- 15 Marks
Question
Abakali Limited is a company engaged in the manufacturing of three variants of beverages. The products of the company are well received by consumers, as the company now controls about 55% of the domestic market. The “chocolate” brand is the top earner for the company. According to a recent newspaper review, “it has the same quality as those imported into the country from the western world.”
The Board of the company, at one of its meetings, decided to enter the West African market in 2024 and, by 2026, the European market, through:
- Establishment of depots in major cities of four neighboring countries (Republic of Benin, Togo, Ghana, and Niger) with goods transported by road.
- Incorporation of a branch in a European country, initially serving as a depot, but within two years, full production will commence.
As emphasized by one of the directors, the main challenge the company must address is the strategy to mitigate the negative impact of high tax rates (in Europe and West African countries) on profits to achieve better returns on investment.
A director, previously employed by an international company, suggested using “treaty shopping” as a tax planning strategy for locating the branch office in Europe. He also pointed out that the Economic Community of West African States (ECOWAS) common external tariff framework provides a solution to different tax regimes in the sub-region.
Most Board members are not familiar with “treaty shopping” or the ECOWAS common external tariff framework, and they have requested professional advice on these matters.
The Managing Director has approached your professional accounting firm for guidance on the key issues raised in the meeting.
Required:
As the officer designated to handle this task, write a report to your Principal Partner for review before sending it to the client. The report should address the following concerns of the client:
a. Explanation of the concept and practice of “treaty shopping” (6 Marks)
b. Discussion on the strategies employed by various countries in curbing treaty shopping in international transactions (2 Marks)
c. Discussion on the features of the ECOWAS common external tariff framework (4 Marks)
d. Comment on the trade defense measures put in place to guide the operations of the common external tariff framework (3 Marks)
(Total 15 Marks)
Answer
To: Principal Partner
From: Senior Tax Consultant
Date: May 2024
Subject: Treaty Shopping and ECOWAS Common External Tariff Analysis for Abakali Limited
a. Explanation of the Concept and Practice of “Treaty Shopping”
- Concept: Treaty shopping refers to a strategy where a taxpayer in one country (the “home” country) indirectly accesses the benefits of a tax treaty between two other countries (the “source” and “treaty” countries). This is often achieved by setting up intermediary entities in countries with favorable treaties to reduce tax liability.
- Practice: For example, a company in Country C (with no tax treaty with Country A) establishes a subsidiary in Country B (a treaty partner of Country A) to take advantage of lower withholding taxes on dividends from Country A to Country B. Although beneficial for the company, this practice can lead to a loss of tax revenue for the source country and may be viewed as an abuse of tax treaties.
b. Strategies Employed by Various Countries to Curb Treaty Shopping
- Anti-Treaty Shopping Provisions: Many countries include Limitation on Benefits (LOB) clauses in their tax treaties to restrict benefits to genuine residents of the treaty country. These provisions prevent entities set up solely to gain treaty benefits.
- General Anti-Avoidance Rules (GAAR): GAAR provisions target arrangements primarily made to obtain a tax benefit, giving authorities the power to deny treaty benefits if abuse is identified.
c. Features of ECOWAS Common External Tariff (CET) Framework
- Harmonized Tariff: The CET standardizes customs duties within ECOWAS member countries, facilitating uniformity in tax rates across the region.
- 5-Tariff Band Structure: ECOWAS applies a 5-band tariff structure, where goods are categorized by type and importance, including essential social goods, raw materials, intermediate goods, and luxury goods.
- Uniform Rate Application: CET applies consistent import quotas and customs duties across ECOWAS countries, fostering intra-regional trade.
- Economic Development Focus: Specific goods critical to regional economic development face lower tariff rates, promoting accessible pricing and trade growth.
| Tariff Band | Duty Rate | Goods Description |
|---|---|---|
| 0 | 0% | Essential social goods |
| 1 | 5% | Basic goods, raw materials |
| 2 | 10% | Intermediate goods |
| 3 | 20% | Finished consumption goods |
| 4 | 35% | Goods significant to economic development |
d. Trade Defense Measures in the CET Framework
- Safeguard Measures: Implemented to protect local industries from sudden surges in imports that could harm the domestic market.
- Anti-Dumping Measures: Prevents dumping of foreign goods that could undercut local production by setting limits or prohibitions on certain items.
- Countervailing Measures: Addresses subsidies provided by foreign governments to ensure a level playing field for local producers.
- Supplementary Protection Measures: Additional defenses are in place to address specific trade-related challenges and protect the integrity of the CET system.
- Tags: Cross-border taxation, ECOWAS, External Tariff, Tax Planning, Treaty Shopping, West African Markets
- Level: Level 3
- Topic: Double Taxation Reliefs and Credits
- Series: MAY 2018
- Uploader: Dotse