‘Flying out of Africa’, an essay on China -Africa relations


The following article featured in BusinessLive (eEdition) on 25 July 2019. It is authored by John Grobler. The article was compiled with the financial support of Journalismfund.eu’s Money Trail grant programme. 

Chinese ‘lying money’, or fei qian, is an ancient form of value exchange. But its modern incarnation is blamed for stripping Africa of its resources.

The secret of Chinese commercial success in Africa, as suggested by an 18-month investigation into the drugs-for-abalone and rosewood trade and a major Namibian tax fraud case, is an ancient system that not only allows African countries to be robbed of taxes, but also plays a part in financing the global $270bn-a-year wildlife contraband trade.

Fei qian, or “flying money”, dates back about 1,200 years, to the Tang Dynasty in China. In its simplest modern incarnation, it is a low-cost and trusted method of remitting money, much like the Islamic hawala system. For example, a person who wants to send funds to a recipient in Africa will pay a fei qian broker in China. For a commission, the broker will arrange that a counterpart in Africa pays the recipient, again for a commission. The two fei qian brokers later settle their account through, for example, the transfer of commodities of equivalent value — but also sometimes through less salubrious methods such as transfer mispricing or invoice manipulation.

In practice, the system relies on the systematic underinvoicing of Chinese imports into Africa and a seamless chain of payments system in which accounts are settled through the transfer of high-end — and often illicit — goods such as abalone, rosewood, rhino horn and ivory. In brief: goods are undervalued on their import documentation; they are then sold for cash; and that undeclared cash is subsequently channelled into high-end commodities that are remitted to China to balance the fei qian books.

“The trick behind fei qian is that the money never actually leaves China,” says a former Singaporean finance expert, speaking on condition of anonymity. “It’s just the commodities that get moved around” as part of a longer payment chain among the Chinese diaspora.

Unlike barter trade, fei qian is not a straight swap; it is an exchange in stored value that leaves no paper trail, except in the books of the fei qian operators themselves. What makes the system even more impenetrable, the investigation has found, is that these operators mostly seem to be older, well-established women working in a closed network of mutually trusted contacts.

This nexus, and lack of paper trail, means fei qian is largely invisible. But it occasionally appears as a gaping hole in a country’s balance of payments account with China – as Namibia has discovered in an ongoing import-tax fraud investigation.

Jack Huang, a business associate of President Hage Geingob, and Laurentius Julius, a former Walvis Bay customs official and now a customs clearing agent, are among eight suspects facing 3,215 charges of fraud and money laundering in the Windhoek high court. Continue reading →


Australia – Drug companies ‘paid tax of just $85m on revenues of $8bn’

Oz Tax Office2Global pharmaceutical companies paid tax of just $85 million in Australia on revenues of more than $8 billion, including $3.5bn from taxpayer-subsidised drugs, Labor senator Sam Dastyari says.

“What is so extraordinary is that you’ve had companies that have been able to arrange their affairs to be able to drive down their revenue to such an extent that their taxable income is simply one per cent of the revenue that they have,” Senator Dastyari said.

Senator Dastyari addressed media during a break at a senate inquiry into corporate tax avoidance in Sydney that is hearing from nine of the biggest drug companies operating in Australia.

“The question before us today was ‘Is this a genuine representation of how profitable these companies have been?’,” Senator Dastyari said.

“The evidence is that they have done what they can to drive up their costs to make themselves as artificially unprofitable as possible in Australia and make themselves more profitable in other jurisdictions to avoid paying tax here.”

Senator Christine Milne, who is also on the senate committee conducting the inquiry, said Johnson and Johnson’s vice president of global taxation had given extraordinary evidence that the company had a profit formula that the Australian subsidiary was required to meet.

“Then they work out their tax affairs so that they move their profits offshore and they maximise their costs here,” Senator Milne told journalists.

“And the extraordinary thing is in the negotiation with the government on the pharmaceutical benefits scheme they ask what the market will bear in terms of the cost of those drugs but they don’t reveal what they actually pay for those drugs from their head office.

“People in the community are saying well look the government keeps coming after us to pay more tax – what about the big end of town?” Source: theaustralian.com.au

US Customs to assist exporters in resolving disputes with foreign customs

CBP logoU.S. Customs and Border Protection (CBP) published a Federal Register Notice inviting U.S. exporters to request CBP’s assistance in resolving disputes with foreign customs agencies over the tariff classification or customs valuation of U.S. exports. CBP explains that it is willing to assist U.S. exporters with these disputes under the auspices of the World Customs Organization (WCO). CBP is very active at the WCO and regularly participates in meetings concerning the application of the Harmonized Commodity Description and Coding System (HS System) and the World Trade Organization’s (WTO) Customs Valuation Agreement (CVA). According to CBP, this process was helpful in providing a successful outcome for clients who disputed a foreign customs agency’s classification of imported goods.

