Withholding tax on demurrage charges will hurt Mombasa port

Mombasa port, which has been in operation since the 18th century, has grown over time and contributes more than 40 per cent of Kenya’s annual revenues.

Being one of the largest ports in Africa, the port serves Kenya and landlocked countries including Uganda, Rwanda, Burundi, South Sudan and the DRC.

Sea ports are gateways for 80 per cent of trade cargo. Currently, Kenya, Tanzania and Djibouti are competing to be the region’s transportation and trade hubs.

Djibouti poses less of a threat because of Mombasa’s larger hinterland and operational efficiencies, not to mention the possible diversion of Ethiopian traffic to Eritrea.

These nations continue to pump in huge investments to further develop and modernise the available supporting infrastructure.

Mombasa port is the largest in East Africa, with capacity to handle up to 500,000 TEUs. However, the port’s volumes exceed the throughput capacity by a factor of more than two.

This implies inevitable delay, especially during busy periods, meaning a significant capacity would have to be added to meet the port’s future demands.

The delays at the port can be attributed to customs clearance processes, land-side connections not able to evacuate containers quickly enough, and freight providers charging clients demurrage for the additional time that customers keep containers.

In a move aimed at boosting revenues for the government to finance its 2018/19 budget, the Finance Bill 2018 seeks to introduce withholding tax (WHT) on demurrage paid to non-resident shipping lines at a rate of 20 per cent on the gross demurrage amount.

The Finance Bill defines demurrage as penalties paid for exceeding the given time for taking delivery of goods or returning equipment used in the transportation of goods.

With Dar-es-Salaam and Mombasa ports charging almost the same rates, the choice of which port to use boils down to how fast goods are cleared.

A port’s charges may be lower, but when cargo stays at the yards for long it attracts significant demurrage charges which makes shippers opt to ship their cargo through a particular port despite high tariffs. Shippers incur millions of shillings in demurrage every year as a result of delays, some of which are beyond the shippers’ control.Demurrage charges start from $10 (Sh1,000) per 20-foot container per day after expiry of the free period, and rise daily. On the other hand, the 40-foot container attracts demurrage of $20 (Sh2,000) per day.

These charges can rise to more than $100 (Sh10,000) per container per day, depending on the number of days the importer stays with the container.

Clearly, delays resulting in demurrage charges fetch penalties that businesses can ill-afford, especially in this era of cut-throat competition and a drive to preserve razor-thin margins.

The introduction of WHT on demurrage paid to non-resident shipping lines will lead to an increase in the cost incurred by importers.

This is because non-resident shipping lines will in all likelihood pass on the tax burden to shippers, further increasing their costs and making an already tough business environment even tougher.

Given these potential costs, if delays at Mombasa port and inland container depots (ICDs) occur frequently, shippers may opt to use alternative ports such as Dar-es-Salaam so as to save on demurrage related costs.

READ: Shippers back 20pc withholding tax on foreign shipping lines

The desired effect of collecting more revenue for the government through the introduction of this law may therefore not come to pass when the Finance Bill is finally passed and assented to by the President. I the law is passed, it might prove to be counter-productive.

A cardinal principle of taxation is efficiency. If it is not cost-effective to collect a tax, the tax ought not be collected. For demurrage costs, individual shippers will be required to compute, deduct and remit the WHT. Imagine a situation of transhipment and the demurrage costs are to be borne by a non-resident shipper, who would be expected to account for the tax — the administrative complexity will be daunting.

The upshot of this is, it would be wise for the government to reconsider this proposal, if nothing else, to safeguard the competitiveness of Mombasa port.

Regina Mwangi is a tax advisor with KPMG Advisory Services Limited.