Report No. 9747-AFR Regional Cooperation for Adjustment: A Program of Trade and Indirect Tax Policy Reforms for Member Countries of the Customs Union of Central African States (UDEAC) June 30, 1992 Industry and Energy Division Occidental and Central Africa Department FOR OFFICIAL USE ONLY WTgcOPQrt CO. tr Pe-AFfT (TypeC) LALL. K. / X34922 / J-Kt3U32/ hF1 E Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENT Currency Unit : Franc CFA (CFAF)1/ US$1 = CFAF 256 (June 30, 1992) MEASURES AND WEIGHTS Metric System Abbreviations and Acronyms AfDB - African Development Bank AEF - French Equatorial Africa ASECNA - Agency for the Safety of Aerial Navigation in Africa and Madagascar BCEAO - Central Bank of West African States BEAC - Bank of Central African States BDEAC - Development Bank of Central African States BOAD - West African Development Bank CAR - Central African Republic CEAO - West African Economic Community CET - Common External Tariff CFAF - Franc of Central African Financial Cooperation CT - Complementary Tax DD - Customs Duty DE - Entry Duty EEC - European Economic Commission ERP - Effective Rate of Protection GATT - General Agreement of Trade and Tariffs ICAI - Domestic Turnover Tax IDA - International Development Association IMF - International Monetary Fund QRs - Quantitative Restrictions RRP - Regional Reform Program SAL - Structural Adjustment Loan TCA - Generalized Turnover Tax TCAI - Turnover Tax on Imports TCI - Internal Consumption Tax TIC - Domestic Tax on Consumption TIP - Tax on Domestic Production TIT - Domestic Transaction Tax TT - Transaction Tax UDE - Equatorial Customs Union UDEAC - Central African Customs and Economic Union UNCTAD - United Nations Conference on Trade And Development UNDP - United Nations Development Program UNFPA - United Nations Fund for Population Activities VAT - Value Added Tax I/ The CFAF has a fixed exchange rate with the French Franc of 50: 1 Tax.Gw%Dg T his report is based on the work of a series of World Bank missions led by Mr. Rajiv Lall (Mission Chief) between July 1990 and June 1991 to each of the six member countries of the UDEAC. These missions were comprised, at various times, of Mmes./Mesrs. Faezeh Fouroutan (Trade Economist), Jonathan Walters (Economist), Patrick Clawson (Consultant), Claudine Morin (Legal Specialist) and Jacques Morisset (Young Professional). Messrs. Jacques Delhay (Customs Expert) and Alain Quily (Fiscal Expert) of the French Ministry of Cooperation also participated in the work of the missions. The comments of the Fiscal Affairs Department of the International Monetary Fund and those of the UDEAC Secretariat are duly acknowledged. Acknowledgements are also due to the European Economic Commission and the French Ministry of Cooperation for their financial and organizational contributions to the workshops held for discussing the report at various stages of its preparation. Research Assistance for the report was provided by Mr. Claudio Montenegro. Ms. Nadia Gouhier provided secretarial support and helped organize the workshops. T.z.Om TABLE OF CONTENTS Pace No. PREFACE ..... . .. . . . . . . . .... . . . . . . . iv EXECUTIVE SUNMARY . . . . . . . . . . . . . . . . . . . v-xiv I. CONTEXT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Historical Background . . . . . . . . . ... . 1 . I B. Characteristics of Member Countries . . . . 1 C. Objectives, Evolution and Performance of UDEAC . . . . . 4 1. Treaty of Brazzaville .. . . . . 4 2. Central Bank . . . . . . . . . . . . . . . . . . . . . S 3. Disappointing Record . . . . . . . . . . . . e o . . . 6 D. Recent Developments and Reform Effort . . . . . . . . . . 8 1. Economic Crisis . . . . . . . . . . . 8 . . . . . . . 8 2. Stabilization and Structural Adjustment . . .. . . . 9 E. Future Priorities and the Regional Reform Program . . . . 10 1. Significance of UDEAC . . . . . . . . .. . 10 2. Rationale and Objectives for a Regional Reform Program . . . . . . . . . . . . . . . . . . . . . . 11 F. Preparation of a Regional Reform Program . . . . . . . . 13 II. UDEAC TRADE REGIME & INDIRECT TAXES$ EXISTING STRUCTURE AND MAIN ISSUES . . . . 5 . . . . . . . . . . . . . . . . lS A. Introduction . . . . . . . . . . . . . . . . . . . . . . 1S B. General Overview . . . . . . .17 1. Declining Tax Yields and Fiscal Receipts . . . . . 17 2. Distorted Incentives Structure . . . . . . . . . . 24 3. Variability of Tax Structure Across Countries . . . 29 C. Import Taxes . . . . . ... . . . . . . . . 30 D. The Taxe Unique Regime . . . . . . . . . . . . . . . . . 33 E. Domestic Sales T&x on Goods and Services . . . . . . . . 36 F. Other Domestic indirect Taxes . . . . . . . . . . . . . . 