The Custom of the World (The Tax Take)

Oct 21, 2019

Sunday Business Post, 20 October 2019

Perhaps the key intervention this week in the Brexit talks did not come from Ireland, or the EU, or the British government.  It may have come from the UK’s Comptroller and Auditor General who declared on Wednesday that, officially, Britain was not ready to handle a no-deal Brexit.  According to the report, the UK government “has been unable to mitigate the most significant risks to the effective functioning of the UK border in the event of no deal”.  Sufficient facilities are not in place at UK ports to handle the customs requirements for importing and exporting to the rest of Europe.  This reality may have provided the impetus to get the political deal on Brexit closer to the line.

Customs is a tax which changes behaviour. It is designed to ensure that local industry and local agriculture deals with the local population on more favourable terms than those applicable to foreigners.  On paper it is simple to operate.  For customs, all you have to do is look up a table to see the rate of duty on what is being imported, and pay it over at the port or airport or land border.  But like any tax, it must be policed otherwise it won't get paid.  Hence the concerns of the UK’s Comptroller and Auditor General.  Hence the EU insistence that under the terms of the new Withdrawal agreement, goods which enter Northern Ireland from the UK but ultimately end up within the EU must be subject to customs duties. 

The EU customs union on which so much has hinged this week and which the Brussels institutions are so desperate to protect, is by no means the only customs union in operation in the world.  Usually speaking, customs unions remove trading barriers among the participating countries, in exchange for the surrender by the participating countries of their capacity to carry out trade deals independent of the customs union to which they belong, coupled with strong enforcement mechanisms to protect trade.  However, the current version of the withdrawal agreement agreed by the EU Council on Thursday suspends or mitigates some of the usual customs union rules for trade on the island of Ireland. 

This kind of flexibility on the usual customs union rules is not unique.  There are precedents elsewhere for tinkering with the underlying rules where geography, politics or economic circumstances demand it.  For instance, one approach to a conundrum similar to the challenge of facilitating all island trade has existed for over a century in Africa. 

The Southern African Customs Union involves the Republic of South Africa and some of the smaller surrounding countries.  All the countries charge the same customs tariffs on goods entering the Southern African Customs union, irrespective of their final destination, and pool the amounts collected.  A reckoning is carried out by reference to a formula to reflect where the goods were eventually used or consumed.  So, for example, if the Republic of South Africa collects customs at one of its ports on goods which end up in Botswana, a rebate is ultimately paid to the Botswana government.  No customs tariffs are charged on goods which originated within the member countries.

These concepts are not very far distant from the solution which is in play in relation to a de facto participation by Northern Ireland in the customs arrangements of both the EU and the UK.  Customs charges are to be levied and, if appropriate, rebated depending on the ultimate destination of goods.  The negotiators of the new Protocol on Ireland/Northern Ireland do seem to have thought outside the box of the usual customs union rules, but they are not the first to have done so.

Although the Protocol arrangements would create additional paperwork and cash flow challenges for some Northern Ireland businesses, the commercial advantages of having a presence in two regulatory camps could outweigh these disadvantages.  A recurring challenge for the Northern Ireland economy has been to change its base away from its dependence on the public sector and more towards the private sector.  This was the prompt for the proposed introduction of a 12.5% rate of Corporation Tax for Northern Ireland, which has been one of the casualties of the absence of the Stormont Assembly.

There are signs that the EU is increasingly viewing post-Brexit Britain as a competitor rather than as a close trading partner.  Just as the smaller African nations in the Southern African customs union have benefitted enormously from the trading arrangements with the Republic of South Africa (to the extent that business interests in Pretoria are growing disillusioned with the system), the dual customs arrangements and the flexibility that might present could provide a significant boost to the Northern Ireland economy.

There is precedent for this type of arrangement working well.  The Protocol may be new but the customs ideas it contains are already being used elsewhere.

 

 

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland