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Business News of Tuesday, 13 July 2021

Source: thebftonline.com

AfCFTA implementation could cause tax leaks – Expert

African Continental Free Trade Area headoffice African Continental Free Trade Area headoffice

Government has been cautioned to critically assess the adverse impact the African Continental Free Trade Area (AfCFTA) may have on revenues, particularly Value Added Tax (VAT), Import Duty and Income Tax.

One critical action plan for the success of the treaty is to create a single market to progressively eliminate tariffs and non-tariff barriers to boost intra-trade on the African continent.

However, a tax analyst, Timore Francis Boi, has warned that in spite of the anticipated benefits, there could be potential tax leaks since the treaty may not benefit every participating country, especially those with fundamental challenges in manufacturing and industrial sectors.

“The danger is that it is likely to cause undue concentration of economic activities in a few African countries with low production cost and this can cause economic imbalance among the member countries,” he said explaining that “investors will want to set up in countries with lower production cost and thereafter export finished products to other African countries.”

He argued that even though the agreement is going to attract more foreign investments to the African continent, it will however in the longer run benefit only a few countries with good infrastructure and cheaper cost of doing business.

“If this happens, countries with infrastructure gap, inadequate power supply and high production cost, will lose out because of high production cost compared to its peers, hence will not fully benefit from this Agreement,” he added.

According to Mr. Boi member states may end up importing cheaper goods from other African countries where production cost is low—displacing locally produced goods and significantly reduce the sales volumes of local businesses.

“This is likely to result in significant VAT and income tax leaks for Ghana, due to lower sales by local businesses while foreign companies from Africa’s manufacturing businesses will be entitled to claim tax breaks under the progressive tariff elimination provisions of the agreement,” he stressed.

He maintained that Ghana, like most African countries, generally operate a tax policy designed to encourage exports and discourage imports.

“If you export, your VAT rate is zero so there are tax incentives to exports while we impose huge customs duties and taxes. Now implementing this progressive tariff elimination is likely to reverse this trend and effectively lead to importation of goods from African countries with lower production cost, to the detriment of locally manufactured goods,” he warned.

Mr. Boi pointed out that he is yet to see any research on how the industrial sector in Ghana is well positioned to benefit from the agreement.

“If any research indicates that the sector will lose out, then there could be problems if the government eliminates tariffs completely. So yes, there is that danger.”

He reiterated that the benefits of the treaty will not accrue evenly among all participating countries.

“Countries that will benefits most are those with stronger export capacities and economic competitiveness. For those who are less competitive, implementation of the progressive tariff elimination provisions of the agreement will effectively erode the tax base. Customs revenue generally constitutes a significant portion of Ghana’s annual tax revenue,” he said.