IMPACT OF THE EAC CUSTOMS UNION PRESENTATION TO STAKEHOLDERS BY Kilungya, S.M. CUSTOMS SERVICES DEPARTMENT KENYA REVENUE

1. IMPACT OF THE EAC CUSTOMS UNION PRESENTATION TO STAKEHOLDERS BY Kilungya, S.M. CUSTOMS SERVICES DEPARTMENT KENYA REVENUE AUTHORITY

2. EAC INTEGRATION PROCESS: Customs Union - 2005 Common Market - July, 2010 Monetary Union - 2012 Political Federation - Ultimate Fast tracked as per decision of the Summit

3. EAC CUSTOMS UNION

4. INTRODUCTION • The EAC Customs Union as an entry point of the EAC integration process commenced on 1st January 2005 with three EAC Partner States; Tanzania, Uganda and Kenya. Burundi and Rwanda joined EAC in 2007 • The EAC Customs Union had an initial transitional period of 5 years starting in January 2005 and ending in December 2009 • The end of transitional period in December 2009 paved way for the commencement of the Fully Fledged Customs Union on January 1st 2010. • The following slides show the progress so far made.

5. THE PROTOCOL ON THE ESTABLISHMENT OF THE EAC CUSTOMS UNION • Implementation of the EAC Customs Union started in January 2005 and has been successful. • However the following challenges have been experienced; • The link between the coordination and monitoring roles of the Directorate of Customs vs enforcement by the national customs authorities; • Conflicting interests at national and regional levels (promotion of trade and investment vs revenue maximization); • Working of the appeals system; • No instrument to guide the discretionary powers of the Commissioners of Customs in the Partner States

6. THE COMMON EXTERNAL TARIFF (CET) Has greatly liberalised the EAC region, (average applied tariffs have come down in all Partner States; Has enhanced predictability for exporters and investors; Has led to an increase in imports under the 3 tariff bands, especially under the 0%-tariff band. Imports under the 0-tariff band were 63.6% (Kenya), 67.9% (Uganda), and 57.3% (Tanzania) Affected trade regimes in the three countries: Increased tariffs for Uganda and Tanzania; Reduced tariffs for Kenya Has led to an increase in tariff dispersions (a) from one product to another, (b) across products within sectors, and (c) across stages of production.

7. The commencement of a fully fledged Customs Union implies that goods originating in the EAC territory shall attract zero tariffs (zero import duty) once traded among EAC Partner States. Domestic taxes such as Value Added Taxes (VAT) and Excise duties shall be paid to the consuming/importing countries. • Although a fully fledged Custom Union ushers in a single customs territory, goods traded within the community will still be subjected to domestic taxes. • The successful elimination of internal tariffs among EAC Partner States ushers in a new era where goods started to be traded duty free among EAC Partner States. Tanzania and Uganda accorded 0 per cent import duty to Kenya following the end of the elimination of internal tariff on 31st December 2009. Kenya, Rwanda and Burundi had already accorded 0 per cent import duty to other Partner States.

8. APPLICATION OF EAC RULES OF ORIGIN Ideally, under a fully fledged Customs Union, member states should not apply rules of origin as goods manufactured in one member state are supposed to move freely. Also goods imported into Customs Union from the rest of the world are supposed to circulate freely. However, this will not be the case for EAC since modalities for collection and accounting for customs revenue are not in place yet. Sphagetti bowl complexity poses difficulties in the removal of the application of Rules of Origin. Therefore, in order to avoid trade deflection as well as promote industrialisation in the Customs Union, EAC will continue applying EAC Rules of Origin. The goods qualifying for EAC Rules of Origin are the only ones which will qualify for community preferential tariff treatment i.e zero import duty.

9. EXEMPTIONS AND REMISSIONS The value of goods which qualified for exemptions and remissions has been growing (especially for Kenya and Tanzania); Revenue foregone has also increased; There are a number of implementation challenges regarding the exemption regime: Exemptions not categorised and harmonised with other investment incentives provided by different agencies; Lack of an appropriate monitoring mechanism

10. EXEMPTIONS AND REMISSIONS

11. NON-TARIFF BARRIERS NTBs remain a serious concern (continue to raise the cost of doing business, and to impact negatively on trade cooperation); Most common NTBS include (customs and admin. procedures, inspection requirements, police roadblocks, varying, cumbersome and costly transiting procedures, etc); Mechanism for elimination of NTBs largely deemed as work in progress.

12. CHALLENGES TO THE IMPLEMENTATION OF THE CUSTOMS UNION National sovereignty; Structural rigidities; Non-tariff barriers; Language barriers; Unrecorded/ informal cross-border trade; Dispute settlement mechanism; Overlapping membership. Disparate internal taxes such as excise & VAT [VAT- Kenya 16%; Uganda 18%; Tz 18% (was 20% before June 2009)]

13. TRADE IMPACTS OF THE CU There has been a general increase of trade for all the three countries; Kenya – benefiting most from the regional market; Trade between Uganda and Tanzania still very low; Commodities traded: Uganda and Tz – mostly agricultural commodities Kenya – industrial goods; Re-exports.

14. REVENUE IMPACTS There has been an increase in revenue despite initial fears. Main factors for this were: Improvements in economic performance (at least until global financial crisis); Improvement in tax administration (e.g. simplification of tax laws and regulations, improvement in staff competencies, etc); Growth in trading activities; Greater reliance on other taxes (income tax, VAT, etc) other than trade taxes (import duties).

15. INVESTMENT IMPACTS Progress made in harmonising investment policies, incentives and laws; There are variations in minimum capital threshold requirements. Cross-border investments still low, with most of them coming from Kenya into the other EAC Partner States.

16. EFFICIENCY OF THE EAC SECRETARIAT INSTITUTIONAL FRAMEWORK • The Directorate of Trade and Customs has endeavoured to perform according to its mandates, however the following challenges have been experienced; • Challenges: • Mandates limited largely to coordination – not much involvement in technical issues, including research & analysis; • Lack of enforcement powers; • Slow response by Partner States to proposals put forward; • Slow implementation of decisions reached regionally; • No institutional structure to deal with policy harmonisation; • Limited personnel.

17. CUSTOMS ADMINISTRATIONS • Efforts have been made to improve the work of the customs departments in the Partner States; • Challenges • Inadequate coordination with other government agencies; • Problems of information exchange; • Fraudulent acts associated with ROOs; • Limited implementation of the customs regulations; • Connectivity challenges • Variations in the ICT software used (Kenya – Simba, Uganda and Tanzania – ASYCUDA ++)

18. IDEAL CUSTOMS UNION Removal of internal tariffs Free circulation of goods Common External Tariff- Currently under review Joint collection of Customs duties Removal of internal Customs borders EAC not yet there but moving on towards the ideal CU

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