Tariff Classification
CBP represents the United States at meetings under the auspices of the International Convention on the Harmonized Commodity Description and Coding System (“HS Convention”). The HS Convention is the international agreement that provides that WCO Members will implement the HS System and comply with decisions of the various committees organized under the convention. CBP attends semiannual meetings of the WCO’s Harmonized System Committee (HSC), where contracting parties to the HS Convention examine policy matters, make decisions on classification questions, settle disputes, and prepare amendments to the HS System and its Explanatory Notes.

Article 10 of the HS Convention governs disputes between contracting parties concerning the interpretation or application of the HS Convention. The article provides that parties with potential disputes should first try to settle the dispute through bilateral negotiations. If such negotiation cannot resolve the dispute, the parties may refer the dispute to the HSC for its consideration and recommendations. The HSC, in turn, refers irreconcilable disputes to the WCO Council for its recommendations.

Customs Valuation
CBP represents the United States at the WCO with respect to issues arising under the CVA. Pursuant to Annex II to the CVA, the WCO’s Technical Committee on Customs Valuation (TCCV) is authorized to examine specific problems arising from the customs valuation systems of WTO Members. The TCCV is responsible for examining the administration of the CVA, providing WTO Members with advisory opinions regarding particular customs valuation issues, and issuing commentaries or explanatory notes regarding the CVA. Like the HSC, the TCCV may get involved in disputes amongst foreign customs agencies. CBP stands willing to help U.S. exporters with these disputes. This process may provide U.S. exporters with a faster procedure to resolve disputes than a typical WTO dispute.

CBP’s Role at the WCO May Resolve Export Issues for U.S. Exporters
CBP states in the notice that its communication with other customs administrations through the meetings of the HSC and TCCV at the WCO can “often serve to eliminate or resolve export issues for U.S. traders.” As an example, in 2014, a U.S. exporter notified CBP of a foreign customs administration’s misclassification of its textile exports. The U.S. exporter requested that pursuant to Article 10 of the HS Convention, CBP (1) contact the foreign customs administration to resolve the tariff classification dispute; and (2) refer the matter to the HSC at the WCO, if it could not be resolved bilaterally. After confirming it agreed with the U.S. exporter’s position, CBP engaged the foreign customs administration directly. Within seven months of the exporter’s request, CBP secured a favorable decision by the foreign customs administration to classify the merchandise in a manner consistent with the U.S. position. Consequently, the U.S. exporter obtained correct tariff treatment of its imported merchandise in the foreign country as a result of CBP’s engagement.

Source: http://www.internationaltradecomplianceupdate.com/

Canada Border Services Agency – raises customs and dutiability issues

EYIn one of the most important customs cases in years (Skechers USA Canada Inc. v The President of the Canada Border Services Agency (2013), AP-2012-073 (CITT), referred to in this article as Skechers Canada), the Canadian International Trade Tribunal (CITT) confirmed an aggressive interpretation by the Canada Border Services Agency (CBSA).

The case concerned additions to the transaction value for intercompany payments made outside of the invoice amount or transfer price that relate to design and development costs allocated to the importer.

As part of a recent enforcement trend of the CBSA toward assessing customs duty on intercompany management or other fees not included in the transfer price, the CBSA determined that the total research and development (R&D) intercompany fees paid by the Canadian company were part of the value for duty allocated over the goods actually imported.

In a potentially far-reaching decision, the CITT endorsed this decision for cases where the importer cannot demonstrate that the payments are unrelated to the goods.

The Skechers Canada case

The taxpayer in Canada purchased footwear from its US affiliate and established a transfer price for goods based on the US affiliate’s factory cost from the offshore manufacturer plus transportation, warehousing and an amount for profit.

This price included the cost of “assists” relating to the molds and samples that the US affiliates provided to the manufacturers for the successful models subsequently imported. It did not include, however, the value of the design work performed in respect of the development of unsuccessful prototypes or models (approximately 45,000 of the 50,000 models under development never made it to the final stage), nor the costs for the general R&D expenses of the US affiliate (salaries and overhead). Therefore, the taxpayer also made payments for these costs to the US affiliate under a cost-sharing agreement (CSA).

The fees paid by the taxpayer under this agreement were a function of the volume of import purchases. They were calculated based on operating profit of the taxpayer pursuant to the terms of the CSA and thus varied with volumes of imports and sales.

As noted, of the approximately 50,000 models under development, only 5,000 made it to the final cut, and of this only approximately 1,700 were imported to Canada. Accordingly, most of the payments for research and design and development under the CSA were not included in the transfer price.

The decision

Both parties to the dispute agreed that the Tribunal should use the “transaction value” customs valuation methodology (the adjusted transfer price). The issue concerned whether the payments for R&D under the CSA were “in respect of” the goods and therefore part of the “price paid or payable” pursuant to Subsections 45(1) and 48(4) of the act.

A basic provision of customs valuation is that the transaction value must include all payments made “in respect of” the goods. The taxpayer contended that the payments were for intangibles and not in respect of the goods as they were for developing the brand.

In a precedent-setting decision, the Tribunal held that all payments under the CSA relating to research, development and design were dutiable because they were, in the Tribunal’s words, “clearly in respect of the goods” given that the evidence disclosed that “the R&D payments most directly concern the footwear products themselves.”

