Customs Mechanisms to Protect Industry. Parliamentary Committee, August 16 th 2016

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1 Customs Mechanisms to Protect Industry Parliamentary Committee, August 16 th 2016

2 Our mandate for Customs & Excise First-line of control over the movement of goods across our country s borders Protect our economy and society Support economic competitiveness Collect and protect revenue 2

3 Customs and excise value drivers and strategic focus Mandatary Value Goods control prior to arrival / departure Facilitation of low-risk goods: Fast, predictable service to support RSA economy Revenue coverage of unknown / high risk trade Protect economy from P&R and unfair competition Protect society from safety and security threats Revenue coverage of known commercial traders Risk Inspection Investigations Audit Critical Success factors 1. Client management Registration & Licensing Permits for P&R 2. Control goods at borders Control of cargo & supply chain Right cargo, 3 rd party, OGA, information for verification matching 3. Right information to collect revenue and protect key industrial sectors: - Customs Declaration: 4. Customs Risk Management What to release vs. Stop? Feedback loop to improve risk 5. Quality Inspection of documents 6. Physical Inspection Professional staff Enabling tools, Dogs, scanners 7. Investigations and Sanctions 8. Audit capability 3

Customs manages risks by overseeing the whole supply chain, before the border, at the border, and post border ORIGIN DESTINATION Economic Operators Customs Exit Port Transit

licensees Management of Permits Customs Mutual Assistance agreements Border control and anti-smuggling Risk evaluation of Goods Declaration Documentary and physical inspection

4 Customs manages risks by overseeing the whole supply chain, before the border, at the border, and post border ORIGIN DESTINATION Economic Operators Customs Exit Port Transit Custom Entry Port Customs Economic Operators EXPORT LEG TRANSIT 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 4

Customs mechanisms controlling borders and protecting industry Strategic Stakeholder Management 1. Industry engagement 2. IPR registration 3. Permits for P&R 4. Registration 5. Licensing 6.

5 Customs mechanisms controlling borders and protecting industry Strategic Stakeholder Management 1. Industry engagement 2. IPR registration 3. Permits for P&R 4. Registration 5. Licensing 6. Accreditation 7. Stakeholder Forum 8. Outreach & education 9. Customs Mutual Administrative Assistance 10. Border Cooperation & Coordination with Govt. Risk and Intelligence Management 11. Customs Risk Engine 13. Data and analytics (including 3 rd party) 12. Manifest Processing, Matching, acquittal 14. Case Selection 13. Reference Pricing 15. Customs Command and targeting Centre Customs Operations Border Mgt Goods Control Declaration Processing Documentary Inspection Physical Inspection Enforcement teams Audit 23 Investigate 5

cumbersome; Make it simpler, quicker and

Risk Assessment Environmental Knowledge &

6 SARS Compliance vision Make the Tax and Customs process less labour intensive and cumbersome; Make it simpler, quicker and hassle free for clients; Improve the service offered to clients; But, ensure maximum compliance. Risk Assessment Environmental Knowledge & Understanding Effective Segmentation Stakeholder Awareness Education 6

Voluntary Compliance VOLUNTARY COMPLIANCE IS BASED ON TWO FUNDAMENTAL PRINCIPLES 1 Make it as easy as possible for those trying to

Interdict illegitimate Taxpayer & Traders Some taxpayers/traders will always try to comply whether effective enforcement exists or

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

7 Voluntary Compliance VOLUNTARY COMPLIANCE IS BASED ON TWO FUNDAMENTAL PRINCIPLES 1 Make it as easy as possible for those trying to comply 2 Make it very hard for those trying to avoid paying their fair share Expedited Service for legitimate Taxpayer & Traders Interdict illegitimate Taxpayer & Traders 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! 7

