Fiscal policy partner and West African tax officer at PricewaterhouseCoopers, Mr. Taiwo Oyedele, shares his thoughts with TUNDE AJAJA about the African continental free trade area, the tax regime in Nigeria and other interesting topics
The The African Continental Free Trade Area was supposed to start on January 1st, but nothing significant has changed between then and now in terms of intercontinental trade. Has it really started?
This is an interesting question. It was supposed to start in July 2020, but was brought forward to January 1, 2021 due to the COVID-19 pandemic. So I would say what basically happened is mostly ceremonial. a launch ceremony to acknowledge and acknowledge that Africa has decided to unite, particularly with regard to trade. However, much more is required for operationalization. For example, you need to train customs, update your rules, import duties and tariffs, and then move on to non-tariff barriers, some of which have to do with local content requirements and some of which require us to change some of our laws. For example, we have laws that only allow Nigerians to do one thing or the other, which the treaty doesn't allow. Do not forget that Nigeria has also ratified the agreement. So officially we started, but I think it would be some time before we see it come to life in terms of hands-on experience.
Given the spread of COVID-19 and the fact that Nigeria only had trade disputes with Ghana just last year, when is it expected to take off fully?
Unfortunately, COVID-19 is challenging, which is why predicting it becomes even more difficult as it depends on how this second wave plays out and some people say there might be a third wave before we get vaccines so that we have immunity together . Before we get to that point, anything else can happen. Thanks to COVID-19, we can even close the borders and stop air travel. But if things don't get worse than they are, there are two factors and one is political will. You can sign a contract and you may not or you may believe in it and there are different interests in your country heading in different directions. It would take longer that way, but if every country feels obliged to do so, I would say that before the end of the year we should see real results, especially in the areas of customs barriers, free movement of people, investment and services, and non-trade Obstacles.
There are people who are still skeptical of the AfCFTA's prospects, but the World Bank said sometime in June 2020 that this treaty represents a great opportunity to lift 30 million people out of extreme poverty and increase the incomes of 68 million others who live on less than $ 5.50 per day. These are very high projections; Do African leaders have the political will to make these projections a reality?
We can do a lot more than that if you look at the experience of regional integration that has worked, like the Association of Southeast Asian Nations or the European Union, which is even an extreme example. They were extremely successful. Trade within the EU is around 70 percent, but even if you say the trade is too extraordinary and you look at what you have in North America or Asia, the result was much better than even the World Bank's projection for Africa. So I think we can easily get a lot more out of poverty than that. We can create economic prosperity if we implement the agreement with good intent and sincerity. Take Nigeria as an example, we shouldn't even have to export crude oil if we pull ourselves together. I recently carried out an analysis and found that the most important element that about eight of the top ten countries in Africa import is petroleum products. Why do African countries import refined petroleum products from Europe and other continents? Why don't they import from Nigeria as we are closer? We should be able to refine our crude oil and sell it to Africa so we can make more money. They would also make more money by paying less for freight. It's a win-win for Africa and that's just one example. There are so many other areas where these possibilities abound.
There are already around eight regional economic communities on the continent. What will happen to them when the treaty comes into full force?
The AfCFTA has planned this. To date, some of these regional communities have largely developed beyond the starting point of the AfCFTA. So the idea is that once you have your subregional communities and your level is better than AfCFTA, you keep doing both. For example, in ECOWAS you can travel to Ghana without a visa, but AfCFTA is not at that level yet, so ECOWAS would continue the free movement of people, but ultimately the idea is to get to the level that Africans live at Integration would develop better than all subregional communities and therefore they would dissolve these subregional communities because they were no longer needed. I can't say how soon it will happen, but that's the ultimate goal.
The treaty provides that countries do not treat products from other countries less favorably than their domestic products. How can we reconcile that with the smuggling of products from non-African countries into our country, like rice from Thailand coming into Nigeria via the Republic of Niger?
