New used car tax model could backfire

History offers invaluable lessons in policymaking, particularly on the consequences of failing to align the intended and unintended consequences of laws.

The Kenya Revenue Authority (KRA) recently issued a public notice on the adoption of a new Current Retail Selling Price (CRSP) schedule to be applied in the computation of Customs value for used motor vehicles imported into the country. 

According to the KRA, the use of CRSP will enhance transparency, consistency, and accuracy in the determination of customs value. Further justification is made that by basing valuations on updated market prices, the taxman will curb under-declaration and tax evasion and, therefore, ensure fair taxation for all importers and increase revenue collection for the government.

This looks good on paper, just like many other policy measures whose unintended consequences are not properly analysed.

Take, for instance, the Volstead Act of 1919, officially known as the National Prohibition Act, that was enacted by the US Congress to enforce the 18th Amendment, which prohibited the manufacture, sale, and transportation of intoxicating liquors. While the primary aim of the Volstead Act was to curb alcohol consumption to reduce crime, improve public morals, and promote health and productivity, the results were disastrous.  

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Instead of reducing crime, the Act led to the rise of organised crime syndicates that profited from the illegal production and distribution of alcohol.

Rather than promoting public virtue, the Act bred widespread disrespect for the law and fuelled a black-market economy, which ultimately led to its repeal in 1933 through the 21st Amendment, marking it as one of the most unsuccessful social policy experiments in US history.

A deep dive into the practicality of Kenya’s CRSP policy shows a similar pattern of unintended consequences. Here’s why. 

First, it is important to note that customs clearance of imported cargo revolves around three key pillars, namely, tariff classification, valuation, and origin of the goods. As such, any practices that fall outside these pillars, such as under-declaration or concealment, are treated as criminal offences.

This simple context explains why, for years, Customs administration has had to contend with persistent under-valuation of imported used motor vehicles, with records of massive losses in revenue due to the application of benchmark valuation. To address the challenges of under-valuation, the World Customs Organisation (WCO) adopted the World Trade Organisation (WTO) system of valuation that gives guidelines on Customs Valuation Methods.

The first and most basic approach under the WTO valuation system is the Transaction Value Method, which relies on the actual price paid or payable for goods, although it is generally not applied to used motor vehicles since the seller is rarely the Original Equipment Manufacturer (OEM), and there is no standardised pricing for such items.

As a result, most often than not, Customs authorities revert to the Deductive Valuation Method, where they work backwards from the local retail price of comparable vehicles, factoring in depreciation and related costs. This approach underpins the use of the CRSP, which is obtained from the local dealers of motor vehicles that are similar to the imported used ones.

However, this practice presents a serious conflict of interest because local dealerships often view imported used car dealers as competitors and, therefore, they may inflate CRSPs or provide skewed data that unfairly penalises other importers.

One would expect that, in this day and age, the Customs Administration would adopt modern tools and approaches to determine the import duties and taxes rather than relying on data provided by the local dealers, for whom the used motor vehicles importers pose a threat of direct competition.

In most cases, the local dealership specifications do not even match the imported used motor vehicles, hence resulting in unfair values for the latter.

If, for instance, the Customs authorities adopted the use of Transaction Values, but with the application of Blockchain technology, things would change for the better.

Blockchain can securely track all the documents relating to the imported used motor vehicles, such as purchase contracts, invoices, packing lists, and bills of lading, among others. Further, Artificial Intelligence tools can be used to flag out inconsistencies to obtain information on identical or similar importations, declared export values from the Country of Origin, importer, and clearing agent trends and behaviours, as well as any data, information, and intel on motor vehicle imports.

Dr Gabriel Kitenga, a leading expert and consultant in Customs Administration, has also raised concerns about the use of the CRSP database. According to him, the list should serve as a risk assessment tool for Customs Officers rather than a publicly applied standard. He argues that while the underlying principle is sound, the methodology is flawed.

He also critiqued the source of the data, whereupon dealers become the sources of models that they know little about. If anything, according to the WCO guidelines, a Customs Administration may, first, not use a database to determine the Customs value of imported goods as a substitute value for imported goods or as a mechanism to establish minimum values. It must also not reject the declared value solely based on a difference between the declared value and the database values.

Safari is a customs and international trade consultant at Arrow Head Consult, while Otiato is a strategic communication practitioner and a commentator on political and economic issues