Review of the SACU revenue-sharing formula

1. Review of the SACU revenue-sharing formula Standing Committee of Finance 14 September 2010

2. Content • Context • An economic perspective of Union • SACU revenue-sharing regimes (1910 to 2002) • How the 2002 formula works and its outcome • Exposure to a volatile form of revenue • Objective of a new formula and proposed changes • Some tentative ideas • Proposed way forward

3. Context • In December 2006, SA notified Council that it intends to review the RSF • Following national consultations and in accordance with Article 43, SA formally proposed the review of the RSF, because: • The revenue sharing arrangement is unsustainable – great volatility • Revenue considerations should not be the single driver of trade policy decisions • Great deal of polarisation caused by trade and revenue reconciliation • SACU payments to the BLNS is seen increasingly by the SA public and parliament as a fiscal burden • RSF limits the possibility of expansion – building block of a SADC customs union

4. An economic perspective of the Union Nominal GDP @ PPP (US$ bn) Real domestic demand (R billions) EIU data for 2009

5. An economic perspective of the Union, cont… Real export of goods and services Real imports of goods and services EIU data for 2009

6. SACU revenue-sharing regimes – 1910; 1969 and 2002 SA collected and distributed according to size of economies 1910 Size matters • Share calculated for BL(N)S based on trade data of past 3-years • SA received residual • Adjustments made in year t+2 1969 SA keeps residual • Revenue earned from customs and excise • Customs component is redistributive • Introduced a development component 2002 Shares based on forecast and reconciled against actual collections and intra-trade data

7. Workings of the 2002 revenue sharing formula • CIF value • Imports from member states into area • % of CIF value of intra-SACU imports Ci= Mi * C i=n ∑ Mi i=1 Customs component Ei= GDPi * E i=n ∑ GDPi i=1 Excise component • Value of GDP • % of total SACU GDP Development component • 15% of excise component Di= 20 * (1-(F/H-1)/10) *I

8. Result of 2002 revenue sharing formula Contribution into CRP Received from CRP SARS Annual Report

9. A destination principle was applied to approximately R1.75 billion worth of goods entering SA and destined for the BLNS in 2006/07 – goods that enter SA, bonded on route to the BLNS, and the duty collected when it enters the territory of final destination Customs collected by SA o.b.o BLNS Value of bonded goods in 2006/07 – R millions • SA collected duties of R5.2 million on behalf of the BLNS in 2006/07 Customs duties collected in 2006/07 obo the BLNS – R millions Source: CAPE System operated by SARS Customs

10. High dependency on customs revenue • Customs as a percentage of total revenue • 2006 • 2008 • 2010

11. …and exposed to volatility • Global recession has forced SACU revenue down to pre-2005/06 levels • Actual customs revenue declined from a forecast of R31.3 bn to R22.8 bn in 2008/09 • The BLNS will all experience a decline in excess of 50% btw 2009/10 and 2010/11 • Revenue will return to 2005/06 levels in 2011/12

12. Trends in SACU Revenue Customs revenues a function of the structure of the tariff book Higher tariffs on final consumer products-sensitive to demand-side pressures Low or no tariffs on capacity building capital goods and most inputs Customs revenue highly dependent on consumer goods About half of all customs revenue collected from vehicles (29%), Electrical goods, footwear, beverages and clothing. Reasons for sharp decline in revenue… Evident in the large share of capital goods in VAT collection on imports Over indebted consumers (low levels of private credit extension, NCA etc.)

13. SACU revenue as a percentage of Budget Revenue

14. A new formula should … • Achieve a sustainable revenue-sharing arrangement • Have a strong development thrust that supports regional infrastructure • Lead to greater transparency and parliamentary oversight • Support the expansion of SACU • Contribute to: • a reduction in non-tariff barriers • the harmonisation of customs systems and procedures • fiscal and tax administration reforms

15. Customs Component Based on volume of internal trade Largely redistributive Receive what economy produces Determined from own collections, re-exports and duty drawbacks Eliminate intra-SACU trade data from formula …will require changes Proposed changes Current RSF under 2002 Excise Component • Linked to size of GDP • Eliminate excise • Should be a sovereign tax that all members set individually Development • Size of GDP and percentage of excise duties • Each member contributes based on GDP and p.c. GDP • Redistributive • Subject to parliamentary appropriation • Partly conditional?

16. Customs Each member state receives what they are entitled to: customs collected in individual territories customs collected on behalf of another member state re-exports Revenue distributed as forecasts in year t and adjustments in year t+2, in accordance with above customs collections Structural/Development Fund Contribution as a percentage of GDP Inverse redistribution of contribution by each member state Inverse factors can include GDP and p.c. GDP and others Can be determined at level of revenue-shares in 2008/09 Some tentative ideas

17. Proposed way forward • Presentation sets the tone for discussion and further study • Negotiations that should not take longer than six months • Parallel consultations in each Member State • Formulation of changes to 2002 Agreement • Parliamentary ratification of amended Agreement • Council approval of new revenue-sharing arrangement when determining revenue-shares in December 2010 • Implement new revenue-sharing arrangement in 2011/12