37 III. OBJECTIVEs AND FRAMEWORK OF PROPOSED REFORMS . . . . . . . . . 39 A. Objectives . . . . . . . .. . . . . . . . .. 39 B. Framework of Proposed Reforms . . . . . . . . . . . . . . 39 1. Reform of Import Taxes . . . . . . . . . . . . . . 39 2. Reform of Taxe Unique on Local Sales/TIP/TCI/TIC . . . . . . . . . . . . . . 43 TOx.OM%lry - {i - 3. Reform of Taxe Unique on Imports B * * * * * .43 4. Reform of ICAI & Other Domestic Indirect Taxes . . 44 C. Implementation Issues & Implications for the UDEAC Treaty 46 1. Protocol of Understanding on a Minimum Platform of Measures. . . . . . . . . . . . . . . . 46 2. Legal Preparation for the Reforms . . . . . . . . 47 3. Monitoring of the Reforms . . . . . . . . . 47 4. Macro-economic Policies and Timing of Reforms . . . 48 IV. RECOUIMDED POST-REFORM RATE STRUCTURES AND THEIR PROJECTED IMPAC . . . . . . o--**ooa.. .. ... 53 A. Methodology . . . . . . . . . . . . . . . . * 53 1. Simulations of Revenues Impact . . . . . . . . . 53 2. Firm Level Analysis . . . . . . . . . . . . . . . 54 B. Recommended Rate Structures . . . . . . . . . . . . . . . 55 C. Impact of Recommended Rate Structures . . . . . . . . . . 56 1. Implications for Fiscal Receipts . . . . . . . . . 56 2. Impact on Existing Firms . . . . . . . . . . . . . 66 3. Implications for the Incentive Structure . . . . . 71 4. Implications for Tax and Customs Administration . 71 5. Impact on the Trade Balance . . . . . . . . . . 73 V. RECO3OEDATIONSANDNEXT STEPS ............... . 74 A. Recommendations ... . .d.ain..................... 74 B. Next Steps ..... . .. . . .. . . .. . . .. . . . 76 TABLES Table 1 : Indirect Taxes ...............1 6 Table 2 : Nominal & Effoctive Tariff Structures . . . . . . 18 Table 3 : Indicative Effective Rates of Protection . . . . 26 Table 4 : Bueden of Indirect Taxes . . . . . . . . . . . . 28 Table 5 : Import Taxes by Type . . . . . . . . . . . . . . 31 Table 6 t Suggested Classification of Imported Products . . 41 Table 7 : Framework of Proposed Reforms . . . . . . . . 50-52 Table 8 : Summary Results cf Simulation Analysis . . . 58-61 Table 9 : Structure and Coverage of Import Exe.nptions . 63-v5 Table 10 : Comparison of Pre- and Post-Reform Incentives 68-69 Table 11 : Post-Reform Theoretical Effective Rates of Protection. . . . . 72 Table 12 : Regional Reform Program . . . . . . . . . . . 78-80 Tau.Oy - iii - Page No . FIGURES Figure 1 t Non-Oil Fiscal Rceipts...... . . . . . .19 Figure 2 : Structure of Imports by Type of Fiscal Regime 20-22 Figure 3 : Nominal and Effective Rate Strueture . . . . . . 32 Annex I : Key Indicators Annex II : Structure of Nominal and Effective Tariffs Annex III : Company Interviews Annex IV-IX s Detailed Results of Simulation Analysis Ann ix IV : CAMEROON Annex V : CENTRAL AFRICAN REPUBLIC Annex VI : CHAD Annex VII : CONGO Annex VIII : EQUATORIAL GUINEA Annex IX : GABON Annex X : Proposal for Reforms of Act No. 13/65-UDEAC-35 of the UDEAC Customs Code Annex XI : Protocol of Understanding Annex XII A : Treaty Establishing a Central African Customs and Economic Union Annex YII B : Act Adopting the Treaty Modifications. Taz.Ouywn PREFACE The recommendations of this report were the basis for a Protocol of Understanding signed by the Finance Ministers of the six member countries of the Customs and Economic Union of Central Africa (UDEAC) on a program of regional trade and tax reforms in Libreville, Gabon, in November 1991. The Protocol was adopted by the Council of UDEAC Heads of State, and the Treaty of Brazzaville (creating the Union) was modified in line with the substance of the Protocol on December 8, 1991. Since then, and per the mandate of the Council of Heads of State, an Ad Hoc Comminsion, comprised of delegates from member countries, has been created to finalize the remaining regional legislat!on necessary for launching the reforms. This Commission convened in Yaounde from April 15 to 29, 1992, to deliberate upon draft legislation prepared by the UDEAC Secretariat, with assistance from the World Bank, the International Monetary Fund (IMF), the EEC and the French Ministry of Cooperation. Representatives of the private sector from all UDEAC-member countries were active participants in these deliberations. Important progress was made. The UDEAC Management Committee, which met in an extraordinary session on April 30 - May 1, 1992, adopted legislaticn pertaining to the =.n.talities for applying a new sales tax and excise levies, and that pertaining to the reduction of exemptions granted under the UDEAC Customs Code. Another session of the Management Committee has been set for September, 1992 to consider legislation on the modalities for applying the new common external