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The Impact of Economic Partnership Agreement on Customs Revenues and Challenges of Tax Transition in Togo

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Obossou Kwami, Togo Revenue Authority (OTR)

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The Impact of Economic Partnership Agreement on Customs Revenues and Challenges of Tax Transition in Togo

  1. 1. IMPACT OF ECONOMIC PARTNERSHIP AGREEMENT ON CUSTOMS REVENUES AND CHALLENGES OF TAX TRANSITION IN TOGO
  2. 2. INTRODUCTION 1. The liberalization pattern and its impact on customs revenues 2. Assessment of the impact of liberalization on customs revenues 2.1. Methodology 2.2. Findings 3. Challenges of fiscal transition in Togo CONCLUSION SOMMAIRE
  3. 3. INTRODUCTION One of the main objectives of the Lomé IV Convention and its predecessors is to improve the commercial performance of the ACP group of countries in order to promote economic growth and development. ACP countries signing EPAs are asked to set up free trade areas (FTAs) with the EU. In other words, these countries will be obliged to open their domestic markets to virtually all EU products over a 12-year period (2008-2020).
  4. 4. INTRODUCTION The main objectives of the EPA process are:  improving access to the EU market,  negotiations on trade in services,  strengthening the process of regional integration between the ACP countries,  improving cooperation in trade-related areas such as competitiveness and investment. In 2014, the EU and West Africa, including Togo, have reached a definitive EPA which will enter into force in the coming years with a view to establishing a free trade area.
  5. 5. INTRODUCTION Objective of the research: To Estimate the medium and long-term impacts of the implementation of the EPA on customs revenues in Togo.
  6. 6. LIBERALISATION SCHEME The products to be liberalized are categorized as follows:  Group A: essential social goods, basic necessities, basic raw materials, capital goods, and specific inputs;  Group B: inputs and intermediate products;  Group C: final consumption goods. Sensitive Products are excluded from the scope of liberalization (products grouped under category D). Tariff dismantling will take place every 5 years, at the end of each quinquennium. The new tariffs will be applied from the first day of the following year.
  7. 7. LIBERALISATION SCHEME GROUPS Tariff T 1/01/T+5 1/01/T+10 1/01/T+15 1/01/T+20 Group D 0% Excluded from liberalization 10% 20% 35% Group C 5% -0% -0% -100% -100% -100% 10% -0% -0% -50% -100% -100% 20% -0% -0% -50% -75% -100% Group B 0% -0% -100% -100% -100% -100% 5% -0% -0% -100% -100% -100% 10% -0% -0% -50% -100% -100% Group A 0% -100% -100% -100% -100% -100% 5% -0% -100% -100% -100% -100%
  8. 8. LIBERALISATION SCHEME The expected positive effects of the agreement The expected theoretical effect of a free trade agreement is the creation of trade effect. This is due to the replacement of less competitive imports and the less competitive domestic production of ECOWAS by imports from the EU. The effect of creating trade therefore has no direct effect on customs revenue. Another direct benefit of the EPA is the conservation of trade preferences for exports from West Africa to the EU.
  9. 9. LIBERALISATION SCHEME The expected negative effects of the agreement One of the possible effects is the diversion of trade and the loss of customs revenues. The dismantling of tariffs on products from EU will make them relatively lower than the imports from the rest of the world. This was one of the stumbling blocks in the negotiations as customs revenues accounted for more than 50% of the tax revenues of most west African countries.
  10. 10. LIBERALISATION SCHEME The specific case of the effects of the agreement on tax revenue The EPA will have effects on customs revenues as well as domestic revenues. In the case of customs revenues, if import behavior remains unchanged, Togo will lose customs revenues by liberalising products imported from the EU. The loss of customs revenues will be even greater if there is trade diversion.
  11. 11. LIBERALISATION SCHEME The specific case of the effects of the agreement on tax revenue For domestic revenues, there will be two types of effects: 1. Loss of domestic duties, which are generally collected on production’s factors; 2. Increase of domestic revenues with the expansion of consumption following the drop in consumer prices unless european exporters or importers increases increase their margin.
  12. 12. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES Methodology Customs data of 2015 from ASCUDA database with the basic assumption that the imports structure does not change significantly. In this regard, we mainly analyze the relative effects (the proportion of customs duties lost in the total of all estimated customs duties at the beginning of liberalisation) rather than the real value of the loss of customs revenues.
  13. 13. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES Methodology If DD is the level of customs duties collected on imports; VDi the customs value of item i; N1, N2, N3, N4 and N5, respectively, the number of imported items taxed at the rate of 0%; 5%; 10%; 20% and 35%. At the entry of the agreement, only the products of 0% are liberalised for the first five years.
