Innovation, Trade and Tax in West Africa—Success and Failure

In 1776, Adam Smith published his book “An Inquiry into the Nature and Causes of the Wealth of Nations” where he mentioned four axioms of taxation as the main basic principles of a good tax system.

What are these axioms?

• The rule of equity: Government shall aim to give economic and social justice to the people. Every citizen shall contribute to the government, as much as possible in relation with their corresponding capacities.
• The rule of certainty: The tax that an economic operator has to pay should be certain and not arbitrary. The economic operator has to know in advance how much they have to pay and when they have to pay this tax.
• The rule of convenience: The mode and timing of the tax payment shall be as far as possible in time at the convenience of the taxpayer.
• The rule of economy: There shall be economy in tax administration. The cost of tax collection should be lower than the amount of tax collected.

In the context of international trade in West Africa, these axioms matter today for two reasons. On one hand, any technology solutions facilitating trade along with tax collection will need to embed these principles, to offer the most advantages to importers and exporters. On the other hand, trade is now global, or at the least regional: West Africa has to embark on a transformative journey that sets a new course, not only in terms of technology but also of tax systems.

Port Community Systems in West Africa: How Fast They Multiplied

As indicated by the Inter-American Development Bank, the direct consequence of the Single Window is to provide accurate trade-related information, reducing the time and cost of trading operations and increasing the confidence of citizens that their government is using its resources efficiently.

The World Bank stresses that the Single Window is a tool for simplification, besides reducing opportunities for rent seeking, increasing transparency and predictability, and facilitating the adoption of modern risk-based approaches. As indicated by the World Bank, the establishment of the Single Window and an integrated port information system reduces delays, port dwell time, and costs.

The Benin case is interesting to consider as a landmark in West Africa that had regional impact. Benin is a West African coastal country, and the requirements of Western African countries are mainly for a limited, usually port-centric Single Window.

The Benin port-centric Single Window implementation started by end of 2010 with the signature of the public-private partnership concession. After the launch of the project, the pilot phase was initiated in February 2011, followed by the start of the logistics processes in June 2011. The transshipment and export phase were finalized by mid-2012. Finally, the paperless pre-clearance procedure was put into use in April 2015.

An Innovation Rapidly Duplicated

It is significant that the number of 20-foot equivalent units handled by the port of Cotonou increased by 57% with the operationalization of the Single Window. However, this was not the only achievement of this digital e-government solution covering trade and customs processes. The achievements of the Benin Single Window are numerous, starting with the container dwell time reduction for imports, from 39 to six days. The Cotonou port ship waiting time went down from eight days to 48 hours, and customs revenues increased by 25%, from $261 million in 2011 to $364 million in 2012, even though traffic had increased by just 10%. In addition, structures like the the National Council of Shippers of Benin (Conseil National des Chargeurs Béninois) tripled their revenues.

In 2014, following the successful roll-out of the Benin Single Window, Togo was inspired by the Benin experience and started implementing its own Single Window.

Small economies like Benin and Togo have been able to compete with large economies such as the number one economy in Africa, Nigeria, due to the Single Window. However, the collaboration between Nigeria and Benin at customs level does not prevent the largest economy from complaining about its lack of automation comparative to Benin and Togo. Indeed, maritime sector representatives in Nigeria have been blaming the lack of automation for the slip of their market share to Benin and Togo, due to their Single Window solutions.

Why Does Tax Matter in Intra-Regional Trade?

Rethinking Regional Trade in West Africa …

At the inception of the customs union, West African governments arbitrated in favor of the elimination of intra-regional trade barriers, and the adoption of common external tariffs that would lead to severe adjustments in public finances. Since then, intra-regional trade has yet to perform, in particular agriculture, that has only grown by 5% between 1995 and 2017.

West African external trade continues to progress, with 3.2% growth in the middle of the Covid-19 pandemic. This growing external trade is mainly composed of raw materials or low-processed products mainly going to the EU (almost 50%), India (23%) and China (17%). This external trade may however include several problems for West African exporters, such as sanitary and phytosanitary standards, that will prevent the region from relying on its external partners.

West Africa may then prefer to refocus on its regional market linkages and work on the complementarities of its national economies. In that context, addressing structural challenges such as diversifying production by ending similarities in exports and imports, improving logistic infrastructure and roads governance is necessary.

Recent years have seen the export governmental agencies in the region working together to enhance commercial information as a factor in increasing intra-regional trade. Other initiatives such as involving national chambers of commerce could lead to better regional market access for West African industrial players.

Another trade solution, a tax-based one and still to be explored in West Africa, is the free-trade zone, but that would require targeted strategies, focusing on the specialization of specific sectors.

… With Strong Tax Fundamentals

As explained in the introduction, any regional economy is in need of a tax system, in particular one that would lower taxes on international trade and improve economic links. West Africa is not exempt from this requirement. Economic regional integration is undermined by a rapidly changing global trade landscape characterized by:

• A shift away from trade in goods to trade in services;
• The spread of global value chains; and
• The inexorable march of technological advances and rapid evolution of business models across entire industries.

Direct and indirect taxes are known to be a crucial factor in investment and trade, in a global environment of intense tax competition. More than a decade ago, the International Monetary Fund issued two sets of predictions regarding the impact on a trade balance of a domestic tax system:

• On one hand, value-added tax will be viewed as inherently trade neutral;
• On the other hand, corporate tax will be seen as, in the short run, increasing net exports as capital would flow abroad and, in the long run, causing a persistent reduction in net exports.

One may wonder whether a country should not substitute an income tax system with a VAT system. Academic authors have long discussed the effects of VAT on international trade, often concluding that VAT would tax traded goods more heavily than non-traded, and therefore would tend to shift resources out of the traded goods sector.

West Africa is slowly engaging in designing its regional tax system: its tax authorities started a high level policy dialogue in 2019 with the objective of sub-regional level of domestic revenue mobilization practice. More recently, the dialogue stressed the need for rationalizing policies on tax incentives in West Africa. While tax incentives may encourage investment in the West Africa region, there is more to be done to ensure that they lead to regional value chains benefiting national economies, and improving intra-regional trades.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anthony Assassa is an associate member of the Chartered Institute for Securities & Investment with more than 12 years’ Africa and Asia background (Cameroon, Comoros, Congo DRC, Laos) in reforms towards mobilization and collection of tax and customs revenues. He attended the international specialization cycle in tax and customs administration of the École Nationale d’Administration, Paris.

Elie Sawaya led several governmental reforms in Asia and Africa and is a digital, private and public sector expert working for GIZ with more than 20 years of practice in public private dialogue, e-government, private sector development, port community systems, supply chain, international trade facilitation, electronic tax systems, risk management, customs and cross border trade.

The authors may be contacted at: anthony.assassa@gmail.com; elie.y.sawaya@gmail.com