tariff and the preferential tariff. Once this legislation is adopted the reforms can be launched. The target date for launching the reforms is January 1, 1993. TmG,Y\. EXECUTIVESUMMARY I. INTRODUCTION 1. Since about the mid-19808, all the six members of the Economic and Customs Union of Central Aftican States (UDEAC) 1/ have been faced with severe economic difficulties brought to a head by the sharp decline in commodity prices and the depreciation of the US dollar. This collapse of commodity prices, compounded by chronically poor macro- economic management, plunged the economies of the region headlong into deep recession, undermined their financial and econom,ic vi2bllity, and exposed serious structural deficiencies. The structural problems that have surfaced as a result of this crisis are broadly similar in each of these countries. They comprise: weak domestic resource mobilization and a narrow government revenue base; a vulnerable current account, hostage to an insufficiently diversified export base; high and wasteful public expenditure; an inefficient public enterprise sector; an uncompetitive domestic production base with a high wage cost structure; and a distorted incentives environment. The banking system in a number of the member countries of the BEAC zone is also in distress, with nalf its loan portfolio compromised, and a third of its banks in liquidation. 2. To deal with these -roblems, all six countries of the region embarked on programs of stabilization and adjustment. The objective of these country-specific programs has been to tackle the problem of macro- economic imbalances, as well as to create the enabling environment for efficient, productive investment and sustained growth. On the stabilization side, these programs have supported efforts to restore and maintain fiscal discipline through a combination of cost-cutting and improved public finance management. On the adjustment front, they have beei. trying to improve the efficiency of current resource use and, given a fixed nominal exchange rate, have focussed on a variety of internal measures to gradually shift the real exchange rate in favor of the tradeable sector. This has entailed public enterprise reform through liquidation, divestiture and restructuring; liberalization of labor market regulations in an effort to reduce real wage levels; rationalization of agricultural price setting and marketing arrangements in an effort to boost agricultural productivity; reduction of regulatory obstacles and rationalization of the incentives structure of the countries in a bid to promote private commercial activity, particularly in the export sector; and, ii some countries, financial sector restructuring, in order to tackle the collapse of bank portfolios. 3. With member countries trying to respond to the needs of adjustment, the problems and deficiencies of the existing regional policy instruments of UDEAC and BEAC have become evident. There is now an awareness amongst all member countries that the policy instruments of UDEAC and BEAC have not evolved to keep pace with changes in the economic environment. Without a region-wide effort, adjustment in each member country of UDEAC would be severely limited -- something that would not be to the benefit of member countries either individually or collectively. The need for regional cooperation has, therefore, never been more compelling, and it is in recognition of this that the Heads of State of the six countries of the subregion endorsed, in December 1990, a call for a regional reform program (RRP) to help deepen and consolidate the process of adjustment already begun in each country. .~/ The six countries together also share a central bank, the Bank of Central African States (BEAC). Tac.GOY - vi - This has been followed-up by the adoption, at the regional level, of a series f reform measures in the area of financial policy, and the endorsement by the Finance Ministers of the six member countries at a meeting held in Yaound6 in October 1990, of a broad framework of r3form in the areas of trade and tax policy and transport and transit policy. 4. A first workshop, organized jointly by the World Bank and the EEC, was held at the UDEAC Secretariat in Bangui in March, 1991 to discuss specific reform proposals presented in two reports, one on trade and tax policy (prepared by the World Bank), and the other on transport and trsnsit policy (prepared jointly by the EEC and the World Ban: ,. 