Question Tag: Treaty Shopping

Abakali Limited is a company engaged in the manufacturing of three variants of beverages. The products of the company are well received by consumers, as the company now controls about 55% of the domestic market. The “chocolate” brand is the top earner for the company. According to a recent newspaper review, “it has the same quality as those imported into the country from the western world.”

The Board of the company, at one of its meetings, decided to enter the West African market in 2024 and, by 2026, the European market, through:

1. Establishment of depots in major cities of four neighboring countries (Republic of Benin, Togo, Ghana, and Niger) with goods transported by road.
2. Incorporation of a branch in a European country, initially serving as a depot, but within two years, full production will commence.

As emphasized by one of the directors, the main challenge the company must address is the strategy to mitigate the negative impact of high tax rates (in Europe and West African countries) on profits to achieve better returns on investment.

A director, previously employed by an international company, suggested using “treaty shopping” as a tax planning strategy for locating the branch office in Europe. He also pointed out that the Economic Community of West African States (ECOWAS) common external tariff framework provides a solution to different tax regimes in the sub-region.

Most Board members are not familiar with “treaty shopping” or the ECOWAS common external tariff framework, and they have requested professional advice on these matters.

The Managing Director has approached your professional accounting firm for guidance on the key issues raised in the meeting.

Required:

As the officer designated to handle this task, write a report to your Principal Partner for review before sending it to the client. The report should address the following concerns of the client:

a. Explanation of the concept and practice of “treaty shopping” (6 Marks)

b. Discussion on the strategies employed by various countries in curbing treaty shopping in international transactions (2 Marks)

c. Discussion on the features of the ECOWAS common external tariff framework (4 Marks)

d. Comment on the trade defense measures put in place to guide the operations of the common external tariff framework (3 Marks)

(Total 15 Marks)