AOA Professional Services

Tag: Africa Trade

  • AfCFTA & PASPPS: Accelerating Africa’s Trade

    AfCFTA & PASPPS: Accelerating Africa’s Trade

    The AfCFTA, African Export-Import Bank, and other partners on 13th January officially launched a unified payment system for the African market. This is the Pan-African Payments and Settlements Systems(PAPSS). Its primary goal is to boost Intra-African trade significantly by making cross-border payments less reliant on third party currencies.

    PAPSS allows a customer in one African country to pay in their currency, while a seller in another country receives payment in their currency. With PAPSS, this would facilitate the African Continental Free Trade Agreement (AfCFTA) aim to bring together the 54 African countries to trade under a single market with liberalized tariffs and the removal of the non-tariff barriers to cross-border trading.

    The commencement of PAPSS would solve reliance on third currencies- US Dollars, Euros and the British Pounds for the clearing and settlement of cross-border payments and transactions which in turn leads to high costs and long transaction times. At the moment, 42 currencies are being spent on the continent and only a couple of those currencies have any value outside the countries where they are tender.

    Before PAPSS, for example, a buyer in Nigeria who intends to buy goods from a seller in South Africa will be required to pay the seller in a third currency from outside the continent- either the US dollar, the Euros or the British Pounds, pay the extra charges to have the agreed sum processed and sent to the seller in South Africa and have to wait several days for transactions to clear.

    Aside from time constraints, the method of currency conversion adds to the value of doing business and actually, the money has got to leave Africa before being sent back to South Africa. With the start and functioning of PAPSS, the same business would only pay in Nigerian Naira for the goods, while the seller will receive South African Rand.

    The PAPSS serves as the clearing, processing and settlement agent in the transaction for MSMEs in Nigeria and other emerging economies facing high import and export expenses, as well as unknown transaction delays due to limited correspondent bank relationships, foreign currency availability, and cross-border transaction rail capacity would be addressed with a commercially viable modern solution in the continent.

    In conclusion, Pamela Coke-Hamilton, executive of the International Trade Centre, said:

    “In these uncertain times, African countries now have a commercially viable tool which will address a critical barrier for MSMEs to trade competitively. ITC is preparing enterprises to profit from PAPSS, creating new opportunities for growth in cross-border e-commerce and sustainable trade.”

    DISCLAIMER:

    The material contained in this publication is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.

    AOA Professional Services is an indigenous tax, regulatory and advisory service firm driven by the values of professionalism and partnership. For further information on the subject matter, reach out to our Africa International Helpdesk

  • AfCFTA: The Need to Review Double Taxation Arrangement

    AfCFTA: The Need to Review Double Taxation Arrangement

    A Tax Treaty otherwise called an Avoidance of Double Taxation Agreement (ADTA) or Double Taxation Agreement (DTA) could be described as an agreement between two or more countries (otherwise known as the Contracting States or parties) to make sure that a resident of one or both of the contracting countries does not suffer from paying tax twice on the same income in both jurisdictions or unduly benefit from not paying appropriate taxes in any of the countries through tax evasion or avoidance. The Agreement covers taxes on income and capital only and does not extend to consumption taxes such as Value Added Tax or Sales Taxes.

    Over the last few decades, the number of bilateral tax treaties has increased dramatically. The United Nations Model Double Taxation Convention Between Developed and Developing Countries (“UN Model Convention”) and the Organisation for Economic Co-operation and Development’s Model Tax Convention on Income and on Capital2 (“OECD Model Convention”) provide models for countries to use in negotiating the terms of their treaties and are regularly updated. For purposes of both the UN and OECD Model Conventions, it is assumed that any rules for the application of the provisions of those Model Conventions are a matter for the domestic law of the contracting states. Consequently, there are no general rules in the Model Conventions or in the Commentaries concerning how the provisions of the treaty should be applied.

    Speaking at the launch of “Dangers of Double Tax Agreement in Financing Development: a case study in Ghana,” Mrs. Ofori-Kwafo said the report emphasized the need to adopt a harmonized DTA model, which would take into consideration diversities in the African economies.

    She said in view of that, Tax Justice Network Africa (TJNA), in collaboration with its members of South and Eastern Africa Trade Information and Negotiation Institute (SEATINI Uganda), Civil Society Legislative Advocacy Centre Nigeria (CISLAC), Ghana Integrity Initiative (GII), Policy Forum Tanzania and Centre for Trade Policy and Development (CTPD) Zambia with support from Open Society Foundation (OSF) had conducted a joint study on the Dangers of DTAs in Financing Development in Africa with case studies of Ghana, Nigeria, Tanzania, Uganda, and Zambia.

    In general, the tax authorities of a country should apply the provisions of its tax treaties to prevent tax avoidance and evasion. This requires careful consideration of the inclusion of anti-abuse rules in tax treaties and the adoption of domestic anti-avoidance rules that can be applied to treaty abuses. However, in addition to ensuring that the appropriate anti-avoidance rules are in place, the tax authorities must have the capacity to interpret, apply and enforce those rules concerning treaty abuses.

    Given the African Continental Free Trade Agreement (AfCFTA), there is, therefore, the need for a thorough review and renegotiation of the Double Taxation Agreement to resolve challenges regarding tax evasion and avoidance in the continent.

    DISCLAIMER:

    The material contained in this publication is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.

    AOA Professional Services is an indigenous tax, regulatory and advisory service firm driven by the values of professionalism and partnership. For further information on the subject matter, reach out to our Africa International Helpdesk

  • AfCFTA: Potentials & Challenges for MSMEs in Africa

    AfCFTA: Potentials & Challenges for MSMEs in Africa

    In 2018, 54 of the 55 countries that make up the African Union (AU) established the African Continental Free Trade Area (AfCFTA). It was created by the African Continental Free Trade Agreement to be a free trade area to fast-track economic development on the African Continent, especially through the small and medium-sized enterprises (SMEs).

