Taxes & Tariffs | |
Taxes & Tariffs | |
1803 VIEWS | |
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Monday, February 03, 2020/06:15PM
/ By Ken, Abimbola, Azeezah, Kemi, Oluwatoba & Emmanuel of Banwo & Ighodalo
/ Header Image Credit: B&I
Proem
Forty-four (44)
member states of the African Union ("AU") signed the Agreement, which
established the African Continental Free Trade Area ("AfCFTA") on March 21,
2018, in Kigali, Rwanda.
The main thrust
of the Agreement is the improvement of intra-African trade. The Agreement came
into force on May 30, 2019 (after attaining the minimum ratification threshold,
which is ratification by at least 22 member states of the AU), and thereby
created a single market for the free movement of goods, services and persons
within the continent. It is envisioned that capital, investments and technology
will flow across all AU recognized Regional Economic Communities (REC)
unimpeded.
The Agreement
prescribes specific action plans to be undertaken and or given effect to by
State Parties to the Agreement. The State Parties are required to;
(i)
progressively eliminate tariffs and
non-tariff barriers to trade in goods;
(ii)
progressively liberalise trade in
services;
(iii)
cooperate on investment, intellectual
property rights and competition policy;
(iv)
cooperate on all trade-related
areas;
(v)
cooperate on customs matters and the
implementation of trade facilitation measures;
(vi)
establish a mechanism for the
settlement of disputes concerning their rights and obligations; and
(vii) establish and maintain an
institutional framework for the implementation and administration of the AfCFTA.
Nigeria signed
the Agreement on July 7, 2019, though, it is yet to commence the legislative
process of domesticating the Agreement by ratifying and codifying it as a local
law1.
Nigeria's delay
in signing the Agreement may not be unconnected to concerns raised by relevant
stakeholders in the economy in relation to the possible adverse impact it may
have on our weak and less-competitive manufacturing and industrial sector, as
well as identified potential tax leaks (Value Added Tax/ Import Duty/ Income
Tax), which may impact Government revenues.
In this
article, we examine possible tax leaks, and the likely economic impact of
AfCFTA, and its implications for Nigeria.
Protocols to
the Agreement The Protocols to the Agreement2 , highlighted below,
are intended to enhance its efficient implementation: 1 Section 12(1) of the
Constitution of the Federal Republic of Nigeria 1999 (as amended) provides that
no treaty between the Federation and any other country shall have the force of
law unless such treaty has been enacted into law by the National Assembly.
The Protocol on
Trade in Goods encourages a liberalized single market for the free flow of
goods within the African continent; through progressive elimination of tariffs
and non-tariff barriers (particularly import duties or charges having
equivalent effects) and the enhancement of efficiency in customs and trade
facilitation procedures, amongst other things. State Parties to the Agreement
are required to accord products imported from other member countries,
treatments which are no less favorable than that accorded to similar domestic
products after clearing by the customs.3 Goods
are eligible for preferential treatment under this Protocol, if they originate
in any of the member countries. The Protocol also allows member countries to
apply anti-dumping and countervailing measures when necessary.4 In
this regard, State Parties are authorized to apply safeguard measures to
situations, where there is a sudden surge of products imported into their
countries under conditions which cause or threaten to cause serious injury to
domestic producers of like or directly competing products.5 They may
also impose measures for protecting infant industries within their territories,
where such industries are of strategic value to their national economies.
The Protocol on
Trade in Services allows countries to enter into agreements or arrangements for
recognition of the education or experience obtained, requirements met, or
licenses or certifications granted in other member countries.6 It
also requires them to regulate monopolies within their territories, in order to
prevent acts inconsistent with their obligations and commitments under this
Protocol. They are further required to eliminate business practices of service
suppliers which may restrain competition and thereby restrict trade in services.7
Subject to the requirements of the Protocol, State Parties to the Agreement are
allowed to adopt or maintain restrictions on trade in services, in the event of
serious balance of payments and external financial difficulties or threat.8
This Protocol is primarily designed to achieve progressive liberalization of
trade in services on the basis of equity, balance, and mutual benefit through
elimination of common barriers.
The Protocol on
Rules and Procedures on the Settlement of Disputes creates the mechanism for
resolution of disputes arising from implementation of the Agreement.
Further to this, the Protocol establishes the
Dispute Settlement Body ("DSB) and the Appellate Body ("AB") of the AfCFTA.
Whilst the DSB has original jurisdiction to interpret and apply all AfCFTA
legal instruments and determine the rights and obligations of State Parties
under the legal instruments, the AB has appellate jurisdiction over decisions
of the DSB but both bodies have powers to issue recommendations and rulings;
upon the hearing and determination of a dispute.
However, if the
recommendations and rulings so issued are not implemented within a reasonable
time, the Protocol allows an aggrieved State Party to temporarily suspend
concessions granted to the other State Party concerned. This is a form of 'self-help' enforcement mechanism provided in the Agreement. The Agreement is
subject to five-year periodic review and a State Party can withdraw from it, at
any time after five (5) years from its effective date, by giving written
notification to other State Parties to the Agreement.
Commentary The
AfCFTA is expected to be one of the world's largest single markets, accounting
for $4 trillion in spending and investment across the continent, with
multi-trillion dollar opportunities for the 54 African countries. It is believed
that effective operation of the AfCFTA would deepen Africa's economic
integration and support the realization of the continental "Agenda 2063" - an
integrated, prosperous and peaceful Africa. In a similar vein, the Agreement
has been projected by most African leaders and global analysts as a framework
for driving economic progress and heralding a new phase of industrial boom for
Africa. Ordinarily, AfCFTA is a course expected to be supported and championed
by Nigeria, as the continent's largest economy and most populous nation.