5. This report presents recommendations for a program of regional trade and tax reforms, finalized followix., the Bangui workshop and bilateral discussions with the authorities of each UDEAC-member country held between May and September 1991. The report, in Green Cover, was the basis for the deliberations of a second workshop held in Libreville on November 14-22, 1991. This workshop, organized jointly by the World Bank, the EEC and the French Ministry of Cooperation, brought together delegations from UDEAC-member countries and from the UDEAC Sec-etariat. It culminated in the signing of a Protocol of Understanding (see Annex 11) between the Finance Ministers of the six member countries on a program of regional trade and tax reforms based on the recommendations of the Green Cover. The P.&otocol was subsequently adopted by the Council of UDEAC Heads of State on December 8, 1991, and the Treaty of Brazzaville 3/ modified in line with the substance of t'e Protocol (see Annexes XII A and XII B). I!. UDEAC TRADE REGIME & INDIRECT TAXES: EXISTING STRUCTURE & MAIN ISSUES A. Main Characteristics 6. Indirect taxes in UDEAC-member countries are comprised essentially of five types: import taxes, export taxes, taxes on sales of domestic goods and services, and specific taxes (mostly on consumption of petroleum products. Indirect taxes typically account for between 60 to 80% of non-oil fiscal receipts. A critical feature of indirect taxes is their regional nature, a large proportion of them (on average about 55% in revenue terms) being subject to regional protocols and provisions of the Treaty of Brazzaville. Three of the four principal import taxes applied by UDEAC countries form part of the common external tariff (CET), and are outside the jurisdiction of individual countries. Likewise, the principal tax on domestic goods on services, the ICAI, is subject to the provisions of regional agreements on fiscal harmonization, and is therefore only in the partial control of individual countries. Each country has the right to fix the rate of the ICAI, but it cannot unilaterally alter the basis for their application. In addition, all member countries apply the taxe un!aue (TU) regime, which is a complex incentives regime that favors eligible regional firms 2/ See Proposition de Reforme des Tarifa et des Imp6ts Indirects dans les Pavs Membres de l'UDEAC, World Bank, March 1991; Volet Transport et TransiL du Programme d'Aiustement Structurel Reaional, EEC/World Bank, March 1991. 3/ Creating the Customs and Economic Union of Central Africa. TuxG'sy - vii - in the application of indirect taxes on their imported inputs, and their sales within the region. 7. The existing indirect taxes and trade regime has three fundamental features: (a) Low and declining yields. 8. The trend in all six countries has been for total non-oil fiscal revenues as a percentage of GDP to decline. One explanation is the widespread and growing use of exemptions. On average, about 71% of all officially recorded imports are wholly or partly exempt from import duties in UDEAC countries. Although there is no way of quantifying it with exactitude, it seems clear that tax evasion has been rising in UDEAC countries -- this has also contributed to the trend of declining tax yields. The high average level of taxes and the complexity of tax legislation encourages fraud and has only aggravated this problem. Moreover, it is very difficult to enforce the customs code given the multiplicity of rates and the fact that so many goods can claim legal exemptions. A third and related explanation for declining tax yields, has been the limited capacity of tax administrations in all countries. (b) Distortionary impact on the incentives structure. 9. One of the contributing causes of distortions to the existing tax and tariff structures is the confusion of instruments and objectives. The problem is that import taxes are often used for revenue generation and not protection, and certain sales taxes in effect provide huge margins of protection to domestic manufacturing activity. By far the most important cause of the distortions in the incentives structure, however, is the extreme fragmentation of the fiscal privileges throught tax and tariff structures which are tailor-made on a firm by firm basis. The combination of high tax rates on the one hand and the widespread use of exemptions on the other, has resulted in a highly uneven distribution of the tax burden between economic agents which penalizes a small segment of taxpayers while leaving other segments almost completely exempt. In consequence, effective protection rates are also highly dispersed. The dispersion of protection rates is made worse by the use of quantitative restrictions (QRs). Sectors protected through QRs (sugar, edible oils, textiles, and cement) though few in number, do still cover a significant proportion of the value added in local manufacturing, and are by and large comprised of very inefficient firms, with negative value added at international prices. (c) Substantial cross-country variability. 