Importers face the risk of higher storage costs as thousands of shipments are delayed due to disputes between the Kenya Revenue Authority and insurance companies over new fees imposed on the system used to process customs bond insurance.
Customs bond insurance is a guarantee to the Kenya Revenue Authority that the insurers will be liable for all duties, taxes, fees and penalties associated with the goods in the event of default by the importing companies. The Kenya Revenue Authority will only clear the goods after proof of the bonds backed by the insurance is presented.
Insurance companies say Kenswitch Ltd, a company that the Indian tax authority joined hands with in 2018 to provide a platform for submitting the original paper copy of the bond to the tax officer before clearing the goods, was offering the service for free but is now demanding 0.125 per cent of the value of the customs bond.
The IRS said it had no contractual agreement with Kenswitch and only started using the company’s system at the recommendation of the Insurance Regulatory Authority (IRA) and had no idea whether any payments had been made to the company over the past six years.
According to the insurers, Kenswitch started collecting fees in November last year and has now stopped the system, asking insurers, banks and clearing agents to start paying.
But insurance companies say this figure is “outrageous” because they charge 0.1% of the bond’s value as a premium to bear the risk of defaulting on fees and taxes.
The gridlock has led to a backlog of goods at various customs points, as the Kenya Customs Service’s Integrated Customs Management System only accepts bonds approved through the KNSwitch system, without which goods cannot be cleared. The weeks-long gridlock has increased storage costs for importers and raised concerns of stock-outs for businesses in Kenya and the region.
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“We don’t understand how the company was included in the first place. Its platform price is higher than the premium price and it doesn’t make commercial sense,” said one insurer, who asked not to be named.
“The Kenya Ports Authority does not accept bonds. This means that cargo is piling up at the port and customers are charged additional demurrage fees for every day of delay. There are hundreds of millions in losses for businesses in Kenya and the region in the case of transit bonds.”
The Kenya International Freight Forwarding and Warehousing Association (Kifwa), the lobby group for clearing, forwarding and warehousing companies in Kenya, has written to the Kenya Customs Authority’s Customs and Border Control Department saying the impasse has locked more than 250 agents out of the system, making it difficult to clear goods.
In a letter dated September 5, a copy of which was seen by the newspaper, Roy Mwanthi, president of the National Kifwa Union, told the Kenya Revenue Authority that the prevailing tug of war had led to a halt in the processing and issuance of customs bonds, including CB11, which is required of clearing agents before they can be licensed to conduct transactions.
In the letter, Mr Mwanthi said that although the agents paid Sh50,000 each for a three-year CB11 bond, they were denied access to the system.
“At present, the affected agents are unable to carry out their daily legal duties of clearing goods and assisting the Kenya Revenue Authority in collecting taxes for thousands of consignments that are now stuck in different customs areas awaiting clearance,” Mr. Mwanthi’s letter read in part.
“We kindly and urgently appeal to you to intervene to break the deadlock to enable the currently paid bonds with various insurance companies to be uploaded into the iCMS system for processing cargo clearance documents.”
In an email response to our inquiries, the Korea Revenue Service said the Kenswitch system was integrated into the iCMS system based on the recommendation of the Internal Revenue Service to facilitate the “smooth implementation” of the government’s directive to award marine insurance business to local insurance companies.
However, the IRS said it had no contractual relationship with Kenswitch, and had no idea whether the company had received any payments for using the system.
“KRA has no insight into any contractual agreement between Kenswitch and the insurance industry and therefore cannot comment (on whether Kenswitch has received any payments). KRA has written to IRA to provide a solution for the insurance industry to enable customers to execute customs bonds online,” said Lilian Niwawanda, Commissioner of Customs and Border Control at KRA.
Era CEO Godfrey Kiptum told this publication in a phone interview that he was in discussions with the Kenya Revenue Authority on an interim measure, including the possibility of manual clearance, to avoid further stockpiling of goods.
“We are in discussions with KRA to assist them either manually or through some other system. I understand that Kenswitch has been testing the system with the understanding that once the system is stable, they can start making money from it. But players are not happy with the fees,” Mr Kiptum said.
Marine and transit insurance saw growth, with premiums reaching Sh4.41 billion last year, up 5.2 percent from Sh4.19 billion the previous year and up 34 percent in the past five years compared to Sh3.28 billion in 2019.
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