24 Jun 2022

Cross-border smuggling / Ethiopia’s car trade: driven by the need to evade taxes

The transnational organised illicit vehicle trade that dodges import duties and taxes is dangerous and costly for ordinary Ethiopians.

Ethiopia’s tax system is making cars unaffordable for ordinary citizens. Those who do buy vehicles in Ethiopia pay twice as much as Kenyans living just across the border.

In addition to customs duty, a car importer in Ethiopia pays 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 vehicle, its age and engine capacity.

Tax levied on local assemblers is only 5% less than that levied on 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 has forced the entire auto market to be driven by the need to evade tax/duties.

The tax system is considered the leading factor in the organised transnational illicit trade of vehicles into Ethiopia, he says. This trade involves two routes, each with their own methods of circumventing Ethiopian customs duty and tax.

Ethiopia's auto market is deemed too small for legitimate business, but is lucrative for illegal traders

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

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

Ethiopian importers also collude with technicians to tamper with the vehicles’ chassis and engine numbers, says another anonymous source, a senior mechanic who previously worked for Toyota in Dubai. Documents are also forged to reduce the cars’ engine cubic capacity on paper. This is a means to benefit from Ethiopia’s tax system, which charges less for vehicles with smaller engines. 

Car importers also work with garages in Dubai to change the transmission gear. The Ethiopian market pays significantly more for cars with automatic transmission than similar cars with manual transmission. So importers work with mechanics in Dubai to transform manual transmission cars into automatics using low-quality gearboxes.

The buyer in Ethiopia is then 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 clearance quite easily

Vehicles with falsified documents usually pass through Ethiopian customs clearance quite easily. This is because the Ethiopian revenue and customs authority doesn’t have the requisite skills or necessary equipment to perform rigorous and advanced inspections on vehicles and documents, says Birhanu.

This is compounded by the fact that because the documents are forged by highly skilled criminals, neither the customs authority nor car buyers suspect their authenticity.

Corruption also plays a role in processing documentation without questions, says Muluken Megersa, an intelligence officer who works at the revenue and customs authority.

Because the vehicles have been imported into the UAE only to be exported to another country, authorities in Dubai are not invested in noticing and fighting this illicit trade, says the senior mechanic.

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

No tax or customs duty is paid for such cars. Illegal traders, some of whom have showrooms in Addis Ababa, bribe Transport Ministry employees in Addis Ababa or regional towns like Jigjiga to get vehicle registration plates without presenting the cars, says Birhanu. This allows the cars to be driven to Addis Ababa. Once there, auto shops remove the number plates and use falsified documents to sell the cars as newly imported.

Auto shops remove the number plates and use falsified documents to sell the cars as newly imported

Businesses in Addis Ababa remove chassis and engine numbers from old or damaged cars, which they then affix or inscribe on newly arrived contraband cars. According to Megersa, the old car’s documentation is altered and transferred to the contraband car so that it seems that the vehicle has entered the country lawfully through customs checkpoints. Sometimes traders buy old cars 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 cases involving customs fraud and contraband goods. The criminal justice approach is not going to solve this transnational organised crime, he says. This essentially means that Ethiopia is losing on both ends – revenue from tax/duties and crime prevention.

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

Megersa suggests collaboration between the revenue and customs authority and the Transport Ministry to inspect and trace documents will be valuable in curbing this transnational crime. The revenue and customs authority should also be equipped with the necessary inspection devices and experts to improve the verification process used to allow vehicles into the country, and strengthen record-keeping to ensure transparency.

If these measures aren’t implemented, the illicit trade will continue, with the government losing revenue and Ethiopians paying large sums of their hard-earned money for fraudulent and dangerous vehicles. 

Tadesse Simie Metekia, Senior Researcher, ENACT Addis Ababa


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