This is a big problem for many people. That risk exists, but whether that risk would materialize depends on the political will of each country involved. There is such a thing as "rule of origin". Typically, if every country is honest, the scenario you are painting should never happen. The “rule of origin” states that you have to add a lot of value within Africa and that this threshold is sometimes up to 70 percent in terms of material, labor and other things. So this rice would not qualify. If the Republic of Benin is honest, when this rice comes to Nigeria it should collect all duties and taxes as it is not a product from Africa. However, if the Republic of Benin is insincere, they can repackage the rice and pretend it was made in their country. Hope this won't happen as this AfCFTA won't work once people start playing games like this. With regard to smuggling, one problem that AfCFTA would solve is that if the product is from another African country, there are no import duties and therefore you do not have to smuggle it. Just bring such goods to the ports and clear them away. I don't see any AfCFTA complicating our borderline problem. It will likely make it better, not worse. We would have teething problems, but in time we would overcome them and each country involved would do the right thing. I am sure.
Nigeria imports most of its goods and is largely a consumer. What should Nigeria do differently so that it doesn't become a garbage dump under this treaty?
I think the starting point for Nigeria is that we recognize and accept that we cannot do everything. Sometimes I think our national strategy is flawed. We want to produce everything. Not even China or the USA produce everything. So Nigeria has to look for its competitive advantage. I gave an example earlier about oil and gas. Nigeria is actually a service economy because the percentage of our gross domestic product that is service is more than 50 percent. Whether you are talking about banking, legal services, accounting, or entertainment, these are the areas we start out from and should take advantage of. Building the infrastructure would take some time. So let's start with our strength so that we can benefit from this contract as we work long-term on how we can compete in other areas, especially manufacturing.
If we focus on services, chances are the contract will choke down domestic manufacturing sectors that are regionally uncompetitive. Aren't we at risk of becoming a dump for such products?
The AfCFTA treaty does not require any country to implement the treaty 100 percent from day one. You can choose to protect the critical sectors in your country for a certain number of years. That is contractually allowed. This allows Nigeria to identify whichever sector it prefers and then gradually relax the protection over time. So you are right; The risk of dumping is there, but again they have done a very good job with the treaty, putting in place for each country to protect what is most important to them until they reach a level they achieve can.
Nigeria has over 41 million micro, small and medium-sized enterprises, and their production costs are high due to problems such as electricity. Even if we postpone this aspect of our trade relations, will they compete when we eventually open?
If you want to protect MSMEs, despite the AfCFTA, you still have to impose duties on products from abroad so that they are not preferred to products made in Nigeria. and you are right that we cannot delay the start of this aspect forever or the contract would be meaningless. The delay is meant to give you enough time to address your local inefficiencies. It is for this reason that I agree to the provisions of the treaty that allow you to protect certain sectors for a period of time and gradually remedy your inefficiencies. Do you know that it is even against common sense that a product made in another country (with cargo, berth, clearing and other things) is cheaper than the one you make next door? It is an indictment against this country. This means that you are inefficient and need to address these issues.
Do you think this would make us serious?
I think this is a wake up call for us, otherwise we would drown in the AfCFTA. If we don't do anything else, other countries would leave us behind. Some countries are already traveling to Ghana to set up their manufacturing facilities and the target market is Nigeria. If we didn't wake up in time, more and more of this would happen. The people would simply set up production facilities in neighboring countries, produce there, in order to meet the “rule of origin” and bring them to Nigeria. That's the only worry I have and I believe the conversation has started. There is an action committee to implement the AfCFTA and I think the work they are doing is good. You have a lot of engagements, maybe we would be there very soon. In the next phase of implementation you need the political will. Sometimes you have to work with the private sector to do these things. So in our case, I've said we need to have a list and say which ones to focus on first. I honestly believe that Nigeria will benefit much more from trying to leverage our strengths in services, entertainment, and oil and gas than from trying to compete with South Africa in manufacturing. I don't think we can compete with Ghana in terms of manufacturing. For us, competition in manufacturing is a long-term goal, maybe in another 10 years. The UK makes a lot of money in services and we know that Germany is the manufacturing giant in Europe and they are doing well too. Nothing says your economy can do well based on manufacturing alone. Let's focus on our strength.