  14. 14. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES
  15. 15. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES
  16. 16. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES
  17. 17. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES
  18. 18. IMPACT OF LIBERALISATION ON CUSTOMS REVENUES
  19. 19. FINDINGS Imports released for consumption and inherent customs duties by area of provenance in 2015 (in Bn XOF) Area of origin CIF value Collected DD Estimated DD West Africa 107,9 8,0 15,3 Rest of the world 446,0 46,6 56,4 European Union 300,1 23,0 28,8 Overall total 854,0 77,6 100,5
  20. 20. FINDINGS Evolution of customs duties estimated by zone of origin Area of origin Estimated DD at T (in Bn XOF) Estimated DD at T+5 Estimated DD at T+10 Estimated DD at T+15 Estimated DD at T+20 West Africa 15,3 100% 100% 100% 100% Rest of the world 56,4 100% 100% 100% 100% European Union 28,8 83% 64% 47% 45% Overall total 100,5 95% 90% 85% 84%
  21. 21. FINDINGS On 1st January of the year T+20, there will be total tariff dismantling on all the products subject to liberalisation. Customs duties on imports from the EU will then fall by 55%, resulting in a 16% decrease in customs duties. As a solution to the probable loss of customs revenues, the EU proposes to implement a fiscal transition program in order to assure higher revenues through domestic taxes.
  22. 22. CHALLENGES OF FISCAL TRANSITION IN TOGO The program of tax transition was adopted by Decision N° 10/2006 /CM/UEMOA of 23 March 2006 by the WAEMU Council of Ministers. The main areas covered by the Fiscal Transition Program are as follows:  the consolidation of the common market;  the support for growth and financing for development;  the optimization of the mobilization of fiscal and customs revenues;  the capacity building and synergy between tax and customs administrations.
  23. 23. N° CRITERIAS AND INDICATORS STANDARDS 2012 2013 2014 2015 2016 A- MAIN CRITERIA 1 Taxes collected at the border to total tax revenue Ratio ≤ 45% 24,0% 33,4% 25,6% 25,7% 23,0% 2 Domestic tax revenue to total tax revenue Ratio ≥ 55% 76,0% 66,6% 74,4% 74,3% 77,0% 3 Domestic tax revenue to Foreign trade revenue Ratio ≥ 1,5 3,17 2,00 2,91 2,90 3,35 Evolution of the criteria and indicators of the fiscal transition in Togo EFFECT OF THE FISCAL TRANSITION
  24. 24. EFFECT OF THE FISCAL TRANSITION B- ADDITIONAL CRITERIA 4 Direct domestic tax revenue to total tax revenue Ratio 19,5% 22,1% 23,9% 21,3% 26,6% 5 Indirect domestic tax revenue to total tax revenue Ratio 56,5% 44,5% 50,4% 53,0% 50,4% 6 Direct domestic tax revenue to total domestic tax revenue Ratio 25,6% 33,2% 32,2% 28,6% 34,6% 7 Indirect domestic tax revenue to total domestic tax revenue Ratio 74,4% 66,8% 67,8% 71,4% 65,4% 8 Custom duty + Statistical charge to total tax revenue Ratio 22,6% 22,4% 20,9% 22,3% 19,7% 9 VAT + Excise duty on imports to total tax revenue ratio 34,2% 29,1% 31,8% 34,8% 33,3% N° CRITERIAS AND INDICATORS STAND. 2012 2013 2014 2015 2016
  25. 25. C- PERFORMANCE INDICATORS 10 Domestic tax revenue/PIB ≥ 10% 12,6% 13,3% 15,4% 15,9% 16,8% 11 Tax revenue collected on Foreign trade to GDP ratio ≥ 7% 4,0% 6,7% 5,3% 5,5% 5,0% 12 Total revenue to GDP Ratio ≥ 20% 16,6% 20,0% 20,7% 21,4% 21,8% D- MONITORING INDICATORS 13 Amount of tax shortfall (tax and duty exemptions) to total tax revenue Ratio 16,1% 24,8% 16,4% 16,3% 22,6% EFFECT OF THE FISCAL TRANSITION N° CRITERIAS AND INDICATORS STAND. 2012 2013 2014 2015 2016
  26. 26. The table shows that the main criteria are met by Togo over the period indicated. The same applies to the performance indicator linked to the tax burden (with the exception of 2012). The analysis also reveals a predominance of indirect taxes mainly VAT in total domestic revenue. EFFECT OF THE FISCAL TRANSITION
  27. 27. Challenge Action to be taken Expanding the tax base Assure a better control of the management of tax declarations through the responsiveness of the tax services The systematic sharing of information between the various national administrations (OTR, Police, Documentation Service, public treasure, social security, Transport department, etc.) for cross-checking purposes The fight against the underground economy (illegal production, the visible and fraudulent informal sector) The systematic identification of taxpayers through the tax census using the techniques of geolocation and biometrics as well as control of the taxpayer's file The reform of the cadastre and the taxation of land property Exploiting the potential of personal income tax by tracking individuals' incomes from a unique identification number SOLUTIONS TO THE CHALLENGES OF FISCAL TRANSITION IN TOGO
  28. 28. Challenge Action to be taken Expanding the tax base Improvement of the billing system (promotion of computerized cash registers, reform of the standard invoice system, etc.) Better control of the collection of VAT The fight against the underground economy (illegal production, the visible and fraudulent informal sector) Exploiting the potential of excise duties through the combination of the specific and ad valorem tax in order to increase the revenue from these taxes (tobacco, alcohol, plastic bags, etc.) The reform of Unified business tax to make it simpler and more bearable for small taxpayers in the informal sector (adopting the patent system for example) Strengthening the system of tax and customs audit and control based on risk analysis and better enforcement of transaction value at Customs level SOLUTIONS TO THE CHALLENGES OF FISCAL TRANSITION IN TOGO
