AfCFTA was brought up by the African Union (AU) in March 2018 to foster trade business among its 55 member nations.Basically, this initiative was developed as a mirror of what is happening in other continents.
It has been discovered that African countries have more trade restrictions/barriers to fellow African counterparts than to countries outside Africa. Based on the research by African Export–Import Bank, also referred to as AFREXIM bank in 2017. It was discovered that about 15% of the international trade carried out by African countries was done with fellow African countries in comparison to bigger figures in other continents like 67% from Europe, 48% from America and 58% from Asia.
This agreement is aimed at eliminating/reducing the tariffs imposed by member nations on goods imported by fellow African nations. Which should mean an individual can easily manufacture goods in Nigeria and sell to some in Kenya with little cost (maybe logistics) as opposed to customs restrictions.
Upon drafting the Agreement by AU, many African countries signed up almost immediately – I will say those that have nothing to lose – while the big economies waited a bit to sign up. Nigeria later signed up in July 2019 after careful review and much coercion arising from the delay was due to concerns by relevant parties, such as Manufactures Association, Customs and others, on how the Agreement will affect businesses in Nigeria.
Although the president has signed, the agreement can only be operational in Nigeria upon ratification by the National Assembly, which is yet to be done, like many other double tax treaty awaiting ratification by the National Assembly.
Based on the timeline set by AU, the Agreement is meant to be operational as from 1st July 2020, but with the COVID-19 pandemic, the commencement date has been moved to a later date which is yet to be declared.
The tax authority is still struggling to meet its tax collection target. To worsen matters, taxes like VAT, Customs Tax would be affected by the agreement.
Also, there will be increase in export sales which are not “Vatable”. There would be increase in export sales which leads to increase in export profit (less cost on the sales), thus reducing the companies income tax and tertiary education tax to be paid.
The AfCFTA could be subjected to the permanent establishment (PE) risk for companies in other jurisdictions. If these companies do not perfect their shipping terms well, the foreign companies may be subjected to tax in Nigeria.
Expectations of the Agreement to the tax sector when the agreement becomes operational include:
1- Increase in tax audit due to drop in taxes collectible.
2- Aggressive revenue drive.
3- The international tax department of the FIRS would be vested in ensuring non-resident companies deriving income in Nigeria pay the fair share.
Due to the agreement, steps may be taken to make amendments in the tax laws aimed at increasing revenue for the government.
Q&A on Tax and AfCFTA
Q: What is/will this in any way affect other economic alliance like the free trade in West Africa (Ecowas)?
A: Since the ECOWAS is a subset of AU, the agreement should be applicable to ECOWAS members. Other countries, who are signatories to the agreement, will be impacted in one way or the other.
Q: What’s in AfCFTA for Africa’s women?
A: There is no gender discrimination in this regard. Women entrepreneurs could make more money and have their voices heard all over the planet
Q: If export profits increases don’t you think producers and manufacturers would prefer to export their products rather sell in their home countries to satisfy their countries local need?
A: Firstly, you should know that you have a competitor in that country of destination. notwithstanding the AcFTA, your products will be subject to standardization and review by their NAFDAC and SON. It will be a big task to induce the officers in other countries as you may probably do here in Nigeria.
Q: Doesn’t you think African countries import less in Africa because they can’t find what they want in Africa?
A: Heeding to the words of Akinwumi Adesina, the president of Africa Development Bank, he said what we trade among ourselves in Africa is more of agricultural products. We are termed as a “consuming continent”. The AfCFTA would attract investors to site their manufacturing plants in Africa and would give room to tax planning for growth and development. A company can site the manufacturing plants and distribution hub in a country with the least or less rigid tax system in Africa and sell to other countries.
Q: How does AfCFTA benefit small and medium-sized enterprises?
A: It creates bigger market and more business opportunities for entrepreneurs, going a long way in boosting profits and economic returns.
Q: Is there any financial obligation for participating companies in the AfCTFA? Maybe a tax or fee allocation by the AU? Will there be a database management or registration/licensing or any requirement for participating companies?
A: It is expected that a guideline should be issued to govern the AfCTFA which would be made available on the African Union’s website.
Q: How can businesses shape themselves up to take the best advantage of the AfCFTA agreement?
A: Businesses should prepare their goods to meet the minimum standard all over the world, review business models to include possibility of entering new markets and seek advice from professionals.
Q: In light of the agreement, what are the tax laws that may be probably adjusted?
A: For now, amendments in the 2019 Finance Act should still be applicable. It is expected that the tax authority will study the business environment when the agreement is operational to identify any loophole.
Q: If Nigeria begins to import some certain goods from other African states and those goods are formerly imported from European or Asian countries.
Don’t you think there would be any consequence if Nigeria want to import other goods that is not available in the African continent?
A: The waivers only apply to goods manufactured in Africa. AU understands that certain individuals might want to implement this strategy so the goods must be manufactured in Africa in order to enjoy the waivers given by AfCFTA.