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 8

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. 9

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. 10

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 11

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. 12

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.) 13

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 14

15 Clothing and textile Case study: Introducing reference prices into risk rules yielded immediate changes in behaviour Unit Prices R Average Clothing and Textile Unit Prices R R R R 5.00 R 0.00 Clothing Blankets Terry Toweling Bed Linen Textiles Average Unit Prices Apr-12 R 3.31 R 6.51 R R 9.20 R Average Unit Prices May-12 R 3.93 R 6.50 R R 9.32 R Average Unit Prices Jun-12 R 5.68 R R R R Ave prices rise: 72% 44% 85% : 41% Note: June 2012 average prices compared to April 2012 baseline, Source: Customs Risk engine analysis 15

16 Clothing and textile case study: Number of tariff headings subject to Reference Pricing, Number of Tariff Headings under Reference pricing 120 Change in risk based strategy Nov-11 April & May 2012 June & July 2012 Sept. Feb. to 2012 to April 2013 Jan Sept Dec 2013 Oct. and to April Nov May - Oct 14 Nov 2014 March- May - Oct - Dec to Feb April 2015 Sept Jan - March 2016 Number of active High Risk rules Number of active Medium Risk Rules

17 Clothing and textile Case study: Average Prices declared Average prices during and percentage increase R % R % R % 15.0% R R % 5.0% R 0.00 Baby Clothing Bed linen Blankets Clothing Curtains Textiles Toilet & kitchen linen Underwear & socks 2014/2015 R R R R R R R R /2016 R R R R R R R R % Increase 25.9% 2.8% 10.7% 4.1% 4.6% 8.8% 2.8% 23.5% 0.0% 17

18 Clothing and textile Case study: 2015/16 compared to 2011/12 18

19 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 19

20 Customs results in Counterfeit, clothing and textiles, illicit alcohol and tobacco Quantity FY15-16 Value ZAR FY15-16 Quantity YTD (up to 07 Aug) Value ZAR YTD (Up to 07 Aug) Type Counterfeit Clothing items R items R Counterfeit Footwear items R items R Counterfeit (Other) N/A R N/A R Alcohol litres R litres R Cigarettes sticks R sticks R Clothing & textiles items R TOTAL R R Source: Customs operations and TIU dashboard

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 kg kg Viagra / Viagra Generics pills pills CITES kg kg Currency 4 ZAR and USD USD Precious Metals kg 0 0 Total Note: Customs seizures are up 47% YTD in comparison to 2015/16 same period Source: Customs operations and TIU dashboard

22 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 22

23 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. 23

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. 24

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. 25

Modernise & align Excise Goods Control -

Goods tracking system - State Warehouses -

Preferred Trader - Audit capacity - Revenue

capacity Risk and Intelligence Management

Inspect Enforce Release Audit Customs Risk

Goods -Provisional payments -Registration

Infrastructure -Facilities plan -Detector

26 Strategic initiatives to Strengthen mechanisms Professional Organisation - Customs competency - Customs uniforms - Reporting & performance - CTL training - Modernise & align Excise Goods Control - Goods control Pilots - Command centre - Goods tracking system - State Warehouses - National Drug Plan Commercial Compliance - Preferred Trader - Audit capacity - Revenue projects Excise - Tobacco Marker - Audit capacity Risk and Intelligence Management Register Cargo Control Declare Assess Inspect Enforce Release Audit Customs Risk Management - Risk strategy & SOPs - Inspection quality - Workflow tools - Customs Risk Engine - 3 rd Party data sources New Customs Act -Manifest processing, and -Reporting & Control of Goods -Provisional payments -Registration and Licensing -Declaration Processing Infrastructure -Facilities plan -Detector Dog expansion -Scanner procurement -State warehouse upgrade Governance -Stakeholder Forum -Reporting and performance improvement -Internal audit 26

WHAT WAS ACHIEVED

Customs WHAT WAS ACHIEVED 2011-2015 2 Halved the time it takes to clear customs Improved world ranking by 29 points Reduced the time, cost and documents required for international trade - 9 days reduction