If it worked for the UK to focus on services and Germany for manufacturing, is it a standard principle that would work in Africa too because it looks like manufacturing could have an advantage here?
It's not a golden rule. Today China produces for the whole world and doesn't even have a contract with half the world. They devised ways to make items at the lowest possible cost, and maybe the quality isn't bad. Even in the US, some of the things you see there are made in China, not to mention what you see in Africa or Nigeria. So let's start with our strengths and develop our infrastructure.
Are there sanctions for African countries that pack or present foreign products as their own product, as not every country can be honest?
Of course there are various bodies that deal with such issues. One of them is the ministerial body and of course you are at a higher level where you have the heads of government on the continent. If that happens, it will be investigated and there would be sanctions against this country. We hope we won't use the stick. Let's say everyone plays their part, but neither can you really tell. That is why you have this framework to prevent the abuse from taking place.
There are also fears that the treaty could lead to the loss of regulatory autonomy and at the moment Nigeria is struggling to implement its laws. What will you see when the contract takes full effect?
I am not a fan of this regulatory autonomy. I think it's just the feeling of pride. Other than that, it doesn't mean anything. So the UK left the European Union and they said okay, now we are in control of our laws. But when they were inside the EU, they were in control, they were very influential within the bloc, and they benefited significantly. They were the headquarters of the financial sector for Europe and almost the rest of the world, but they are now losing all of those advantages. Ultimately, I would say that I don't care that someone can come to Nigeria without a visa. I am interested in whether we can allow them to come and invest because that affects life. As Africa's largest economy, Nigeria is big enough to influence this policy at all. In fact, I think it is the other countries in Africa that should be concerned about us, not us, that are concerned about the rest of the continent. We are big enough and have the resources and the human capacity to drive these initiatives forward so that we don't hit the short end of the line. Overall, I don't think this would be a problem.
While Nigerians are the largest and most populous economy, they are treated badly in some of these smaller African countries like neighboring Ghana, but there are no consequences. Doesn't it seem like our size hasn't earned us so much respect and advantage?
It's not these countries fault, it's our fault. There are things you will not do to the United States or its people because you know there will be consequences. So the federal government has a duty to ensure that we are respected. Basically, however, I think the way a country's citizens are treated abroad depends on two things. how they treat these citizens in their own country and leadership. For example, check out the ongoing national identity number registration exercise and how Nigerians are treated as slaves. There is no dignity in the way they are treated just to register for NIN. In their own country! The same Nigerians would go to the embassy of a country in Nigeria and they would be treated as if they were worthless and no one said anything. So if you treat your citizens without respect in your own country, others would take a cue from you and do the same to them. Only one American was kidnapped and America sent their security forces to rescue the person while our farmers were killed on their own land and the government said they were not allowed to go to their farm. If you don't treat your citizens with respect, why should anyone respect them? If these countries don't respect their citizens, then they also know that you wouldn't do anything because they don't take your leadership seriously. To be honest, I am not blaming these countries. I blame Nigeria for not reacting the way it should.
The maritime sector is another aspect where the government has failed. Why was it impossible for them to get it right in this sector because there are no ordinary scanners that should facilitate operations in the port?
One has to do with politics and the other with interests. There are people who benefit from our crises, like the chaos in this sector. For them, they don't want the system to work because if it works, they will lose the money they make. This is where leadership and politics should come into play. Why do we allow these people to continue to exploit us? You mentioned the scanner. You can scan a container in minutes and it would pick up everything in the container. Therefore, you don't need anyone to physically remove the items and you won't lose some of the items. Some of these containers are loaded by machine. So if they are doing a physical inspection, the container may not pick up the items when they are returned. Plus, people spend time switching from one regulator to another. The agencies were asked to harmonize, but they refused. There are all kinds of people who ask for bribes before the container finally leaves port. When you are done with all the complications in the ports, evacuation from the ports is another "rocket science". I think it was the Financial Times that said shipping a 20ft container from China to Lagos would cost about $ 3,000, and you can spend $ 4,000 from the port to some other places in Lagos. But if you want to address these issues, it's not rocket science. Check out Dubai. You can develop a port in Nigeria that is efficient enough that nothing gets to the port that would take 48 hours to clear. All of these could be private sector investments as it would be profitable. You can't build a port and lose it because Nigerians don't stop importing and exporting. There are people who are now bringing their goods to neighboring countries and moving in from there because they just don't want to deal with Nigerian ports. The government should create the right environment and allow these issues to be a thing of the past.
