ACC& Co (Chartered Accountants)
Lagos
INTERNAL MEMO
Date:
From: Senior Tax Consultant
To: Principal Partner
RE: TREATY SHOPPING AND ECOWAS COMMON EXTERNAL TARIFF
Sequel to your directive in respect of the request of our client for advise on concept and practice of “treaty shopping”, strategies being employed to curb treaty shopping; features of ECOWAS common external tariff and the trade defense measures put in place to guide the operations of the common external tariff, my comments are as follows:
a. Concept and practice of “treaty shopping”
Concept
(i) Treaty shopping is a situation where a person, who is resident in one country (say the “home” country) and earns income or capital gains from another country (say the “source” country), is able to benefit from a tax treaty between the source country and yet another country (say the “third‟ country).
(ii) The situation often arises where a person is resident in the home country but the home country does not have a tax treaty with the source country. (iii) Treaty shopping is an analysis of tax treaty provision by non-treaty party to structure an international transaction or operation so as to gain or take advantage of a particular treaty benefit.
Practice
(i) A resident of a state that is not a party to the double taxation treaty establishes an entity within a state that is party to the treaty in order to take advantage of its provision.
(ii) Consider a situation that there is double taxation treaty between country A and country B. Instead of a company resident in country C (which does not have a tax treaty with country A) investing directly in country A, it establishes a legal entity in country B through which it invests in country A in order to take advantage of country A/country B tax treaty to minimise its tax liability. Meanwhile, since there is no tax treaty between country C and the treaty countries (that is, countries A and B), resident of country A and B will not receive equal tax treatment with respect to income derived from country C. Therefore the principle of reciprocity is breached.
b. The strategies being employed by various countries in mitigating the menace of treaty shopping in international transactions
(i) The problem of treaty shopping could be tackled through anti-treaty shopping provisions despite the fact that it is one of the most complex international tax rules.
(ii) Some countries have also tackled the problem of treaty shopping by includingin their tax treaties, specific provision referred to as “limitation on benefit” or “LOB”. These provisions limit the benefits under the treaties in certain circumstances.
(iii) Companies which are not bona fide residents of the treaty countries or which are set up for treaty shopping purpose may be denied the treaty benefits.
c. Features of ECOWAS Common External Tariff (CET)
(i) The ECOWAS common external tariff is one of the principal instruments for harmonising ECOWAS member states and strengthening its common market.
(ii) To this end, the ECOWAS authority of heads of State and government established an ECOWAS customs necessitating the formulation of a common external tariff with a common nomenclature so that customs procedures are transparent, readily followed and delays at borders decreased, is a key stone in achieving this union.
(iii) In January 2006 in Niamey, the Authority of Heads of State and Government of ECOWAS adopted a decision establishing the ECOWAS- CET which draws on the basic UEMOA CET composed of four tariff bands, or rates of customs duty. Below is a table depicting the four tariff bands:
| Category |
Percentage of duties |
Good description |
| 0 |
0% |
Essential social goods |
| 1 |
5% |
Goods of primary necessity, raw materials and specific inputs |
| 2 |
10% |
Intermediate goods |
| 3 |
20% |
Final consumption goods |
(iv) The ECOWAS tariff nomenclature has been migrated from 2007 to the 2012 version (HS2012) introduced by the World Customs Organisation (WCO).
(v) On 25th October 2013, ECOWAS member states adopted the ECOWAS Common External Tariff with the 5-tariff band structure.
| Category |
Percentage of duties |
Good description |
| 0 |
0% |
Essential social goods |
| 1 |
5% |
Goods of primary necessity, raw materials and capital goods |
| 2 |
10% |
Intermediate goods and inputs |
| 3 |
20% |
Final consumption goods or finished goods |
| 4 |
35% |
Specific goods for economic development |
(vi) Application of uniform tariff rate – CET is the application of the same customs duties, import quotas and preferences by a group of countries in a custom union.
(vii) The CET is one of the major characteristics of a custom union, which is a type of trade bloc formed through a trade agreement between governments of multiple tax jurisdictions.
d. The trade defense measures put in place in guiding the operations of the common external tariff include:
(i) Safeguard measures; especially in the protection of local industries;
(ii) Anti-dumping measures, through prohibition of certain items;
(iii) Anti-subsidy and countervailing measures; and
(viii) Supplementary protection measures.
Thank you.
Owo Ruh Senior Tax Consultant
