Indirect taxation in 2013: free trade is increasing but is meeting protectionist challenges

March 28, 2013

Customs duties were once a primary source of revenue for most countries. But continuously growing global trade and the efforts of organizations such as the World Trade Organization (WTO) have led to a constant reduction in customs duties around the world.

This trend continues around the world as countries continue to conclude a growing network of various kinds of trade agreements. The WTO currently has 158 members (the most recent, Laos joined at the start of February 2013) and it reports 546 active and pending reciprocal regional trade agreements among its members.

This number does not include unilateral preference programs, that is, trade preferences granted to products imported from identified countries without reciprocal benefit, such as the Generalized System of Preferences (GSP) in the EU and the US, which provide dutyfree treatment to many products from developing nations.

A number of new free trade agreements (FTAs) are expected to enter into force in 2013, thus further reducing the amount of customs duties imposed on global trade; examples include the agreement involving the EU and Peru and Colombia, Montenegro and the European Free Trade Association, and Hong Kong with the European Free Trade Association, and Indonesia and Pakistan.

Nearing completion are, among others, the trade agreements between Costa Rica and Peru and between Canada and India, and negotiations are in various stages of completion for a range of others.

Duties still a significant source of revenue and cost

However, the situation is not always that straightforward. Although customs duty rates are generally reducing for international trade, these taxes still play a very significant role in meeting countries’ budgetary needs. In many cases, duty rates on many goods and materials remain high.

Unlike VAT/GST, duties charged at one stage in the supply chain are not offset against taxes due at later stages, so duties form part of the cost base of affected goods. In addition, customs clearance procedures can add to the time and related costs of moving goods crossborder.

And even where FTAs exist, many businesses are not actually obtaining the potential benefits offered because they cannot or do not meet the qualifying conditions.

Protectionism

More generally, global trade may be hampered by the current economic climate, which is encouraging protectionist tendencies, as evidenced by the current difficulties encountered in the Doha Rounds. Non-tariff barriers have grown substantially in recent years, many in the form of health, safety or environmental requirements.

The WTO reported 184 new trade-restrictive measures enacted between October 2010 and April 2011 and 182 between October 2011 and May 2012. In addition, where countries are not bound by FTAs, import duties are still a common and often-used means to steer trade and production.

For example, to boost the development of sugar cane production toward meeting the raw sugar needs of domestic sugar refining companies, effective 1 January 2013 Nigeria now applies a 0% import duty on machinery for local sugar manufacturing industries, but it has increased the total tariff on imported refined sugar to 80% from 35%, and raw sugar tariffs increased from 5% to 60%.

Read more: Indirect tax in 2013 – A review of global indirect tax developments and issues

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