Africa

ISS TODAY ANALYSIS

Overwhelming taxes continue to drive Ethiopia’s illicit vehicle trade

Overwhelming taxes continue to drive Ethiopia’s illicit vehicle trade
Vehicles and pedestrians move along a road in Addis Ababa, Ethiopia, 27 November 2020. flourishing illicit trade will drain government revenue and see Ethiopians paying enormous sums for fraudulent and dangerous vehicles. (Photo: EPA-EFE/STR)

Illegal transnational dealings drain government revenue and force Ethiopians to pay huge sums for fraudulent and dangerous cars. 

Ethiopia’s tax system is making cars unaffordable for regular citizens. Those who buy vehicles in Ethiopia pay twice as much as Kenyans living just across the border. High prices incentivise illegal sales, and exorbitant taxes are considered the main driver of Ethiopia’s illicit vehicle trade.

In addition to customs duty, car importers in Ethiopia pay five different forms of tax: VAT of 15%; excise tax of up to 100% (depending on engine size); 10% surtax; withholding tax of 3%; and income tax. Together, this adds up to more than 500% of a vehicle’s import price based on the type of car, age, and engine capacity.

Tax levied on local assemblers is only 5% less than for commercial importers. This provides little incentive for car manufacturers to set up auto parts factories or assembly plants in the country.

Wondiye Birhanu, a Senior Prosecutor at Ethiopia’s Ministry of Justice, says the country’s auto market is deemed too small for legitimate business but is lucrative for illegal traders. Birhanu, who has prosecuted customs fraud and tax evasion cases concerning vehicles, says the high tax regime means the entire car market is driven by the need to evade tax/duties.

Taxes are considered the leading factor in the transnational illicit trade of vehicles into Ethiopia, he says. The business involves two routes that use different methods to circumvent customs duty and tax. 

The first is from the countries of manufacture, such as Japan, via Dubai in the United Arab Emirates (UAE), which has become an import/export hub for Middle Eastern and African countries. A source who requested anonymity and who previously imported cars to Ethiopia from Dubai, told the Enact project that importers used fraudulent and dangerous methods to maximise profits. 

There’s an import restriction on cars over eight years old in Ethiopia, and the government levies taxes based on the car’s year of manufacture. To circumvent this, importers work with technicians in Dubai to change odometer readings so that cars seem newer. Forged documents containing false manufacturing dates accompany the imported cars, he says.

Ethiopian importers also collude with technicians to change vehicles’ chassis and engine numbers, says another anonymous source who worked for Toyota in Dubai. Documents are forged to reduce the engine cubic capacity, which translates into less tax since charges are lower for vehicles with smaller engines. 

Car importers also work with garages in Dubai to change the transmission system. Ethiopian customers pay much more for cars with automatic gears, so manual transmissions are transformed into automatics using low-quality gearboxes. The buyer in Ethiopia is told that the vehicle comes with automatic transmission from the manufacturer, says the anonymous former importer. This compromises the safety of drivers and passengers.

Vehicles with falsified documents usually pass through Ethiopian customs quite easily because officials don’t have the skills or equipment for rigorous inspections, says Birhanu. The high quality of the forged paperwork also gives customs authorities and car buyers little reason to suspect their authenticity. Corruption is another factor enabling documents to be processed without questions, says Muluken Megersa, an Intelligence Officer with the revenue and customs authority.

Because the vehicles are imported into the UAE for export to another country, authorities in Dubai are not invested in uncovering and fighting this illicit trade, says the former Toyota employee.

The second route for the illicit trade of vehicles into Ethiopia is from neighbouring countries such as Somaliland (via Jigjiga), Djibouti (via Dewele and Dire Dawa), Sudan (through Metema), and Kenya (through Moyale). Cars are smuggled into the country by avoiding customs checkpoints.

No tax or customs duty is paid, and illegal traders bribe Transport Ministry employees in Addis Ababa or regional towns to get registration plates without presenting the cars, says Birhanu. This allows the vehicles to be driven to Addis Ababa. Once there, auto shops remove the number plates and use fake documents to sell the cars as newly imported.

Businesses in Addis Ababa remove chassis and engine numbers from old or damaged cars, which they affix or inscribe on contraband imports. According to Megersa, the old car’s documentation is altered and transferred to the smuggled vehicle, which then appears to have entered the country lawfully through customs checkpoints. Sometimes traders buy old vehicles at low prices at government auctions to use the documents for expensive contraband cars.

Birhanu has recently visited Ethiopia’s eastern region to supervise law enforcement agents investigating customs fraud and contraband goods. He says the criminal justice approach won’t solve this transnational organised crime problem. This suggests that Ethiopia is not only losing out in terms of revenue from tax and duties, but also crime prevention and safety.

The country should look beyond criminal prosecutions and focus on weak institutions. As much as it needs to revise its tax system, the government should improve awareness about these crimes and foster alternative livelihoods among border communities. Without concerted efforts, Berhanu warns, criminals will continue to develop more sophisticated techniques for committing offences.

Megersa suggests collaboration between the revenue and customs authority and the Transport Ministry to inspect and trace documents. Revenue and customs officials need expertise and inspection devices to improve the verification process used to allow vehicles into the country, and strengthen record keeping. Without these measures, the flourishing illicit trade will drain government revenue and see Ethiopians paying enormous sums for fraudulent and dangerous vehicles. DM

Tadesse Simie Metekia, Senior Researcher, Enact, Institute for Security Studies (ISS) Addis Ababa.

This article was first published by Enact. Enact is funded by the European Union and implemented by the Institute for Security Studies and Interpol, in affiliation with the Global Initiative against Transnational Organised Crime. 

First published by ISS Today.

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