There have been endless complaints about multiple taxation, but the government continues to deny it. Do you think the problem is excessive or as bad as reported?
I think the problem of multiple taxation is not well understood in Nigeria. Many stakeholders, including some government officials, private sector actors and even some professionals, do not understand this. The starting point with multiple taxation is realizing that you don't need to call it a tax. If I'm the one who pays, I don't care if you call it a tax or a levy or a levy or a fee. I don't care what you put it, as long as you asked me to pay an amount I would rather not pay, this is a tax to me. The problem is that government officials would say it wasn't even a tax that people pay and they just complain. The second point is what we call informal taxes. There are taxes that people have to pay that are not contained in any law. A lout would park your motorcycle, remove the side mirror of another “danfo” (yellow bus), or carry the goods of people selling things in the open market or on the roadside. At the end of the day you are forced to pay the lout a certain amount and there is no receipt for it. It doesn't go to the government and for me they make you pay taxes and that's why we call it an informal tax. The government must identify these formal and informal taxes. First, they have to change the laws and repeal many of the old tax laws that don't make sense. Look at the state of Kaduna, they used technology to stop paying taxes in cash and their revenues are up more than 200 percent. from N13bn to N44bn. That's in about a year or two. So the fact that people pay cash is a problem.
What's the first solution we should look at?
Amendment to the Constitution to limit the number of taxes that federal, state and local governments can levy. I recommended that it should be a single digit, no more than nine. So if you already have nine taxes and are thinking of taxing the ozone layer, save one to introduce the new one. If we take this approach, we would solve the problem. Otherwise, I can tell you that this is a real problem for companies in Nigeria today.
There was a time when the government silenced the idea of taxing luxury goods like private jets and yachts. How do you rate this proposal?
I think it's a political problem. It is politically correct to believe that luxury taxes can make you big money, but you really can't. It makes the public happy that you are putting a tax on the rich. Using private jets as an example, you can count how many private jets are in Nigeria. Let's say they are less than 200. Of the 200, I can guarantee you that more than half are rented. You didn't buy them right away. So if you want to put a tax on it, they just tell you it is a rental agreement and not a direct one. If you say you want to tax them whenever they fly, how often do they even fly these jets? Let's say everyone pays you N1m for every flight. How much will you generate, N200m in a month and in a year, you will generate N2.4bn. That doesn't solve our problem. Another point that people are talking about is if you want to put a tax on imported wine. How much will that generate? I'm not against the luxury tax, I'm just saying that it won't solve our problem. I don't even see us generating N1tn from luxury taxes in Nigeria in an entire year even if they do implement it. It will increase your earnings a little, but it won't solve your problem. To solve the income problem in Nigeria you need something that will bring you N20tn per year.
Do we have the ability to generate that?
Yes, we have the ability to generate more than that. As of today we will generate around N7tn from all tax authorities. South Africa generated an N11tn equivalence from income tax alone last year. The income tax in Nigeria is only 1.3 billion NN.
We have the population, where does the problem come from?
