Don’t be Trumped by Import Tariffs (Reportable Irregularity)
Don’t be Trumped by Import Tariffs (Reportable Irregularity)
By Seelan Muthayan, Partner
The Auditing Profession Act requires auditors to respond to certain serious unlawful conduct involving those responsible for the management of an entity. A reportable irregularity may arise where such conduct causes, or is likely to cause, material financial prejudice to the entity or to stakeholders dealing with it, involves fraud or theft, or amounts to a material breach of fiduciary duty under a law applicable to the entity or its management.
Where an auditor concludes, or has reason to believe, that such an irregularity has occurred or is occurring, the Auditing Profession Act requires the auditor to report the matter to the IRBA without delay and to provide the relevant particulars in writing.
The incorrect tax treatment of a transaction, or of a particular class of transactions, can have serious consequences. SARS may raise additional assessments and impose late payment penalties, interest, and understatement penalties. In appropriate circumstances, the auditor may also be required to report the matter to the IRBA as a reportable irregularity.
Why duty exposure deserves attention
Since President Trump’s inauguration, import tariffs have returned to the centre of the international trade debate. The imposition of tariffs is often aimed at raising revenue under the guise of providing protection to local industry or responding to unfair trade practices. Whatever the intention is, their impact is felt directly in the landed cost, pricing, working-capital planning and supply-chain decisions. For South African businesses, customs planning has moved from an administrative compliance procedure to a core commercial control that is planned proactively rather than left until clearance of the goods.
Customs duties are assessed when goods are “entered” into South Africa. The amount payable may be calculated by reference to value, quantity, weight, volume, or another method prescribed for the relevant tariff heading.
Although tariffs are driven by “protectionism”, increases in the rate of duty are considered an immediate business cost by the importer. If the tariff heading declared is wrong, the exposure may extend beyond the unpaid duty to interest, penalties, delayed clearances, and the management time required to deal with disputing SARS’ position.
The South African framework
In South Africa, SARS administers customs duties under the Customs and Excise Act, No. 91 of 1964. In practice, the duty payable is dependent on the three pillars of customs: the nature of the goods (tariff), the value to be declared (valuation), and the country of origin.
Any enquiry in any one of these pillars can influence the customs duty liability. Challenges by SARS in the classification may result in a different customs duty rate being applied. Likewise, cost items like license fees may impact the customs valuation and result in an adjustment in the duty base. Origin may affect preference, rebate eligibility or exposure to trade-remedy duties. It follows that importers should consider these pillars before sourcing and contracting decisions are finalised, and not when the goods are presented to SARS Customs when the clearing documents are prepared.
Tariffs as a supply-chain risk
The tariff landscape is increasingly difficult to predict. Policy changes, safeguard measures and retaliatory responses (foreign and local) can alter the economics of cross-border trade with little lead time.
South African importers may be affected even where a foreign tariff is imposed elsewhere in the chain (in the country of export). Suppliers often pass through additional costs, freight routes may be adjusted, customer pricing may be re-opened and contracts may need clearer allocation of duty risk. Customs exposure is therefore part of supply-chain governance.
Two recurring risk areas
Classification is often the first point at which duty risk arises. A commercial label, invoice description or internal stock code by itself is often not sufficient information in determining the correct tariff heading. Generally, importers analyse the classification of their goods with reference to tariff headings, section and chapter notes. Without a proper understanding of the interpretive rules (general rules of interpretation), importers often must make decisions on the classification of goods that could appear correct on the surface - using the description on the invoice- but are technically incorrect.
Valuation is another area that is under constant scrutiny by SARS. The invoice price is only the starting point in determining the customs value and is not always the final customs value. Other cost items not paid at the time of importation such as royalties and license fees, assists, commissions, discounts, post-import price adjustments in a structured transaction (between related parties) may all affect the transaction value that must be declared.
Incorrect headings and third-party tariff libraries
Application of the incorrect tariff headings remain a frequent source of customs exposure. The cause may be innocent: legacy tariff headings may be carried forward without review, product specifications may change, supplier descriptions may be incomplete, or a tariff heading may be copied from a clearing agent or tariff database without testing whether it fits the goods being imported.
Third-party tariff libraries are useful reference tools, but they do not remove the liability from the importer in the case of a challenge against the tariff position of the importer. A database result may not take account of the exact product, the condition in which it is imported, recent tariff amendments, or the full context of the applicable chapter and section notes and the interpretative rules. The burden of proof is on the importer i.e., to be able to explain why the declared heading is correct (especially in the absence of a determination from SARS).
If SARS questions a declaration, pointing to a third-party code is unlikely to be enough. Customs declarations are effectively made on the basis that the importer has taken responsibility for the position adopted. Where SARS finds that the declared heading resulted in an underpayment of duty or another compliance failure, the consequences may include further duty exposure, interest, penalties, and an administrative nightmare that includes inter alia demands for payment, detention, or a delay in the release of goods due to alleged contraventions.
A defensible approach should record the classification reasoning, the materials considered and the basis on which any external reference was accepted or rejected. Periodic reviews become a critical post clearance control, especially in cases where suppliers, product composition, functionality, or tariff provisions has changed. For high-value or uncertain products, a formal SARS tariff determination may provide a better foundation than reliance on a database entry alone.
South African case law: classification, valuation and remedies
South African decisions make clear that classification is a legal exercise applied to the goods in the form in which they are imported. The approach associated with International Business Machines SA (Pty) Ltd v Commissioner for Customs and Excise [1985] ZASCA 87 requires the tariff provisions to be interpreted, the goods to be identified by reference to their nature and characteristics, and the correct heading then to be selected. Decisions such as Commissioner for the South African Revenue Service v Mining Pressure Systems (Pty) Ltd 565/2023) [2026] ZASCA 21 also show the importance of the objective features of the goods, especially where technical specifications or “of a kind used” wording are relevant.