10. Over the years, and in the face of increasing resource constraints, individual member countries of UDEAC have been driven to supplement their respective tax revenues through the creation of instruments outside the framework of the Treaty. In this context, the rigidity of the instruments of regional UDEAC policy has proven to be counterproductive, for it has led to the mushrooming of a wide and disparate array of taxes and parafiscal levies that have only added to the incoherence and complexity of the overall incentives environment in each country and undermined the regional objectives of the UDitAC framework. Tax.omy'o4 - viii - B. Profile of the Exietina Trade Reaime and Tax Structure 11. The CET is in fact the sum of three different import taxes, namely the customs duty or Proits de Douane (DD), entry duty or Droits d'Entr6e (DE), and the turnover tax on imports or Taxe ur-Chiffre d'Affaire A l'Imoortation 'TCAI). There are serious flaws in the design and structure of the CET as it presently stands. The base on which the CET is applied is not the same across all countries. While some coountries apply the DD and DE of the UDEAC tari'f code on the c.i.f. price of import,- in others import duties are assessed on a schedular value. Each i..juntry retains the right to suspend the CET or some of its component taxes on specific products. Moreover, eacl: country has resorted to the ubiquitous use of duty exemptions, outside the provisions of the UDEAC Customs Code, to favor different local constituencies using imported products. Thus, each member country is in fact only applying the CET on a selective and highly individualized basis. The use of the complementary tax (CT) continues to undermine the objectives of che CET. Many countries apply additional levies on imports outaide the framework of the regional agreements concerning the CET and the CT. 12. If tne TU has been at all successful at promoting manufacturing activity in the region, it has done so at significaa,t cost. Exoneration of all duties and taxes on inputs in the producing country over an indefinite time period under the TU regime has resulted in important revenue losses for the governments concerned. The fact that the TU regime is awarded on a firm-specific basis has rendered the incentives regimes in UDEAC countries very distortionary. Two firms manufacturing the same product in the same country and exporting to the same destination within the region, can be subject to different tax rates, and to different degrees of preference in intra-Union trade. The fragmentation of the incentives regime that has resulted from the use of the TU regime has meant that the profitability of any venture in these countries is at least as much the result of its success in acquiring a preferred tax status as in producing and marketing efficiently. The TU has been a failure as an instrument for promcting intra-Union trade in manufactures. Although TU firms are expected to export a part of their output to other member countries, in practice they export little, if anything. As if the structure of import taxes in each country was not already complex enough, the TU regime adds a very considerable administrative burden on customs services. 13. The structure of domestic indirect taxes is also complex, the principal tax being the domestic turnover tax (ICAI). This tax is subject to the provisions of regional agreements on fiscal harmonization, per which, member countries are expected to levy the ICAI on the same basis and subject to the same criteria, although the determination of the rates is left to the jurisdiction of each country. The ICAI that is applied on the sale of domestic goods is distortionary because it is, in most cases, different from the TCAI applied on competing imports. 14. In a bid to genezate incremental revenues, many countries have resorted to the use of additional domestic indirect taxes outside the framework of the existing agreements on fiscal harmonization. The most important such tax is the transactions tax (TT) in Gabon, the Central African Republic, Chad, and Congo. Aside from the transactions tax, many UDEAC countries also use parafiscal levies, which are just added onto the ICAI. Only Gabon and Cameroon have so far made use of excise duties on the local sale of goods other than petroleum products as a source of revenue. T1X.GMX4 - ix - 15. Finally, some member countries have rendered their indirect tax regimes even more complex by introducing indirect taxes that mimic the TU. Since TU status is granted