A210: Until such time as import duties and taxes are brought to account, goods arriving in South Africa are administratively “not here”, even though they may be physically located in the Republic. They are not in free circulation and not yet part of the economy.
As such, if goods are held in bond for eventual local consumption (when duties and taxes are being deferred to a later date), or if duties and taxes are being avoided entirely (when goods are in bond for export i.e. only temporarily held in SA, and never intended for local consumption), then they cannot be ‘worked’ or changed in any regard – at least not without a very specific set of circumstances, where the merchant might get Customs’ authorization. They are not ‘here’ therefore they cannot be physically altered.
However, the advantage of an export bond store is that imported stock may be held in South Africa for immediate onward dispatch to a non-resident buyer. If the stock is otherwise only imported when the export demand arises the lead time can be long and uncompetitive.
Bond stores are a well-established feature of Customs’ operations, yet the Customs position is not the main challenge when considering bond-for-export models.
Rather it is the SA merchant’s Exchange Control position that becomes the starting point for planning.
If goods enter from a non-resident country (China, say) and are held in bond for export, then by definition they have not been imported into South Africa. To import is to bring cargo in for local consumption immediately or at a future point.
The procured stock therefore cannot be paid for as an import purchase.
It follows that when the goods are on-sold and forwarded to another non-resident country (Malawi, say), then the dispatch of the goods could not be classed as an export as the supply was never part of the SA economy in the first place.
The payment therefore cannot be reported as the receipt of export funds.
Because of these conditions, for Exchange Control purposes the model falls into the definition of Merchanting (and though we are discussing Merchanting from an Exchange Control perspective, note that Merchanting is not a variation on importing or exporting – it has different laws, different rules; different contract conditions and risks, and very specific commercial terms.)
For Exchange Control purposes, the goods are considered to be moving directly from China to Malawi. The ‘pause’ in transit in South Africa is not relevant to the model as the goods were economically never here.
Of course, the SA merchant will need to pay China, and in turn Malawi will pay the SA merchant. Thus, effectively, any entity Merchanting is importing and exporting money, not cargo. Because of this, and the risks posed by the model, Merchanting is highly regulated and always requires prior bank approval.
Note that the credit risk cannot fall on South Africa. If the Malawi buyer in the example failed to pay the SA merchant, then the SA merchant would be barred from paying the supplier in China.
If the goods are brought into bond for speculative export, and a firm sale is only made at a future point, say three months down the line, then (apart from the concession discussed below) China cannot be paid until the SA merchant is paid, three months later. China carries not only the credit risk, but also the credit cost.
Should the supplier in China require an earlier settlement, the merchant may have no choice other than to import the stock, bringing duties and taxes to account and breaking the supply chain into an import and a subsequent (and unrelated) export.
Thereafter, once the stock is finally exported, the merchant may qualify for a duty drawback on the initial import (if import duty was applicable), but this is a complex and time-consuming process and specialist advice should be sourced before assuming this benefit.
In a slight concession, if the ultimate buyer is in Africa it is possible to have an overlap in terms of payment (China being paid up to 60-days before Malawi makes payment) but this is subject to bank approval and might require the Malawi payment to be bank-secured (such as with a letter of credit) at the bank’s discretion.
This is an extract from the Currency and Exchanges Guidelines for Business Entities at Section 9 – Merchanting, barter and counter trade;
9.1 Business entities wishing to engage in merchanting trade transactions must apply to an Authorised Dealer. If approved, a condition would be that the time lag between paying funds to the foreign supplier (seller) and receiving funds from the foreign importer (buyer) must not exceed 60 days for trade with countries on the African continent and 30 days for trade with any other country. Authorised Dealers must ensure that payment is received from the foreign importer (buyer), which must include the South African merchant’s profit and must be received in foreign currency or Rand from a Non-resident Rand account in the name of the non-resident and/or Rand from a vostro account held in the books of the Authorised Dealer. A copy of the relative agreement entered into between the parties concerned or a commercial invoice from the seller together with a commercial invoice from the South African merchant must be produced to confirm the arrangements. In instances where the above-mentioned requirements cannot be complied with, a written application must be submitted via an Authorised Dealer to the Financial Surveillance Department, for consideration.
Once and if approved, payments in and out are reported under BoP category 110 and not reported as import or export activity.
Additionally, this is an extract from the Currency & Exchanges Manual for Authorised Dealers –
Section B.1. (payment for imports) subsection F;
(iii) Authorised Dealers must be alert to the presentation of documentation that would indicate that the goods have been exported from South Africa. Such transactions are regarded as merchanting transactions and are subject to the provisions outlined in section B.12(A) of the Authorised Dealer Manual.
(Note that B.12(A) is substantively the same text as quoted above from the Merchanting section of the Business Entity Guidelines, with the added clause that non-compliance “will be viewed in a serious light.”)
It is often the case that the use of an export bond store is seen as a Customs issue alone and, provided that Customs’ procedures can be adhered to, running the store is a practical, cost-effective way of serving an export demand with previously imported stock. Avoiding duty and VAT obviously appears to be an attractive benefit, however in all matters of cross-border trade – “Exchange Control First”.
You cannot be Customs (or VAT) compliant if you are not Exchange Control compliant.
If you are in doubt, and before you speak with your clearing agent about an export bond store, be guided by your bankers.
Note that Namibia, Lesotho, and eSwatini are not classed as non-resident origins or destinations for Exchange Control purposes.
The next Exchange Control and VAT course runs on the 25th and 26th of March. If you are interested, email me for further details.