However, as earlier indicated, the AfCFTA, in spite of its promises, may not
benefit Nigeria in the areas of revenue generation and general economic growth;
except immediate and drastic measures are taken to reposition the economy by
addressing the fundamental challenges facing the manufacturing and industrial
sectors.
Whilst the
envisaged single market and integrated economy would likely attract more
foreign investments to the African continent, as production in one African country
effectively allows for free access to the entire continental market; the likely
undue concentration of economic activities in few African countries with low
production cost levels, may lead to huge economic imbalance among the member
countries of the AfCFTA. The reason for this is that investors (foreign or
African) might be more willing to produce in African countries with lower
production cost levels and thereafter export finished products to other African
countries with higher production cost levels.
Nigeria belongs
to the latter group of countries, given its wide infrastructure gap,
bureaucratic regulatory regime, high trade-related costs, inadequate power
supply and dearth of sufficient incentives to foster the growth of infant
industries. A country's competitiveness or ability to produce goods at lower
costs, compared to its peers, determines the extent to which it can take full
benefit of the continental market established under the Agreement. Rising
aggregate cost of production continues to impact the manufacturing sector, with
Nigeria's non-oil exports performing below full potential. The implication of
this is that, businesses engaged in the production and export of non-oil goods
in Nigeria are likely to suffer severe revenue downturn; as cheaper goods
imported from other African countries with lower production cost levels will
displace locally produced goods and significantly reduce the sales volumes of
local businesses engaged in the production and sale of the goods. This will
likely result in significant VAT and income tax leaks for the country, as local
manufacturing businesses will have a low tax base (due to reduced sales
volumes) while transnational manufacturing businesses will be entitled to claim
tax breaks under the progressive tariff elimination provisions of the
Agreement. In any event, the progressive tariff elimination provisions of the
AfCFTA may be incompatible with the fiscal policies of Nigeria on international
trade. Nigeria generally operates a fiscal policy designed to encourage exports
and discourage imports. This is currently achieved by granting tax incentives
to exports while denying such benefits to imports. Implementation of the
progressive tariff elimination provisions of the Agreement are likely to
reverse this trend and effectively hike the rate of importation of goods and
services in Nigeria - to the detriment of locally-manufactured goods and
services.
A recent study
conducted by the Nigerian Economic Summit Group (NESG), on the economic
implications of the AfCFTA on Nigerian industrial sectors, expressed concern
that the industrial sectors in Nigeria will lose out in all segments; if the
government eliminates tariffs completely and at the same time attempts to
cushion the economy by increasing expenditure. The only palliative to this
potential economic crisis on the country's industrial sector is for the
government to augment the complete elimination of tariffs with an increase in
government investment, rather than expenditure. Even if government were to
adopt this measure, the industrial sector will generally not derive any special
benefits therefrom. This is because the revenue losses to the government,
resulting from the reduction in tariff, may not be compensated for by the
expected level of expansion in local industrial activities.
Hence, the
general assumption that the progressive elimination of tariff barriers will
automatically spur expansion in African economic activities may be fallacious.
The assumption may not prove true for economies like Nigeria, where there are
long-standing non-tariff barriers that represent a critical obstacle to the
competitiveness of the Nigerian industries. It goes without saying that the
benefits of the AfCFTA will likely accrue unevenly among all participating
countries. It is also apparent that the larger portion of any such benefits,
will be captured by few countries with stronger export capacities and economic
competitiveness. As already shown, Nigeria may not fare well in this regard.
Although there
may be scope for further increases in the share of trade for countries that
strengthen their valueadded contents at all levels, the Nigerian industrial
sectors are currently not operating at the capacity (in terms of technical and
volume indexes) where they could leverage on the potential benefits of the
AfCFTA, to create more wealth for the economy. Implementation of the
progressive tariff elimination provisions of the Agreement will thus
effectively erode the tax base of Nigeria, through a significant reduction or
outright elimination of the country's customs duty revenue base. Customs
revenue generally constitutes a significant portion of Nigeria's annual tax
revenue influx. Nigeria therefore needs to put measures in place to plug the
tax leaks, that may result from implementation of the Agreement in the country.
Footnotes
1 Section 12(1) of the Constitution of the Federal
Republic of Nigeria 1999 (as amended) provides that no treaty between the
Federation and any other country shall have the force of law unless such treaty
has been enacted into law by the National Assembly. This constitutional
provision is supported by Article 22(2) of the Agreement.
2 The Protocols on Trade in Goods, Trade in
Services, and Procedures on the Settlement of Disputes are annexed to the
Agreement whilst the Protocols on Investment, Intellectual Property Rights, and
Competition Policy are yet to be concluded.
3 See Article 5 of the Protocol on Trade in Goods
4 Ibid, Article 17
5 Ibid, Article 19
6 See Article 10 of the Protocol on Trade in
Services
7 Ibid, Articles 11 and 12
Maintain
8 Ibid, Article 14
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Persons
Abimbola Akeredolu, SAN, FCIArb. Ken Etim
aakeredolu@banwo-ighodalo.com Ketim@banwo-Ighodalo.com
Azeezah
Muse-Sadiq Kemi Ajayi
asadiq@banwo-ighodalo.com Kajayi@banwo-ighodalo.com
Oluwatoba Oguntuase Emmanuel Onyeabor
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DISCLAIMER:
This article is only intended to provide general information on the subject
matter and does not by itself create a client/attorney relationship between
readers and our Law Firm or serve as legal advice. We are available to provide
specialist legal advice on the readers' specific circumstances when they arise.
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