Shein and Temu tax crackdown in South Africa

Potential changes to duties on imported products are not meant to hurt consumers but rather level the playing field for local and international players in South Africa’s textile and apparel industry.

This is according to Dr Mark Goodger, CEO and founder of Maritime Legal Solutions and Chartered Tax Adviser from the South African Institute of Taxation.

Goodger’s comments come after news broke in early June that, starting next month, low-value and small-volume clothing orders from Temu and Shein will be subject to higher taxes.

The Foshini Group’s CEO, Anthony Thunström, said the South African Revenue Service (SARS) has committed to tax all clothing parcels with an import duty of 45% plus VAT from 1 July 2024.

“It’s a big move, and I think it will help local industry, including local production and jobs,” Thunström said.

The change comes after local clothing retailers and stakeholders in the textile industry accused the Chinese companies of exploiting a tax loophole that kept their import prices low.

The so-called de minimis rule allowed Shein and Temu to get clothing parcels of under R500 through customs with a 20% import duty and 0% VAT.

Clothing retailers complained that they always had to pay the 45% plus VAT rate for imported clothes, putting them at a disadvantage to direct-from-China importers like Temu and Shein.

Goodger explained that there is a concession document that goes back a number of years that applies to high-volume, low-value shipments.

This document provides a provision to the courier industry to pay a flat fee of 20% once a month with the aim of facilitating trade and lightening the burden on customs authorities for these types of declarations.

“In respect of high-volume, low-value consolidated shipments, it appears apparent that Shein and Temu have utilised this provision,” he explained.

Therefore, he said the complaint from local apparel and clothing retailers is based on the fact that they do not have the benefit of this 20% flat rate. When local retailers import similar goods, they pay a rate of around 45% and 15% VAT on top of that.

“Definitely, there is a concern that if one particular entity or another does receive such a advantage, then it is considered to be not a level playing field,” Goodger explained.

Therefore, SARS has been requested to remove that tolerance as it relates to items like textiles, apparel, and clothing, therefore creating a level playing field.

“It is not a move directed at depriving any particular community of receiving that low-value product,” he specified.

“It is rather a corrective move towards a level playing field, and in terms of the customs that the values declared must be correct.”

eCommerce wars

Chinese eCommerce giants Shein and Temu are rapidly capturing the South African online market and taking on local players with a powerful one-two punch of unbeatable prices and aggressive marketing campaigns.

A look at the playbook these companies used in the US shows how they have captured the South African market.

Owned by the massive PDD Holdings – market cap of $151 billion – Temu entered the US market in September 2022 and immediately flooded digital platforms with advertisements.

This spending spree made them the top advertiser on Meta in 2023 and a top-tier advertiser on Google. Their reach extended beyond search engines, dominating ad space on major websites and even securing a Super Bowl ad slot.

However, this aggressive marketing wasn’t cheap. PDD Holdings spent a staggering $3 billion on sales and marketing in Q3 2023 alone, with estimates suggesting Temu lost an average of $7 per order due to marketing costs.

Yet, this strategy worked and propelled Temu to become the most downloaded app in the US, surpassing even social media giants.

Now, South Africa faces the same onslaught. Temu ads are inescapable, blanketing online spaces, and they are outspending any local competitor.

This dominance is reflected in app downloads, with Similarweb ranking Temu’s mobile app as the most popular in the country, surpassing established platforms.

South African eCommerce players, while benefiting from local connections, are crippled by limited marketing budgets.

Their budgets typically stay in the single digits compared to revenue, making it impossible for them to compete with Shein and Temu’s financial firepower.

With giants like Takealot considering selling Superbalist due to competition concerns, the future of South African eCommerce appears tilted towards the Chinese players.

Their aggressive marketing strategies and low prices are making them formidable forces, challenging the dominance of local brands.

This article was first published by Daily Investor and is reproduced with permission.