The same approach can be seen in disputes involving composite or multi-function products. In Commissioner for the South African Revenue Service v LG Electronics SA (Pty) Ltd (Case no 715/2021) [2022] ZASCA 166, the focus remained on the goods as presented for importation. In Pacific Solar Technologies (Pty) Ltd v Commissioner for the South African Revenue Service (Case no 715/2021) [2022] ZASCA 166, the Supreme Court of Appeal considered the classification of solar home systems by reference to their essential character. These authorities underline the need to keep technical specifications, product evidence and current reasoning in the customs file.
Valuation and origin issues can be just as fact dependent. In Commissioner for the South African Revenue Service v Levi Strauss South Africa (Pty) Ltd (509/2019) [2021] ZASCA 32, the Supreme Court of Appeal considered issues including commissions, royalties and origin documentation in the customs-duty context. The case illustrates why the invoice price should not automatically be treated as the complete answer where group procurement arrangements, royalties, buying commissions, or preference claims are involved. This may even apply to arm’s length third party transactions where additional payment may be made indirectly to another party so as to delink the payment.
The procedural route selected after a SARS decision is also important. Customs disputes may involve statutory appeal mechanisms, review proceedings, or other remedies under the Customs and Excise Act. Importers should obtain advice promptly, identify the decision being challenged, protect applicable time periods, and choose the remedy that matches the decision and the relief sought.
Practical controls for importers
Risk is reduced when the customs position is tested before the goods move. The following controls provide a practical framework:
|
Control area |
Practical action |
|
Tariff classification |
Link the goods’ physical and technical features to the correct heading and subheading, applying the tariff notes and interpretative rules. |
|
Tariff data governance |
Use third party tariff libraries as research aids only, and verify the proposed heading against the product, current tariff text, applicable notes, and SARS material. Importers should review their libraries or historic import data for inconsistencies periodically. |
|
Customs valuation |
Confirm that the declared value is supportable, including the treatment of royalties, assists, commissions, discounts and related-party pricing. |
|
Origin and preference |
Check whether origin rules, certificates, preference arrangements, or rebate items apply, and retain the evidence supporting the claim. |
|
Documentation |
Keep invoices, agreements, specifications, shipping documents, valuation evidence and correspondence in a file that can be produced on request for at least five years. |
|
Reportable irregularity assessment |
Where a wrong heading creates material exposure, consider whether the conduct, disclosure, quantification and remediation raise auditor reporting issues. |
|
Dispute readiness |
Allocate responsibility for SARS responses, provisional payments, guarantees, and specialist escalation before clearance delays arise. |
The need for control is greatest where goods are high in value, imported frequently, sourced from related parties, or affected by changing tariff measures. A modest error on one entry can become significant when repeated across a long import history.
Managing a SARS challenge
Where SARS raises questions about classification, value or origin, the response should be managed carefully and without delay. The importer may need to submit technical evidence, request reasons, consider remedies, deal with penalties or deposits, or pay under protest to secure release of the goods while maintaining its position.
The best dispute file is usually created before any dispute exists. Current records explaining the classification and valuation analysis will often be more persuasive than a justification prepared only after a detention, audit or assessment. The case law shows that courts focus closely on the goods, the technical evidence, and the statutory framework; the importer should therefore be able to reconstruct the duty position from its records without relying on hindsight.
Further consideration: reportable irregularity
A separate governance issue is whether an incorrect tariff heading could, on particular facts, raise reportable irregularity concerns. That assessment requires care. A reportable irregularity should not be inferred merely because there was a classification error, a tariff library was consulted, or SARS later reached a different view. Classification can involve judgment, competing interpretations, and product-specific evidence. The focus is therefore not the classification outcome alone, but whether management conduct points to unlawful and materially prejudicial behaviour.
Broadly stated, the question is whether a person responsible for management committed an unlawful act or omission that has caused, or is likely to cause, material financial loss, is fraudulent or amounts to theft, or constitutes a material breach of fiduciary duty. In a customs setting, the risk is more acute where management knew, or ought reasonably to have known, that the declared heading was incorrect or not justifiable, continued using it for recurring imports, ignored SARS correspondence or professional advice, concealed the issue from auditors or those charged with governance, or failed to quantify and disclose a material exposure.
This distinction is important. A genuine classification dispute, supported by current analysis and open engagement with advisers, auditors and SARS, should not be equated with misconduct simply because SARS disagrees. However, unsupported declarations, weak escalation, incomplete disclosure, or deliberate inaction may cause a technical customs matter to become a broader governance and reporting issue. Management should preserve the classification rationale, quantify any duty, interest and penalty exposure, consider financial statement recognition or disclosure, and assess remedial engagement with SARS promptly.
Conclusion
The central point is that import tariffs should not be treated as a mechanical field on a customs declaration. They affect pricing, contracting, supply-chain resilience, financial reporting, and engagement with SARS. In a less predictable trade environment, importers should be able to demonstrate that classification, valuation, and origin were considered before shipment, supported by records and revisited when products, suppliers, or tariff measures change.
Businesses that address classification, valuation and origin before goods move are better positioned to manage their landed cost structure, reduce the risk of frequent disputes, and they are able to respond effectively if SARS challenges the position. In customs, preparation is generally less expensive than correction. BDO can assist in this regard.