only by the UDEAC General Secretariat, acceas to it is difficult. A number of governments have set up parallel single tax regimes, such as the internal production tax (TIP) regimes in Cameroon, the internal consumption tax (TIC/TCI) in the Central African Republic, Gabonl, and Congo. These regimes provide comparable privilegeo to firms, but access to them is much easier because it is determined by the national government itself. Like the TU, such regimes lead to oignificant revenue losses and make the incentivea structure in these countries into largely a firm specific affair. XII* .BYECTIVES AM FANWORK OF PROPOSED REFORMS 16. A priority concern in each country is the mobilization of domestic resources. This necessarily involves fiscal reforms. However, country-specific efforts in this direction have been curtailed by the existing regional conventions on fiscal harmonization. In consequence, efforts in each country have so far been limited to improving fiscal administration and to some extent, to reducing exemptions. The structure of taxes is in need of overhaul, and the RRP would pave the way for comprehensive country-specific reforms by working out a new and more flexible agreement on fiscal harmonization in the subregion. A. Obiectives 17. First, the reforms must aim at improving the revenue generating capacity of member countries, tariff and tax structures. The only way in which to substantially increase customs revenues in UDEAC countries is to cut the nominal tariff rates, and thereby reduce the incentive to fraud and make possible a phased reduction in the plethora of exemptions currently awarded. Second, the reforms must aim at improving the efficiency and competitiveness of domestic manufacturing activity, while spreading the burden of taxation more uniformly across sectors and firms. Third, an important objective of reforms must be to make the regional instruments of tariff and indirect tax policy more flexible so that the diverse needs of the member countries can be accommodated in a more rational manner. Finally, the reforms must aim at simplifying tax structures as much as possible, and thereby make them more easily administrable and transparent. B. Recommendations 18. The following recommendations are made for the minimum platform of common measures to be undertaken at the soonest possible (January 1, 1993) by all countries simultaneously: (a) The turnover tax on imports (TCAI) should be removed from the CET. It would thus return to the jurisdiction of each country and enable each to set its rate independently and in harmony with its own domestic indirect taxes; (b) The CET, its various components, and the CT should be replaced with a single import duty with three rates for the following three product categories: essential products (category I); raw materials and capital goods (category II); and general conraimption goods (category III). The allocation of tariff lines into each category should be regionally agreed upon and uniformly applied across TMGMqS - x - countries. Category I products should be subject to a 5% tariff and category II to a 15% tariff in all countries. All member countries should adopt a rate of 70% for Category III products in the immediate term, and agree to progressively and simultaneously reduce this to 35% over a maximum transition period of five years (this period being revisable depending upon the evolution of the macro-economic situation of the member countries) from the date of the start of the reform program. The application of a temporary surtax should be permitted within a ceiling of 15% over the duty rate on Category III products. Eligibility for the surtax should be restricted to a list of regionally selected products. This list should comprise only those products that are currently subject to QRs. The surtax should be applied only to replace an existing QR, and for a maximum period of three years from the date of removal of the QRs which it replaces. No product should be eligible for the introduction of a surtax after the end of the third year from the date of the start of the reforms; (c) The TU regime should be abolished. No new agreements for the TU should be approved. The UDEAC Management Committee should no longer have jurisdiction over the TU on the sale of local goods, which in each country should be replaced by the local sales tax. TU firms should pay the new import duties applicable to their country of location on all their imports. The TU on imports should also be abolished; (d) Each country should introduce a generalized preferential tariff for all intra-Union trade in manufactures per an agreement defining "rules of origin" or some other appropriate