The problem is that we don't enforce the taxes we have, especially on the rich people; I mean the middle class and the upper class. When I say wealthy people, I am not talking about billionaires because there aren't many of them. I'm talking about people who are worth about N10m to N50m, or people who are worth N30m and about N200m. There are many people in this category. If you earn N2m or less in one year in South Africa, you are completely exempt from income tax. From their 60,000 best citizens, they collected roughly N6tn equivalents. This means that the money South Africa makes with 60,000 citizens is more than the combined revenue of the Federal Inland Revenue Service and all internal revenue services in the 36 states combined. So Nigeria's money is there, but we're just lazy. If you take property tax as an example, take a state like Lagos as an example. You can make money and hide it, but you cannot hide your belongings. For example, 70 percent of people who own real estate in Lagos are not even registered for income tax. How is that difficult when the government wants to do it? So we are not ready. If so, Nigeria's problems are not all that complicated, especially when it comes to the economy. So we can generate more than N20tn in a year if we are ready and do the right thing.
Apart from laziness, what other factors make Nigerians unwilling to pay taxes?
Mistrust is a big problem, but in other parts of the world they console themselves that the tax they pay is the reason they have free health care, electricity, security and good roads, which makes it less painful. But in Nigeria you pay your taxes and have to repair your road, keep your estate safe, generate electricity and water, and other things that you have to do yourself. That alone makes it difficult for people to want to pay taxes. The other part is that Nigeria is not using what I would call tax information and data. The main reason people pay taxes in many developed countries is because they have no choice. Some countries today say you don't have to hand in your returns as everything is monitored. While you are using your credit card, the government receives the data. So when you buy a car, you will not be able to drive it until you have registered it. Who is registering it? Government. You are buying land. Who gives the title? Government. You want to go abroad, where can you get a government passport from? So you also have a bank account and the government has everything under control. In countries where they are serious about taxes, they collect this data and connect the dots. When a family has two cars and a house, has three children, has previously traveled abroad and has a child in a school in the US or UK and buys foreign currency from the CBN to pay bills. The government would then compile all the information. If the government checks their tax returns and shows that they only earn N1m in a month, they would have questions to answer. Let's say you bought a car worth N50 million that same year. Where did the money come from? When you connect the dots through data, people's ability to hide and not pay taxes decreases. So you make them pay, and if they don't pay, you use the full weight of the law on them. I have been a tax advisor in Nigeria for about 20 years and have not heard from anyone who went to jail for not paying taxes. So this is a big problem.
In a Nigerian recession, where people's purchasing power has deteriorated and inflation is high, do we need a tight tax system?
All you have to do at a time like this is not to overload the people who are already paying, but rather focus on those who are not. People who have the ability to pay and never pay are the ones you go to. Using data today, you can increase Nigeria's tax revenue by more than 200 percent. The state of Kaduna has demonstrated and they haven't even done half the possible and we are already seeing the result. Customs made more money at a time of the pandemic when borders were closing than at a time when there were no closings. So Nigerian Customs can easily make N10tn per year if they do the right thing. Just use technology to reduce smuggling and corruption and you will see your revenues grow magically, just like it did for the states and FIRS.
The IMF said Nigeria's fiscal problem is low income rather than high debt, but many Nigerians feel differently. How do we bring these into line?
I guess it's always a question of whether you say the cup is half full or half empty. Both are correct. Since our income is very low, our debts are no longer sustainable. In the first or second quarter of last year, we spent 99.2 percent of government revenue servicing debt. Who does that? Wenn wir unsere Einnahmen auf etwa 15 bis 20 Prozent des BIP steigern können, wäre unsere Verschuldung sehr gering, da wir aufgrund der Verschuldung gegenüber dem BIP eine der niedrigsten der Welt haben. Die beiden Faktoren, die für unser Problem verantwortlich sind, sind niedrige Einnahmen und hohe Kreditraten. Sie würden sehen, dass viele Regierungen auf der ganzen Welt Kredite zu ein bis zwei Prozent aufnehmen würden, während wir bis vor kurzem zweistellige Kredite aufgenommen haben. Ihre Kreditrate ist also zu hoch, Ihre Einnahmen sind zu niedrig, daher geben Sie fast alle Einnahmen für die Bedienung von Schulden aus und dies ist nicht nachhaltig. Egal, ob Sie sagen, wir haben ein Schulden- oder ein Einnahmenproblem, ich denke, es ist Semantik. Wir haben beide Probleme.
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