  29. 29. Challenge Action to be taken Promoting tax compliance Involve high-level actors in raising awareness: members of the government; the National Assembly, civil society, Introduce transparency in the use of public resources (consolidation of the spending circuit, fight against corruption, overbilling, double expenditure, luxury expenditure, etc.) Strengthen measures to fight corruption and tax frauds; Implement decentralization in Togo to promote local governance SOLUTIONS TO THE CHALLENGES OF FISCAL TRANSITION IN TOGO
  30. 30. Challenge Action to be taken Better control of exemptions and other derogating measures The prohibition of the granting of exemptions by non-legislative acts; Computerization of the procedures for the management of exemptions Revision of all texts and agreements granting exemptions (Free Trade Zone Act, Investment Code, Mining Code, etc.) The rationalization or even the abolition of the treasury checks mechanism (contracts financed out of external resources) Periodic preparation and publication of tax expenditure reports in accordance with Decision No. 08/2015 / CM / WAEMU of 02 July 2015 establishing the modalities for the assessment of tax expenditures in WAEMU Member States Operationalization of the Fiscal Policy Unit set up by act N ° 095 / MEF / CAB of 29 June 2017 SOLUTIONS TO THE CHALLENGES OF FISCAL TRANSITION IN TOGO
  31. 31. Challenge Action to be taken Strengthening the fight against corruption, fraud and tax evasion The prohibition of the granting of exemptions by non-legislative acts; Computerization of the procedures for the management of exemptions Revision of all texts and agreements granting exemptions (Free Trade Zone Act, Investment Code, Mining Code, etc.) The rationalization or even the abolition of the treasury checks mechanism (contracts financed out of external resources) Periodic preparation and publication of tax expenditure reports in accordance with Decision No. 08/2015 / CM / WAEMU of 02 July 2015 establishing the modalities for the assessment of tax expenditures in WAEMU Member States Operationalization of the Fiscal Policy Unit set up by act N ° 095 / MEF / CAB of 29 June 2017 SOLUTIONS TO THE CHALLENGES OF FISCAL TRANSITION IN TOGO
  32. 32. Challenge Action to be taken Strengthening the fight against corruption, fraud and tax evasion Price transfer Mining sector Telecommunication E-trading and e-services Financial activities (banking, insurance) SOLUTIONS TO THE CHALLENGES OF FISCAL TRANSITION IN TOGO
  33. 33. OTHER CHALLENGES Improve management of public enterprises Normally, like private companies, public enterprises are subject to the payment of taxes and dividends on fiscal benefit. However, a number of state-owned companies often have negative balance sheets, and as a result they pay very little taxes (except for the Minimum flat rate tax at 1% of turnover and capped at 500 million FCFA). The same applies to dividends paid into the State budget, which are eroded year by year. It would therefore be advisable to pay particular attention to the transparent and efficient management of public enterprises in order to generate more revenue and dividends from the State budget.
  34. 34. AUTRES DÉFIS À RELEVER AU NIVEAU NATIONAL Better optimization of non-tax revenues In recent years, there has been little financial participation by state-owned enterprises in non-tax revenues. There are even royalties and other parafiscal revenues collected for the benefit of certain government departments. As the fiscal transition involves increasing domestic revenues (tax and non-tax revenues), it is necessary to optimize the collection of non-tax revenues which also include tax niches in order to put less pressure on the OTR which is considered the sole provider of resources to the state budget.
  35. 35. RECOMMENDATIONS  For the time being, OTR and the government must prepare for the entry into force of the agreement by making the necessary reforms to the tax transition to mitigate the loss of border revenues;  Upon the entry into force of the Agreement, OTR needs to strengthen risk analysis and post-clearance control as the risk of tariff slippage will be high due to the exclusion of the 5th band products and most of the products of the 4th band;  Strengthen the training of the Office's staff on the liberalization scheme provided for in the agreement before its entry into force in order to ensure better implementation of tariff dismantling;
  36. 36. RECOMMENDATIONS  Increase the awareness of economic operators (importers and exporters) on the changes introduced by the agreement in order to prepare them for the tariff dismantling;  Train economic operators on product quality standards and the opportunities offered by the EPA in order to get them ready for competition and, above all, to exploit the potential offered by the European market;
  37. 37. MERCI

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