Customs changes bring opportunities in East Africa

February 25, 2013

The East African Community is modernizing customs. What does this mean for international businesses?

The revenue authorities within the East African Community (EAC) member states (Rwanda, Uganda, Kenya, Tanzania and Burundi) have established customs modernization departments undertaking several projects to improve customs administration and revenue collection.

One of the most important modernization projects for companies operating in the region is the adoption of Authorized Economic Operator (AEO).

What is an AEO?

An AEO is an entity (e.g., importer, clearing agent or transportation company) that is authorized to import and move cargo within the EAC region with minimal cargo inspections and other customs interventions that can cause delays at customs checkpoints.

The AEO is given first priority during clearance and instead, the AEO faces customs review some time after importation in the form of post-clearance audits (which, we note, non-AEOs are also subject to) to confirm compliance with the customs rules and regulations.

AEO progress in the EAC

The EAC partner states launched the AEO program in 2008 to be implemented through a pilot program. However, there was a lack of consistency with respect to the application of each member country’s pilot program. One of the primary challenges was that not all partner states were accepting a registered AEO evaluated by another state’s revenue authority, despite the intent for mutual recognition.

In March 2012 at the fifth steering committee meeting for the World Customs Organization (WCO) — EAC facilitation project, all five EAC partner states officially signed a new common customs policy for AEO. Under this common policy, AEO authorization is granted to entities that:

  • Meet key requirements with respect to customs compliance
  • Have fully functional and technologically strong information systems
  • Have an internal program of self assessment to promote customs compliance All EAC partner states are still in the pilot phase of AEO adoption.

All EAC partner states are still in the pilot phase of AEO adoption. Kenya and Uganda have been actively promoting the AEO project by requesting interested parties to apply and be evaluated for possible consideration. In Kenya, as of August 2012, over 50 companies have been registered for the program.

Implications for business

AEO in the EAC is designed to reward companies that establish themselves as “low-risk” importers with faster cargo clearance, so that the revenue authorities can focus their resources on higher risk importers. AEO status can provide companies with significant competitive advantages in terms of supply chain certainty and reduced import costs.

Once the AEO program becomes fully implemented, registered importers will have the following benefits:

  • Reduced transport costs due to faster deliveries of cargo across the region
  • Reduced storage costs/demurrage considering that the goods are subject to minimal customs border inspections
  • Reduced customs intervention for goods in transit in the form of road blocks

Only companies that meet the EAC AEO requirements will be granted AEO status. Accordingly, it is important that interested companies prepare by conducting an effective self-assessment prior to AEO application.

As part of the self assessment, the following actions should be considered:

  • Undertaking a customs health check (such as a customs review or internal audit) of the company’s import and export operations. Any identified exposure can be voluntarily disclosed to the customs authorities with the payment of any tax deficiencies.
  • Implementing procedures and internal controls that promote continued compliance with all customs laws and regulations.
  • Undertaking a review of the company’s information systems to ensure that necessary data is accurate and can be provided in a short time frame to the revenue authorities upon request.

Conclusions

Overall, in these turbulent times of economic downturn, businesses need to consider all opportunities to reduce product costs to be competitive. With the AEO program’s progress in the EAC, the cost and supply chain advantages of this preferred status are starting to materialize.

More than ever, AEO is poised to become a significant customs modernization program that benefits compliance-minded traders in the region.

The full version of this article was first published in the Ernst & Young Indirect Tax Briefing, Issue 6, December 2012 (pdf, 4.50 MB)

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