Ex Africa semper aliquid novi – There is always something new out of Africa: A DTA between ECOWAS members

Ex Africa semper aliquid novi said old Pliny, in the first century AD. And it still seems to be true today, certainly when it comes to tax and funny acronyms. Fifteen countries in West Africa are members of the Economic Community of West African States, or ECOWAS – the number may now be a bit less, with Mali, Burkina Faso and Niger announcing their withdrawal. ECOWAS has been mainly known recently, outside West Africa at least, for its attempts to discourage unconstitutional changes in the governments of its member states.

In the tax world, it has been trying to bring some similarity in VAT rates between member states. But much more interestingly, it has now produced a double taxation agreement (DTA), that should be in force in all its member states, which stretch from Cabo Verde in the West to Nigeria in the East.

This DTA has been a bit of a secret, it seems. But we have now established that it was signed by the Heads of Government in December 2018, and it has been published in the ECOWAS Official Journal in 2021 (what a fun read that must be!). The ECOWAS Commission sent it to member states’ Ministers of Finance in May 2022. The Nigerian government published the text of the DTA in its Official Gazette on 27 September 2023. The DTA is in force in Nigeria from 1 January 2024. We are also aware that it has been brought into force in Benin and Cote d’Ivoire. The DTA forms part of the ECOWAS treaty, so it seems not to need any further ratification by member countries.

There was already a DTA between members of UEMOA (another great acronym, this time being the currency union between countries using the West African CFA franc), but this new ECOWAS treaty now includes many West African countries which are not members of UEMOA.

Some key provisions:

1. Withholding tax rates on dividends, interest, royalties, and technical service fees are limited to 10% (or 5% for technical service fees earned by an individual). This only applies if the income is taxable in the recipient’s country. This will limit the applicability for Nigerian investors, as these forms of income are not taxable in Nigeria if they are brought back into Nigeria through official banking channels. This limitation will also not have much impact on investors in Nigeria, as the rates are the same as in Nigeria’s domestic tax legislation. However, it should be useful for some investors in other member states. For example, Ghana has a withholding tax rate on royalties of 15%, and on technical service fees of 20%. Cote d’Ivoire’s rates are 15% on dividends, 18% on interest and 20% on royalties.
2. Income from immovable property is taxable in the country where that immovable property is located.
3. Operators of ships, aircraft, boats, rail, or road transport are only taxable on their profits in the member state that are resident in. This should be particularly useful for airlines. Nigeria, for example, normally demands a “liftings tax” of 2% of outward passenger and freight revenue.
4. Capital gains on disposal of immovable property, or movable property used by a permanent establishment, can be taxed in the country where the property is located. Gains on disposal of shares can only be taxed in the country of residence, unless those shares derived more than 50% of their value from immovable property located in another member state, at any time in a 365-day period before the disposal.
5. Gains on disposal of any other property can only be taxed in the country of residence.
6. Any activity in connection with exploration or exploitation of natural resources in another member state will be seen as a permanent establishment if the activity is carried on for more than 30 days in a 12-month period. Gains on disposal of exploration or exploitation rights, or shares which derive the greater part of their value from such rights, may be taxed in the country where the rights are situated. This is on the assumption that the domestic tax law of that country allows these gains to be taxed.
7. Inheritance tax can be imposed by countries on immovable property and on tangible and intangible property used by a permanent establishment in that country. Inheritance taxes can only be imposed on tangible personal property by the country where those assets were located at the time of death. We note that Nigeria’s probate duty is not included in the list of taxes that the DTA applies to.
8. The non-discrimination clause says that a permanent establishment cannot be subject to additional taxes, above those that a resident company would be subject to. This may affect Ghana’s tax on repatriated branch profits.
9. The DTA has a useful provision granting tax credits for foreign country taxes such as withholding taxes. These are to be deducted from the home country taxes due on the income. This should be useful for Nigerian recipients of income from other ECOWAS member states, as Nigeria’s domestic law on double tax credits is very restrictive and only applies to taxes imposed by Commonwealth countries.

This newsletter is published to draw attention to this new DTA and is not intended as a detailed analysis of the DTA. The DTA should be welcomed, and we congratulate ECOWAS and its members for this initiative.