By Abu Bakarr Jalloh
In 2019 domestic tax and customs duty accounted for 53 and 25 percent, respectively, of the tax revenue of Sierra Leone, according to figures from the National Revenue Authority (NRA).
Many people wonder why customs duty contributes so little at a time when Sierra Leone import almost everything, from basic staple and textile to fuel and high-tech goods. The country’s merchandise trade balance reached Le8 Trillion ($800 million) in 2018, according to the United Nations Conference on Trade and Development (UNCTAD).
There are many arguments among the general public why customs duty performs so poorly compared to domestic tax. However, many tax experts say one of the main problems in collecting taxes has always been about overcoming the challenge of misclassification, undervaluation, data collection, low level of tax education and tax avoidances, etc.
“Take for instance taxpayers data, you can say you have like 62, 000 registered taxpayers, some of them are not taxpayers, some of them just come and register and do not continue the business, maybe they only wanted the contract, so you can come and register, once you get the contract that’s it. Some of them register you don’t even know where they are located, the addresses they give when they register are not correct,” said Dr. Philip Michael Kargbo, Director of Monitoring, Research and Planning Department at NRA.
Like taxpayers data, collecting accurate revenue data is also a big challenge, despite 21st Century payment systems technology. For example, tax payers still have problems understanding the difference among payroll tax, personal tax and corporate tax, which make up the domestic tax. Many taxpayers usually mistake payroll tax for corporate tax. Moreover, it is difficult to reconcile what taxpayers pay to the [Central] Bank of Sierra Leone and what NRA record as tax collected. A number of domestic taxpayers would not even return and present their receipts to the NRA after paying at the banks.
“Sometimes even with our arrears figures, sometimes it is embarrassing as we do our arrears list, we would say this taxpayer owes us a lot, when we write them a letter, the person would just come with a receipt,” Dr. Kargbo said.
The Domestic Tax Department has just launched the Integrated Tax Administration System (ITAS) technology to overcome the challenge of bank reconciliation and accurate revenue data collection. Like the Automated System for Customs Data (ASYCUDA) at Customs, ITAS would automatically do bank reconciliation as soon as the domestic taxpayer pays at the bank. However, Customs seems to be plagued by misclassification and undervaluation more than the Domestic Tax Department.
Tax education
Lack of understanding among the general public as to how to do customs duty has always been one of the biggest challenges Customs faces in a country that ranked 184 out of 189 countries in the United Nations Human Development Index (HDI) in 2018.
It is difficult for many citizens to even differentiate a custom officer, a custom broker, a seaport terminal operator, port authority-man or someone who just provides labor.
“The big problem here has to do with the public, their level of understanding tax, understanding the system itself, the type of taxes we collect out here and how taxes are being assed and what taxes are for, that is one big challenge,” Mr. Kpana M. Conteh, the Assistant Commissioner, Operation, Custom Service Department (CSD), explained when asked to discuss common problems Customs faces in collecting taxes.
However, the laws cover various questions citizens ask every day such as how to calculate taxes, what taxes are, who pays taxes and why we pay them, general concept of taxes, why they exist, and how they work, different types of taxes, basic process of collecting taxes, etc.
After the introduction of the Customs Act 2011, Customs now says they are easy to audit because almost everything is legislated. The laws even tell you how to go about determining the value, getting your rate and calculating customs duty. However, majority of the population lack the basic education required to understand these rules.
Unlike the Domestic Tax Department, disagreements at Customs are not with the banks but the taxpayers. ASYCUDA and banks communicate directly and automatically. In other words, dealing with misclassification problems at Customs includes disagreement between ASYCUDA and the physical goods.
Customs usually complains that even many custom brokers expected to be experts in doing taxes have problems understanding tax laws. “We expect the custom brokers to understand the laws and the processes just equally as the custom officers. The brokers who are supposed to be the kind of middlemen they do have problem of understanding of all these things. So because of that we have a lot of problems and their lack of understanding is associated with under-declaration, miss-description, misclassification, undervaluation and a lot of these things,” Mr. Conteh added.
