The very complicated temporary rebate rules for onion powder

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There are no onion powder manufacturers in South Africa and there have not been any for at least 20 years, but there is still an import duty on onion powder, despite an application by a user of this raw material, to have the duty removed. No one opposed the application, but it still took 28 months to decide to keep the duty, and give duty relief (while there is no producer), as long as the applicant makes commitments around employment, pricing and so on. The hope is, that for as long as the tariff persists, it will act as a beacon to attract someone to set up an onion powder factory. This, in my experience, is not how investment works.

The original use of temporary rebates was for seasonal goods, but temporary rebates now often take the place of duty removals. Temporary rebates have not only become more common, but also become more complex, with long list of requirements to be met before a permit is issued and increasingly onerous reporting requirements to secure future rebate permits.

How to get a rebate permit

There is a form to fill out, with attachments, like a tax clearance PIN and a statement confirming you comply with the labour laws of South Africa. If you make a mistake on the form, your application will be rejected.

Once your form is submitted, ITAC have at least 14 days to process the application. It’s not clear what happens on day 15 if the permit has not been issued. Once you have your permit, you’ll be able to see how long it’s valid for. You can’t transfer your permit to anyone else, so you either use it or lose it.

The rebate permit conditions

As noted by ITAC in the guidelines

The benefit of the rebate provision will be tied to conditions related to economic performance over time and may be reviewed after a specified period. Reciprocity commitments as set out in the application form must be addressed in each application submitted.

The applicant must commit, inter alia, to the creation of employment and provide in each permit the number of jobs it expects to create annually as a result of the rebate permit granted.

If ITAC has reason to believe the terms of the permit are not being complied with, the permit holder will be given seven days to explain why the permit should not be withdrawn. ITAC will then decide if the permit should be revoked or have its terms amended.

Now to the reciprocal commitments, which take the form of three year commitments on stuff like employment, investment, local off-take commitments when (if?) the local production comes on line. This form is then copied into the actual reciprocal agreement for signature.

Once issued,

the Applicant must provide the Commission with annual reports detailing its adherence to the commitments, with the first report to be provided to the Commission upon submission of a second application for a rebate permit, with additional reports to be provided to the Commission every year when applying for a renewal permit.

In addition, the CEO must confirm that s/he will provide “a quarterly report on job creation performance.”

How much duty could be rebated?

Based, on the imports from August 2023 to July 2022, R152 million worth of onion powder was imported, attracting R27 million in duties. This is the potential amount to be rebated. These duties are spread over 60 importers, of which the largest accounts for 25% of the duties paid. The top 11 duty payers make up 80% of all the duties paid, but only seven companies paid more than R1 million duties in the year.

The reciprocal agreement fallacy

The primary driver behind reciprocal agreements is job creation.

The company who must give the commitment is the importer, but in many cases, the importer is a wholesaler who then sells to manufacturers. This is a very important service, but its not usually very labour intensive. The wholesaler has to make a commitment to employ more people, but if they only warehouse the powder and then sell it in batches to manufacturers, this is unlikely to create jobs. Perhaps the onion powder users see their volumes increase, but maybe onion powder is only a small part of their bill of materials and so improves things only slightly. All of this is complex, unlike the commitment where you must presumably create at least one more job to get duty relief. You need to give feedback each quarter, so its fair to assume after one job, you are not off the hook.

The largest beneficiary of the rebate may feel it worthwhile to employ one more person, but the smaller company can’t do that. The national minimum wage is around R60 000 a year, so the 26 companies whose benefits are less than that per annum, are counted out immediately. Yay for Big Onion. The bigger companies will be more cost competitive, and those 26 smaller companies might disappear.

ITAC’s rationale for reciprocal agreements is that

Duties are ‘economic rents’ that firms apply for, to which they are not entitled nor ought to claim a right to. These rents, while they have a targeted firm benefit, visit a ‘diffuse set of costs’ across different economic actors. As such, those who receive the benefit are ‘encouraged’ to reciprocate (or align their private benefit with the national interest) through increased production, investment and employment. Not just in their own self-interest, but also in the interests of society. That is, companies make reciprocal commitments based on their financial and market position, existing expansion plans and projected demand growth. 

Duties are indeed “economic rents”, visiting a “diffuse set of costs on different economic actors”. The duties on onion powder are no different, yet here the “different set of economic actors” (consumers) must fund this rent in the hope that there will be a future “targeted firm” to benefit from the high duties but who also will sell to them below import price. If they want relief now, they must employ people they don’t need (if they needed them, they would already have employed them). They either pay the duties or they pay the salaries, but either way they are less competitive against import competition than they should be.

You never knew onion powder customs duties could be this interesting, or that someone would actually explain all of this on a Saturday afternoon. This is the kind of commitment to knowledge we have at XA. 

Send a mail to info@xagta.com and find out how we can help you.

 

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