Since the past two months, the insurance industry was on a crackdown. The situation was followed by the sudden move of Customs Authority which claims that it owes them close to one billion Birr for expired customs guarantee bonds. Law enforcement staffs of the Authority are seizing the bank accounts and confiscating the vehicles of insurance companies, giving a headache to the industry which is in its infancy, reports FASIKA TADESSE, FORTUNE STAFF WRITER.
It has been a couple of months since the experts and law enforcement staffs of Ethiopian Revenues & Customs Authority (ERCA), attired with a blue shirt and black pant, has started knocking the doors of insurance companies.
They request the insurers give the settlement of the outstanding custom guarantee they had provided to clients. The amount which is required from the insurance companies amounts close to a billion Birr.
Custom guarantee bonds are issued for companies that brought items temporarily into the country and did not pay tax and duty as the machines will be re-exported after the mission was accomplished. In this case, the insurers guarantee the businesses until the insured brought declaration approved by customs exit office as proof of re-export.
Largely the policies were issued for construction companies that came to the country to undertake mega projects. Many vehicles that entered into the country this way were transferred to third parties including to the government after the completion of the projects, according to Meseret Bezabih, the CEO of the United Insurance Company (UNIC) and president of the Ethiopian Insurers Association.
The bond will stay valid until the end or termination of the project contract. After that, the vehicles and machinery are supposed to be re-exported. Otherwise, custom and tax have to be settled if those companies transferred them to a third party.
The 17 operational insurers have been issuing customs guarantee bonds over years until it was banned by ERCA first and then by the regulatory bank, the National Bank of Ethiopia (NBE).
It was outlawed as the nature of the guarantee is unconditional, where the insurers claim they are entitled to do so in good faith, provided there is no explicit language in the underlying contract that prevents that party from doing so.
In guaranteeing such clients, the Insurers get a premium of 0.3pc to 0.6pc of the insurance total policy coverage a year.
Considering the very minimal yield rate, the companies have been using the policy for two purposes, according to Asseged G. Medhin, deputy CEO of operations at the National Insurance Company of Ethiopia (NICE).
"Beyond encouraging investment and economic development of the country, the insurance companies have been using it as a marketing strategy to get more clients," he told Fortune.
However, business could not continue as usual following the beginning of the Ethiopian New Year. Since then Customs Authority started to issue letters of notification to the insurance companies notifying them to settle the due amounts of expired bonds they had granted to their clients.
The guaranteed have primary responsibility in case of a default. Nonetheless, the effect would boil on the legs of the insurance companies, in this case, the guarantor, if the guaranteed defaulted.
"But we started to take measures as most of the insurance companies were not properly responding to our requests," said Alemayehu Ankicho, deputy director for the law enforcement division of ERCA's Kality branch.
Prior to taking actions, the authority has issued letters, made phone calls to the insurance companies and sent its experts to caution them about the payments, according to Alemayehu.
"We had also formally issued a 30-day last warning letter before taking actions," Alemayehu told Fortune.
For expired bonds, that does not have documents confirm in the machines are re-exported, ERCA offered them the chance to renew the bond for an additional three months. It also gives two more months to re-export the machines and clears the documents. The legal action comes after these steps.
From the insurers, Africa was asked to pay 13.6 million Br, Nile and Abay were requested to pay 20 million Br, and the state-owned Ethiopian Insurance Company (EIC) was demanded to pay 60 million Br.
Just a month and a half ago law enforcement experts of the Authority has started confiscating vehicles owned by these insurers and seizing their bank accounts.
"We confiscated the vehicles to warn them to settle the payments within 10 days," said Alemayehu, "if they failed, we would auction off the vehicles to use the revenue for the resettlement."
With this mechanism, ERCA has collected 300 million Br from them as of the end of last week. It also aspires to collect an additional half a billion Birr from expired customs guarantee bond.
The amount required by ERCA is one-fifth of the total capital of the 4.3 billion Br registered by the insurance companies at the end of June 30, 2017.
The move is not welcomed by most of the insurance operators, stating it could cause closure of insurance companies as it will lead them to liquidate.
"It will affect the solvency, profit and liquidity of Insurance firms, especially small-sized insurers," said one of the Insurance executives who commented under the condition of anonymity.
Meseret, UNIC's CEO and president of the Ethiopian Insurers Association, shares the danger which approached the insurance industry.
"It is a high risk for the insurance industry which is in its infancy," said Meseret.
In the beginning, ERCA's action was a headache for most of the companies as it has been creating messes in the industry. The Authority has been claiming payments for the already settled bonds, seizing the entire bank account of insurance companies and placing a wrong payment order on the insurance companies.
Through their Association, the companies had filed a complaint letter to ERCA listing out deficiencies in the process. After the complaint, the representatives of the Association, ERCA and vice governor of the National Bank sat down for a discussion to sort out the issues.
After the discussion, Tesfaye Tulu, deputy director of the Authority for Customs Division, issued a letter on April 16, 2018. The letter consists of clarification that can partly address the complaints of the companies.
In his letter, Tesfaye ordered the experts of the Authority to investigate thoroughly before requesting settlements, to seize only the due amount required from the companies from banks and issuing notices for the companies a month ahead of any action.
Though the action could have an effect on the insurance industry, Abdulmenan Mohammed, an accountant for the past 15 years with a wide range of experience in Ethiopia and United Kingdom, argues that ERCA has the right to resort to the insurance companies.
"If the insurance companies couldn't present documents showing the bonds are cleared, they may shoulder enormous costs for failures of the guaranteed," he said.
ERCA, according to Alemayehu, will continue taking actions on the expired bond until the delinquent payment is settled.
Recently ERCA has been facing tough challenges from members of the parliament for failing to collect targeted revenue. It has planned to receive 72 billion Br in the first quarter of the current budget year but managed to collect only 63 billion Br.
Lack of modern taxation technologies, outdated tax registering tools, along with failure to tackle tax deception, tax avoidance, extended tax duration system, and improper tax exemption were the significant deficiencies of the authority stated by the parliament's standing committee.