Growth through regional integration, tax
THE importance of regional integration as a means to unlocking Africa’s great potential and supporting its economic development has long been recognized by investors and stakeholders. Several initiatives and brainstorming sessions over the issue have as well shown Africa’s desire to deepen regional integration. Perhaps, the collaborative efforts of the Economic Community of West African States (ECOWAS) Commission and West African Union of Tax Institutes (WAUTI) are no exception.
Of course, successful regional trade integration can help African countries reap economies of scale, expand markets and collectively exploit their resources and gradually raise its competitive strength in the global economy. It can also reduce countries’ dependence on traditional trading partners and raise their resilience against external shocks.
In Africa, this is really a challenge. For one thing, besides the structural constraints- lack of resource and production complementarities among many African countries and low levels of incomes and investment, there are various infrastructure-related and policy-induced impediments to intra-African trade and as a result, African trade has remained low. Still, because agreements are not fully implemented by member-states, as tariffs and taxation remain high on exported products, non-tariff barriers became pervasive across the continent. This is made worse for some landlocked countries.
At a Transfer Pricing Seminar held in Abuja, the challenge of exploiting regional integration as a tool in accelerating development, mobilising revenue and associated tax issues were brought to the fore, even as experts sought leeway and policy options that may be provided by developed economies and multilateral institutions like the World Bank and International Finance Corporation on the one hand and a regional institution like ECOWAS on the other hand.
According to Wikipaedia, transfer pricing, which is currently gathering global momentum, is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price. Legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned ultimately by the parent corporation.
Transfer Pricing, which may emerge as one of the features of trade integration is seen from varying perspectives. Certain jurisdictions consider entities to be under common control if they share family members on their boards of directors. It can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before tax to countries where it does business. Transfer pricing results in the setting of prices among divisions within an enterprise.
In principle a transfer price should match either what the seller would charge an independent, arm’s length customer, or what the buyer would pay an independent, arm’s length supplier.
While unrealistic transfer prices do not affect the overall enterprise directly, they become a concern when they are misused to lower profits in a division of an enterprise that is located in a country that levies high taxes and raise profits in a country that is a tax haven that levies no or low taxes. Transfer pricing is the major tool for corporate tax avoidance also referred to as Base Erosion and Profit Shifting.
The forum, in Abuja, which also marked the launch of IFC/ECOWAS collaboration, the Partner/Head of Tax and Regulatory Services, PwC, Taiwo Oyedele, who also represented the West African Union of Tax Institutes (WAUTI), noted that the relationship was aimed at facilitating the integration of the regional economies by removing both the physical and invisible barriers to trade, movement and cooperation first within the sub-region.
He noted that major partners that would be working with ECOWAS on the project are the World Bank and IFC; United Nations Industrial Development Organisation; and The German Federal Enterprise for International Cooperation (GIZ).
Already, a total funding of about 12 million euros is being provided by the EUropean Union and the German Government to support the project, which have different work streams including: Implementation of regional quality policy for ECOWAS; improved and facilitated trade in West Africa; and achievement of Customs Union for West Africa.
Specifically, for improved and facilitated trade and achievement of Customs Union for West Africa, further areas of intervention to address transfer pricing, common external tariffs and coordination of fiscal policies were developed and though, there was no specific mention of treaties for the avoidance of double taxation within the sub-region, the ECOWAS Commissioner pledged that it would be incorporated.
The three work streams, however, have timelines ranging from 3 to 5 years or more to deliver on the specific targets.
Speaking on the outcome of the event on behalf of WAUTI, Oyedele said: “We now need to set the ball rolling as this is a unique opportunity for us to make real impacts in West Africa and help shape the direction of our regional integration. We however need to get further details from ECOWAS as to our specific mandate, funding and timelines. I thank WAUTI for nominating me and the other eminent tax professionals to work on this project.”
ECOWAS had in 2014, at the third edition of WAUTI conference in Ghana, charged the union to work with it towards developing a model for the avoidance of double taxation among member states to complement the ECOWAS Treaty and support the implementation of Transfer Pricing rules across the region.
But the Head of Unit, Trade and Customs, GIZ, Nurjamal Bokoeva, in a presentation titled: “Promoting West African Trade Integration (WATIP)”, noted that the objectives of the integration was to enthrone inclusive economic growth and poverty reduction; ensure common market, customs union and monetary zone in West Africa; and strengthen trade facilitation- restrictions limited to movement of illegal products such as drugs, weapons, among others.
Other objectives include accelerating the process of achieving a customs union in West Africa; developing a common trade policy; facilitating the harmonisation of trade-related policies (regulations) and statistical data; and disseminating trade-related information.
Bokoeva pointed out that for a result to be attained on improved implementation and coordination of the West African regional economic integration, intervention would be required in establishing its process; support of trade-related policies and regulations; disemmination and communication of trade-related information; facilitation of cooperation between ECOWAS and
West African Economic and Monetary Union (UEMOA); regional trade information system.
Also, to record increased trade and achievement of Customs Union in West Africa, further intervention would be needed to support formulation of Common Trade Policy; harmonization of statistical data; implementation of Common External Tariff; strengthening capacities for trade negotiations; improving ECOWAS Trade Liberalisation Scheme; and coordination of fiscal policies.
The GIZ official therefore, recommended sector policy review committee to define the policy framework of the regional integration project; a steering committee to review WATIP’s strategic approach and as well, monitors implementation progress; technical experts of the ECOWAS Commission with support of WATIP team to implement activities; and relevant stakeholders in member states to facilitate implementation at national level, while cooperation would be needed from the private sector operators and Civil Society Organisations.