Tax avoidance
Poor contribution of customs duty might also be primarily because of noncompliance problems among the general public. It seems majority of the population try to use loopholes such as misclassification to avoid paying the correct taxes.
Someone who has poor tax education is more likely to take public service and road infrastructure for granted and evade taxes. Moreover, many Sierra Leoneans perceive that large part of tax revenue is misappropriated because, they argue, public service such as education, healthcare, electricity, water supply and transportation are in very poor condition. The Transparency International Corruption Perception Index (CPI) in 2019 ranked Sierra Leone 119 out of 180 countries.
“If the goods are not properly described and you custom officer, you do not have the experience, somebody can technically avoid paying the correct taxes,” Conteh said.
He added that Customs’ system was like “you assess yourself and you pay.”
It means taxpayers have to assess themselves and pay at the banks. The NRA is only responsible to verify or reconcile. For Customs, the verification starts at the level where documents and attachments such as invoices and receipts of payments at the banks have to be authentic and correct.
However, Customs does not have the capacity to reconcile each and every bank receipt with each and every physical good, especially when the seaport is inundated with containers. Moreover, dealing with misclassification and tax avoidance is a daunting task.
“Misclassification is the main cause of the chaotic thing and it is a headache for all of us who manage them and who manage the whole thing, it is also a pressure on us,” Mr. Conteh said. This suggests that large number of containers is not physically verified and tax avoidance or evasion is widespread.
Customs usually say taxpayers who intentionally misclassify their taxes and bribe custom officers are as guilty as those who take the bribe. They argue that the public supplies bribes and influence the demand side of corruption.
“you pay at the bank, my responsibility is to verify, if I verify that it is not correct there is no way that person is going to commit a crime. Whatever the crime, you are going to be part of it because you don’t want to go back to the bank, you don’t want to pay for the extra, and some people without integrity would take advantage of that. Don’t allow that to happen and do the correct thing,” Mr. Conteh advised.
Some customs experts are calling for “risk assessment” to identify consignments with high risks. Risk assessment would guide Customs where to concentrate its limited resources or areas where that stand to lose revenue most instead of attempting to verify each container. Speed, accuracy, transparency, accountability and predictability matter in trade facilitation.
Tax reforms
The previous discussions suggest that institutions in Sierra Leone are very weak and misclassification of taxes take place outside the institutional framework, obey few rules or boundaries. Tax reforms in Sierra Leone, seen as one of the most innovative in the sub-region, are incomplete. Customs says it find it difficult to enforce tax laws, particularly the Custom Act of 2011, because according to them, there are no regulations. However, the law makes provisions for regulations. Many experts say lack of regulations weakens tax law enforcement. It also makes customs officers have wide discretion in applying the law, giving private interest the possibility to seek rent.
Customs officers are many times forced to use what they call “administrative policies” to deal with challenges such as misclassification of taxes primarily because regulations are absent. “Internal weaknesses have to do with provisions for which you need regulations to interpret these laws and those regulations are not there, this is where the challenge comes as to which decision the custom-man should take out there,” Mr. Conteh said.
Moreover, law enforcement officials always complain that the Tariff Act 1978 and the Excise Act 1982 are too old and must be replaced. Amended versions of both laws have been drafted but are still stuck at the Ministry of Finance and Economic Development.
The review of the 1991 Sierra Leone Constitution has been going on for years now without consensus. Many legal experts argue that a new constitution should make provisions for public institutions such as the NRA, the National Minerals Agency (NMA) and the Anti-Corruption Commission (ACC) to be transparent and accountable to not only from above but also to the public.
Also, many civil society organizations have urged authorities to introduce quotas to limit the amount of customs duty waived every year. Duty waiver increased from Le363.859 billion (about $37 million) in 2018 to Le500 billion (about $50 million) in 2019, according to NRA figures.
Finally, porous borders and widespread smuggling are said to be one of the reasons Customs contribute little to tax revue. Therefore, tax reforms will also have to include improving controls at the country’s borders.
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