director.
He, however, warned that more needs to be done to ensure there is smooth flow of trade within the region, including elimination of non-tariff barriers by the partner states and harmonisation of domestic tax/VAT/excise duty.
The revised rules are expected to be implemented immediately after the Heads of State Summit in November. Among those likely to be spared the 30 per cent tax are manufacturers of edible oils, beauty products, milk products, television sets and lubricants, as well as car assemblers.
Companies and exporters selling goods in sets are also likely to benefit from a new rule for goods sold in that manner. Tax on such goods will be lower than that on goods sold singly.
“We expect that the new rules will be simple, trader-friendly, and more importantly accessible for uniformity across the five partner states,” said Kenneth Barungi of Madhvani Group in Uganda.
Under the current Rules of Origin, only goods produced wholly from local inputs are allowed to cross national borders without attracting Customs taxes.
Goods produced from imported raw materials also enjoy duty-free treatment, where the exporter can prove that at least 35 per cent of the ex-factory value was added within the region.
The application of the 35 per cent threshold rule has been controversial, with Kenyan traders claiming it is selectively applied by Customs officials to bar Kenyan products from entering Tanzania, Uganda, Rwanda and Burundi.
Last year, Kenyan manufacturers lost a bid to have the EAC Council of Ministers stop Uganda and Tanzania from charging full duty on imports.
A case at hand is the war between the Kenya Association of Manufacturers and Tanzania and Uganda Revenue Authorities. KAM had written to the Ministry of EAC Affairs, Commerce and Tourism requesting that under the EAC Common Market Protocol, Kenyan firms be allowed into the Ugandan and Tanzania market without paying full duty as demanded by the two countries. However, the Kenyan traders were asked by the ministers to observe the 35 per cent tax as required by the Rules of Origin.
The rule on approved exporters has also been relaxed, allowing national authorities of partner states to authorise any exporter who makes frequent shipments of products.
In the new rules, proof of origin shall be valid for six months from the date of issue in the exporting country.
“In the old rules, it was not clear of the period of providing proof while exporting under the Rules of Origin,” noted Mr Njau.
The ownership of a fishing vessel required to qualify as that of a partner state, hence liable for lower taxes, has also been reduced from 75 per cent to 20 per cent.
In preparation for implementation of the revised rules, the EAC Secretariat has been tasked to set up a central database of registered exporters to help track the type and number of goods traded within the partner states.
The revised rules are expected to prepare the region for an eventual merger with the Common Market for Eastern and the Southern Africa (Comesa) and Southern African Development Community (SADC) under the Free Trade Area regime.
The private sector in East Africa had earlier raised concerns over Article 25 of the East Africa’s Common Market Protocol saying it crippled trade within the region by making their goods more expensive than those manufactured outside the region.
Article 25 of the Protocol which was operationalised in 2005, only allows goods benefiting from export promotion schemes to be primarily for export.
It states that 100 per cent of the production for export is expected to be sold outside the EAC region but in case it is sold within, then only 20 per cent of annual production will be allowed provided that full duties, levies and other charges are paid.
Source: Christabel Ligami and Adam Ihucha - The East African