There was one continuous process by which the research, design and development process flowed through the season to develop the footwear. Therefore, the activities and associated costs covered by the R&D payments can all be located somewhere along the continuum of that lengthy and interrelated process and the research and design efforts and associated fees were “directly aimed” at developing the models available for purchase each season by the taxpayer.

Thus, the Tribunal found that the costs were directly related to developing and designing the particular footwear that was imported. The payments and the imported goods were directly linked as the fees were calculated based on the taxpayer’s Canadian operating profit and, hence, if imports increased, so would the payments.

What does the Skechers Canada decision mean?

As a result of the decision, in Canada, at least for now, payments made by the Canadian purchaser to the overseas vendor for “research, design and development” costs, whether they result in actual production of the purchased models or are allocable to other non-imported models or aborted designs, are part of the value of the goods for customs purposes where the Canadian importer pays amounts that vary with sales and imports, to an affiliate under a CSA.

Impact on supply chain planning

The case is a wake-up call for many multinationals to consider customs planning rather than just income tax or logistics planning. Further, it highlights the need to be aware of, or to seek advice from advisors experienced with, the latest case law or CBSA policy. Customs compliance and leading practices for planning need to be considered along with any other savings to achieve the best overall efficiency for the supply chain.

Lessons learned?

First and foremost, a supply chain structure must be considered very carefully when importing goods into Canada, particularly through a supply chain involving affiliated parties. Often a direct sale from the manufacturer to the importer may have customs planning advantages.

Where there are purchases from a related party who sources the goods abroad, it is important to ensure that the transfer price is acceptable for customs valuation purposes and to confirm whether any adjustments are required for other payments, such as R&D costs and royalties. In a direct sale, “assists” must also be considered.

The onus is on the importer to prove that any payments made are not in respect of the goods under the act. This point is often overlooked. In this case, it was crucial as the Tribunal made its finding on the basis that the taxpayer did not discharge this onus. It is important to keep the importer’s onus of proof in mind when undertaking any customs duty planning and also when deciding to make any appeal against a determination.

This article was first published in EY´s Indirect Tax Briefing: July 2014

China Customs – New Valuation Regulations

China Customs EmblemImportant information regarding customs valuation in respect of imports and exports in the People’s Republic of China.

The General Administration of Customs of the People’s Republic of China (“GAC”) issued two new regulations on customs valuation, both effective from 1 February 2014. GAC Order No. 213 (“Order 213”), entitled Measures of Customs of the People’s Republic of China for the Determination of Dutiable Value of Imports and Exports, will replace the existing regulation with the same title issued under GAC Order No. 148 on 28 March 2006 (“Order 148”). In addition, GAC Order No. 211 (“Order 211”), entitled Measures of Customs of the People’s Republic of China for the Determination of Dutiable Value of Domestic Sales of Bonded Goods, is an entirely new regulation specifically providing for the valuation of bonded goods sold within the territory of China.

Briefly, the abovementioned Orders cover the following issues –

  • Customs may consider the circumstances of a sale in determining the acceptability of transaction value between related parties.
  • Calculation of international freight for imported goods.
  • Commissions in the valuation of exported goods.
  • Bonded materials or finished goods (including defective and substandard goods) sold by a contract manufacturer located within the territory of China.
  • Bonded waste and scrap materials, by-products and residue after accidents sold by a contract manufacturer located within the territory of China.
  • Bonded goods transferred under deep processing and sold by the transferee.
  • Bonded materials or finished goods sold by a manufacturer located within a customs bonded area.
  • Bonded scrap, defective or substandard products and by-products sold by a manufacturer located within a customs bonded area.
  • Bonded goods imported into a customs bonded area for logistics, inspection and exhibition purposes and sold within the territory of China.
  • Bonded goods for Research and Development (“R&D”) in a customs bonded area and sold within the territory of China.

 For more details, read the full analysis at Baker & MacKenzie’s website.

WCO expert provides Customs Valuation training assistance

WCO expert Ian Cremer (centre, back row) with SARS staff involved in valuation training project.

WCO expert Ian Cremer (centre, back row) with SARS staff involved in valuation training project.

The SARS Academy is reviewing and packaging its training material so as to align its curriculum to international standards. It has embarked on a process of benchmarking its training material, kick-starting the process in the School of Customs and Excise.

WCO facilitator Ian Cremer recently visited the Academy at Waterkloof House in Pretoria to provide assistance with the strengthening of their valuation training programme. A group of trainers, curriculum developers and valuation specialists from business worked with the WCO valuation expert in the development of the new training material.

Training modules will be developed at the following levels: Basic, Intermediate and Advanced, and will be aligned to the WCO’s own valuation training modules.

Further work will now be conducted on developing a delivery strategy. This will ensure that key staff are trained to the necessary level and are able to conduct their duties in a professional level, meeting the dual requirements of fair and efficient revenue collection and the facilitation of compliant trade. Source: SARS