eligibility criteria. Each member country should apply this tariff at a rate equivalent to 75% of the normal im-ort duty it would apply to similar products of non-Union origin; (e) Treaty provisions on fiscal harmonization should be modified to enable each country to introduce: a generalized sales tax (Tasa sur Chiffre d'Affaires - TCA) to replace the existing TCAI, ICAI, TU on the sale of local goods, TIP, TIC, TCI, and at their own rhythm, also other domestic indirect taxes, such as the TT; and excise levies on a regionally agreed list of products which is, at a minimum, to include, tobacco and drinks. Each country should be allowed the freedom to fix the rates of these taxes in the light of its own fiscal requirements, and those countries that wish to proceed with the introduction of a VAT, should be allowed to do so; and (f) The existing Act 13/6r of the UDEAC Customs Code should be revised to make it more restrictive with regard to award of import duty-exemptions as recommended in Annex X to this report. TM.OS - xi - 19. The following recommendations are made for measures to be adopted on a country-specific basis: (a) The current ICAI on services should be replaced with the above mentioned generalized sales tax (TCA) at rates to be determined by each country independently, and applied on the same basis as at present; (b) All import duty exemptions relating to TIP/TIC/TCI regimes (which are the responsibility of individual member countries) should be discontinued at the same time as the elimination of the TU regime; other duty exemptions under existing Investment Codes should be allowed to lapse without renewal, and the Codes should be revised so that in the future no firms are accorded import duty exemptions; other exemptions (special conventions, ad hoc exemptions, etc.) should be reduced progressively so that the goal of a minimum 5% imposition on all imports, without exceptions, is achieved at the soonest possible 4/; and (c) QRs on remaining sectors should be removed over a maximum period of three years from the start of the reform program - - in this context each country may use temporary surcharges per the regional agreement stipulated in paragraph 18 (b) above 5/. 20. Simulations were undertaken to analyze the revenue implications for each country of implementing the tariff structures of the minimum platform above. Receipts from the new generalized sales tax and excise levies cannot by themselves compensate for revenue losses associated with the taxes earmarked for elimination and with the new tariff rate structure. The parallel reduction of exemptions is crucial to ensure that there is no overall decline in fiscal receipts and, therefore, to the success of reforms. The simulations show that, provided the recommendations for reducing exemptions are fully implemented, the minimum platform of measures would raise receipts from the taxes subject to reform by a minimum of 5% over their 1990 levels in all member coLntries. 21. Every effort was made to ensure the robustness of the fiscal simulation analysis. Prudent assumptions were made about the ability of each country to progressively reduce exemptions; the value of officially recorded imports was used as the import tax base in each case, with no reduction in customs fraud being assumed; a deliberately conservative estimate was used for the tax base of the sales tax on the domestic goods; and, finally, a sensitivity analysis was conducted for each country of the impact on revenues of different assumptions concerning price elasticities of import demand. 4/ This will require tax-inclusive accounting for donor financed imports (grants or loans), and the setting up of an appropriate administrative mechanism to make this operational. 5/ To facilitate the transition, member countries should also pursue, in parallel, pr'qrams of public enterprise reform that seek to liquidate those t:rms that cannot be salvaged and to restructure those that are potentially competitive. Tax.OtM%DS - xii - 22. The above revenue simulation analysis was supplemented with a firm-level analysis of the micro-economic implications of the reform program. A total of 86 manufacturing firms were interviewed in five countries J/. The sample of firms was chosen so as to cover the principal sectors of formal manufacturing activity in these countries (food processing -- mainly sugar and edible oils, tobacco and drinks). Effective rates of protection were estimated using the Corden approach, under a variety of different post-reform scenarios and rate structures. 