    The AfCFTA has opened a $3.4 trillion borderless market created to present an opportunity and rekindle hopes for African recovery through trade in a post-Covid-19 world. As nations continue to battle a pandemic that does not respect national borders, the Intra-African trade is currently low at 14.4 percent of total African exports. The United Nations Conference on Trade and Development (UNCTAD) estimates that the AfCFTA could boost intra-African trade by about 33 percent and cut the continent’s trade deficit by 51 percent.

    The latest Economic Development report shows that about 34 percent of African households live below the international poverty line ($1.9 per day), and around 40 percent of the total wealth is owned by approximately 0.0001 percent of the continent’s population. Then the pandemic has exacerbated inequalities and vulnerabilities of marginalized groups, resulting in an additional 37 million people in sub-Saharan Africa living in extreme poverty.

    A key question is how economic growth through regional integration can contribute to poverty reduction, cut inequality, and foster inclusive development, which is the main objective of the African Union’s Agenda 2063. Reports have shown that the continent’s current untapped export potential amounts to $21.9 billion, equivalent to 43 percent of intra-African exports. An additional $9.2 billion of export potential can be realized through partial tariff liberalization under the AfCFTA over the next five years.

    So what are we saying here?

    • With the AfCFTA, the market potential is huge but there is an equally huge challenge, which is that of a wide poverty line in the continent.
    • MSMEs are at the centre of leveraging the potential of the market and also solving the problem of poverty through job creation.
    • MSMEs would also help reduce over-reliance on foreign goods while enhancing the production of locally made goods which would boost infrastructure within the African Continent.

    According to the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), SMEs in Nigeria account for about 96 percent of registered Nigerian businesses, employ about 75 percent of the national labour force, and contribute 48 percent to the country’s Gross Domestic Product (GDP). A 2020 survey of 1,804 MSMEs across Nigeria by the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) showed that more than 50 percent of those surveyed were most concerned about the threat posed by imported cheaper goods competing with local products due to the AfCFTA, while only 20 percent were aware of the existence of the AfCFTA.

    In conclusion, it’s not just policies and procedural shortcomings that have resulted in limited cross-border trade volumes in Africa. Medium Small and Middle-Scale Enterprises (MSMEs) and other stakeholders in Africa must look deeper into why intra-African trade has been slow to gain traction, leading to Africa’s ongoing heavy reliance on imports and taking advantage where necessary to grow their business and market share in Africa.

    DISCLAIMER:

    The material contained in this publication is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.

    AOA Professional Services is an indigenous tax, regulatory and advisory service firm driven by the values of professionalism and partnership. For further information on the subject matter, reach out to our Africa International Helpdesk

  • AfCFTA: The Ease of Doing Business in Africa

    AfCFTA: The Ease of Doing Business in Africa

    The African Continental Free Trade Area (AfCFTA) agreement will create the largest free trade area in the world measured by the number of countries participating. The pact connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion. The combined gross domestic product (GDP) of AfCFTA economies is valued at US$3.4 trillion.

    With the potential to lift 30 million people out of extreme poverty, achieving its full potential will depend on putting in place significant policy reforms and trade facilitation measures.

    World Bank Report

    The agreement will encourage trade relations in Africa by removing tariffs for over 90% of goods traded between member countries. Expectedly, it will lead to the free movement of people within the continent, thereby enabling a single market for air and road transportation.

    The just-concluded Intra-African Trade Fair (IATF2021) hosted by South Africa in Durban also revealed that the AfCFTA is poised to boost commerce across Africa, with $40 billion of trade and investment deals. According to the UN Economic Commission for Africa (UNECA), the AfCFTA agreement has the potential to boost intra-African trade by more than 50% from the low level of 13%.

    AfCFTA provides an opportunity to improve trade facilitation more widely in the continent at borders and along corridors between African countries. The trade facilitation agreement would provide the framework and access to knowledge to guide such improvements, and AfCFTA provides the political momentum and additional commitment mechanism to support broad implementation.

    In addition, the AfCFTA benefits member countries by lowering costs for consumers and producers, reducing administrative red tape, and reducing compliance costs. Of course, the reduction in tariffs will be of benefit to lower the prices of imported goods for consumers, as well as for producers using intermediate inputs.

    In some member countries like Nigeria, Minister of Industry, Trade and Investment, Adeniyi Adebayo, has said the President Muhammadu Buhari administration is adopting a legislation-backed policy to promote the ease of doing business in the country. He added that the revised Companies and Allied Matters Act (CAMA) 2020 and the Petroleum Industry Act 2021 have repositioned the country as an investment destination of choice in Africa. The minister further said that the African Continental Free Trade Area Agreement (AfCFTA) implementation plan is undergoing adoption by the Ministries, Departments, and Agencies (MDAs). According to him, the move is geared at ensuring that existing policy frameworks maximize benefits to the advantage of Micro, Small, and Medium Enterprises (MSMEs).

    In conclusion, the trade will grow substantially with the following stats:

    • The volume of total exports will increase by almost 29% by 2035.
    • Intracontinental exports increase by over 81%.
    • Exports to non-African countries increase by 19%.

    “It is clear that we must find an African solution to Africa’s problems, and that this can only be found in African unity. Divided, we are weak; united, Africa could become one of the greatest forces for good in the world.”

    (Dr. Kwame Nkrumah)

    DISCLAIMER:

    The material contained in this publication is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this alert.

    AOA Professional Services is an indigenous tax, regulatory and advisory service firm driven by the values of professionalism and partnership. For further information on the subject matter, reach out to our Africa International Helpdesk