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Merchanting Transactions - Exchange Control Perspective.

Merchanting Trade – What you need to know.

In simple terms a merchanting transaction is a trading arrangement which involves the purchase and shipment of goods from foreign country ‘A’, for sale in another foreign country ‘B’, where a South African ‘middleman’ facilitates both the purchase and sale of the goods, for a profit and where the goods are never physically received/‘Customs Cleared’ in South Africa.

From a South African perspective, merchanting transactions are neither defined as an Import or Export arrangement, but nevertheless traders can make a profit by acting as ‘middlemen’ in facilitating and administering these types of international trade transactions.

Insofar as an Export transaction is concerned, goods leaving the country are cleared by Customs and linked to an incoming payment via the exporter’s Bankers. With an import payment, currency is made available to pay the supplier, against the presentation of transport documents, customs documents evidencing that goods have been received in the country, as well as a commercial invoice.

The purpose is to monitor and ensure that South Africa’s foreign currency reserves grow, in respect of receipt of export proceeds or in the case of import payments, that foreign currency reserves are used for a legitimate Merchanting Trade – What you need to know purpose.

In a merchanting deal, however, inward and outward funds cannot be linked with a movement of goods to and from South Africa. This does not necessarily pose a risk to South Africa’s foreign currency reserves, since in a merchanting deal where the South African trader is paid before the supplier needs to be paid, there is no risk of loss from the Reserve Bank’s perspective, but what if the South African party must pay the supplier first?

An Example of a such a merchanting trade transaction is provided below:

  • A South African trader/agent receives a purchase request from Mali and then places an order for the required goods with a French supplier

  • The supplier requests full payment of EUR 5 000 before goods are shipped.

  • The South Africa entity pays EUR 5 000 to France for the goods, against the receipt of a commercial invoice from France.

  • Arrangements are made for the goods to be shipped directly from France to Mali.

  • Mali thereafter pays EUR 7 000 (which includes profit) to South Africa, against a

  • Commercial invoice issued by the South African trader/agent.

Depending on the terms of the merchanting transaction and review of related supporting invoices and/or agreements by their Banker, a local trader can obtain authority from their Bank to transfer currency out of the country to pay a supplier first and accept payment on credit from their end buyer.

However, to minimise the potential loss of currency, as well as money leaving South Africa illegally under the guise of a merchanting deal, SA Reserve Bank expects their ‘policy’ procedures governing such transactions to be strictly adhered to.

The ideal and preferred merchanting transaction from a Financial Surveillance (Exchange Control) perspective, would always be for the offshore buyer to rather pay the South African entity, prior to the South African entity having to make payment to its offshore supplier. However, the Currency and Exchanges Manual does permit local Banks to authorise Merchanting transactions where the time lag between paying away funds to the foreign supplier(seller) and receiving funds from the foreign customer (buyer) will not exceed 60 days for trade with countries on the African continent, which, for these purposes, also includes the Indian Ocean Islands and 30 days for trade with any other country. Ie, under certain conditions, which a local Bank needs to formally approve, the local trader/agent may pay the foreign supplier first, before receiving funds from the foreign buyer.

Payment needs to be received from the foreign buyer in either foreign currency, or Rand from a Non-Resident account, which incidentally includes the Rand accounts of foreign Banks held by South African Banks and needs to include the South African agent’s profit. Although not obligatory, these transactions should ideally be covered by confirmed irrevocable letters of credit, issued by the foreign buyer’s bankers in favour of the South African agent, which will provide comfort against 'default', etc.

It goes without saying that the local Bank administering these transactions must, at least view a commercial invoice from the seller of the goods, together with a commercial invoice issued by the South African party to the end buyer, to confirm the validity of the arrangements. A commercial invoice is the document which Customs require to calculate taxes and duties, as the value reflected is accurate and will not be subject to change, unlike a ‘pro-forma’ invoice.

A commercial invoice also provides significant detail regarding the goods and their shipment. These documents would represent acceptable documentary evidence for a local bank to approve the merchanting transaction, as would copies of agreements, concluded between the various related parties. However, in practise, agreements are not always put in place, for these types of transactions.

From a taxation point of view, because merchanting transactions do not involve the import or export of goods, there are no Customs duties payable by the South African trader/agent. VAT is applicable, but may be charged at the zero rate, subject to the submission of proof of the merchanting deal, to the tax authorities.

It is also worth noting, that when goods enter South African ‘in bond’, they are not legally defined as entering the country. Goods may be kept ‘in bond because they are moving through South African with the ultimate destination being another country, or goods can be kept in bond to be cleared at a later stage. Bonded goods may be kept in an approved storage warehouse and exported up to 6 months after arrival without ever being legally imported, so the South African trader does not pay import tax on such goods.

It is therefore evident that whilst a merchanting transaction can involve goods travelling through South Africa ‘in bond’, the legal timeframe for payment must still be adhered to. If the trader has paid the supplier and is sending the goods to a country in Africa, for example, they only have 60 days to receive payment, regardless of how long the goods are retained ‘in bond’.

If the goods are ever cleared and taken out of bond while they are still in South Africa, the transaction is an import – not a merchanting transaction.

For exchange control purposes, South Africa, Lesotho, Namibia and ESwatini form a single Common Monetary Area (CMA). Together these countries have a common financial border, not to be confused with the common Customs border formed by the Southern African Customs Union (SACU).

Typically, foreign currency, eg US$, Euros, GBP cannot be transferred automatically between these countries and most cross border transactions between entities in these countries are concluded in Rand. In the circumstances a trade transaction between a South African trader and counter-parties in Namibia and Lesotho for example, would not be deemed to be a merchanting transaction.

At Beztforex we are well equipped to assist with all your trade related transactions and any necessary applications to the South African Reserve Bank. Please get in touch with us and we will help you through all the necessary administrative requirements.

Keith White

Financial Surveillance


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