DONALD MACKAY: The very complicated temporary rebate rules for onion powder

There are no onion powder manufacturers in SA, and there have not been any for at least 20 years. Yet there is still an import duty on onion powder, despite an application by a user of this raw material in the food processing industry to have the duty removed.

No-one opposed the application, but it still took 28 months to decide to keep the duty and give duty relief (even though there are no producers), as long as the applicant makes commitments around employment, pricing and so on. The hope is seemingly that for as long as the tariff persists it will act as a beacon to attract someone to set up an onion powder factory.

This, in my experience, is not how investment works.

The original use of temporary rebates was for seasonal goods, but temporary rebates now often take the place of duty removals. Temporary rebates have not only become more common, but also more complex, with long lists of requirements to be met before a permit is issued and onerous reporting requirements to secure future rebate permits.

To obtain a rebate permit, there is a form to fill out, with attachments such as a tax clearance PIN and a statement confirming that you comply with the labour laws of SA. If you make a mistake on the form, your application will be rejected.

Once your form is submitted, the International Trade Administration Commission of SA (Itac) has at least 14 days to process the application. It’s not clear what happens on day 15 if the permit has not been issued. Once you have your permit, you’ll be able to see how long it’s valid for. You can’t transfer your permit to anyone else, so you either use it or lose it.

As noted by Itac in the guidelines, the benefit of the rebate provision is tied to conditions related to economic performance over time and may be reviewed after a specified period. Reciprocity commitments as set out in the application form must be addressed in each application submitted.

The applicant must commit to the creation of employment and provide in each permit the number of jobs they expect to create annually as a result of the rebate permit. If Itac has reason to believe the terms of the permit are not being complied with, the permit holder will be given seven days to explain why it should not be withdrawn. It will then decide if the permit should be revoked or have its terms amended.

Now to the reciprocal commitments, which take the form of three-year commitments on things like employment, investment, and local offtake commitments when (if?) the local production comes on line. This form is then copied into the actual reciprocal agreement for signature.

Once issued, the applicant must provide the commission with annual reports detailing its adherence to the commitments, with the first report to be provided to the commission on submission of a second application for a rebate permit, and additional reports to be provided every year when applying for a renewal permit. In addition, the CEO must confirm that they will provide “a quarterly report on job creation performance”.

How much duty could be rebated? Based on the imports from August 2023 to July 2022, R152m worth of onion powder was imported, attracting R27m in duties. This is the potential amount to be rebated. These duties are spread over 60 importers, of which the largest accounts for 25% of the duties paid. The top 11 duty payers make up 80% of all the duties paid, but only seven companies paid more than R1m in duties in the year.

Reciprocal agreement fallacy

The primary driver behind reciprocal agreements is job creation. The company that must give the commitment is the importer, but in many cases the importer is a wholesaler that sells to manufacturers. This is an important service, but it is not usually labour intensive. The wholesaler has to make a commitment to employ more people, but if it only warehouses the powder and sells it on in batches to manufacturers, this is unlikely to create jobs.

Onion powder users may see their volumes increase as a result of the rebate, but it is likely that onion powder is only a small part of their bill of materials and so the improvement is likely to be slight. All of this is complex, unlike the commitment where you must presumably create at least one more job to get duty relief. You need to give feedback each quarter, so it is fair to assume that even after creating the first job you are not off the hook.

The largest beneficiary of the rebate may feel it worthwhile to employ one more person, but smaller companies can’t do that. The national minimum wage is about R60,000 a year, so the 26 companies whose benefits are less than that per annum are counted out immediately. Yay for Big Onion. The bigger companies will be more cost competitive, and those 26 smaller companies might just disappear.

Itac’s rationale for reciprocal agreements is that duties are “economic rents” that firms apply for, to which they are not entitled nor ought to claim a right to. These rents, while they have a targeted firm benefit, visit a “diffuse set of costs” across different economic actors. As such, those who receive the benefit are “encouraged” to reciprocate (or align their private benefit with the national interest) through increased production, investment and employment. Not just in their own self-interest, but also in the interests of society. That is, companies make reciprocal commitments based on their financial and market position, existing expansion plans and projected demand growth.

Duties are indeed “economic rents”, visiting a “diffuse set of costs on different economic actors”. The duties on onion powder are no different, yet here the “different set of economic actors” (consumers) must fund this rent in the hope that there will be a future “targeted firm” to benefit from the high duties but that also will sell to them below import price.

If they want relief now, they must employ people they don’t need (if they needed them, they would already have employed them). They either pay the duties or they pay the salaries, but either way they are less competitive against import competition than they should be.

• MacKay is CEO of XA Global Trade Advisors.