23. The food-processing sector in almost all countries is currently the most protected due to the use of QRs. It tends also to be the most inefficient, and is likely to be the most vulnerable to the proposed reforms, for, assuming that all remaining QRs are dismantled, there would result a substantial decline in effective rates of projection (ERPs). The political economy of this change in trade regime may prove to be difficult to manage, given the relatively large share of formal sector employment that this sector generates, and the fact that most of these firms are partly state-owned. The use of temporary import-duty surcharges as discussed in para. 18 (b) will, therefore be important to facilitate the transition in these sectors. In addition, it is proposed that the removal of QRs in these sectors be accompanied by a program of public enterprise reform that seeks to liquidate those firms that cannot be salvaged and to restructure those that are potentially competitive. 24. Unlike in food processing, the incidence of illegal imports being particularly widespread, the textiles sector is currently not highly protected in all countries, despite the use of QRs. The proposed new tariff rate structures would accord greater protection to the textiles sector only if the reforms succeed in reducing customs fraud. The experience of textile firms in Cameroon and Gabon shows, however, that they can survive very stiff competition. Firms in these countries are, therefore, expected to adapt to the post-reform incentives environment. Textile firms in Chad and the Central African Republic, on the other hand, are most inefficient, and unless there is a substantial decrease in customs fraud, it is difficult to see how they could be salvaged no matter what fiscal or trade regime benefits are accorded to them. 25. The drinks (mainly beer) and tobacco sectors are both heavily protected in most countries (ERPs ranging from 130% to 670%). Both sectors are also doing very well at present. Post-reform, these sectors will see a progressive reduction in their ERPs, but they are robust enough to be able to adjust to the new incentives environment. 26. An analysis was also conducted of the implications for the indirect tax burden to firms of the proposed reform measures. Most firms will see the cost of their imported inputs rise post-reform due to the elimination of duty exemptions. The net impact on fiscal burden of firms will, however, depend on the rates of the new sales tax that each country would introduce in place of the existing TU/TIP/TIC/TCI. It is possible to fix the rates of these taxes in such a way as to maintain, at least in the immediate-term, the post-reform global average fiscal burden close to current level. for firms in the non-excisable sectors of most countries. Whatever the rate structure of the sales tax, however, given that one of the objectives of the reforms is to improve the 6~/ Of these, sufficient data were available for 76. No firms from Equatorial Guinea could be included in the sample. In any event, this country has negligible formal-sector manufacturing capacity. Tax.OmyCa2 - xiii - distribution of the fiscal burden, on an individual basis, some firms will certainly see their indirect taxes rise, while others will see them fall. As concerns firms producing excisable products, and in particular firms in the tobacco and drinks sectors, their indirect tax burden would, in most cases, rise post-reforms 7/. However, it is expected that these firms will be able to pass on a good proportion of the tax increase onto consumers, without losing significant market share to illegal imports. 27. Finally, given the BEAC zone's loss of competitiveness in the 1980s, it is important to ensure that the recommended reform measures do not lead to a deterioration of the trade balance. To this end, the rate structures proposed for import tariffs have been chosen such that the post-reform effective duty rate on imports (total receipts from import taxes as a proportion of the total value of imports) is at least as high, if not higher, post-reform than it is at present in 'each country. 28. The proposed tax measures and provisions for the reduction of exemptions are designed to increase revenues in all member countries through every stage of the reform program. The suggested pace of the reforms is based on the assumption that UDEAC countries will continue to face macro-economic difficulties in the short-term, and that they then will gradually regain competitiveness through deflation and internal adjustment measures. Thus, it is proposed that the reforms start with measures that are implementable under present macro-economic circumstances. These immediate-term measures seek primarily to render the structure of incentives and indirect taxes simpler, more uniform and easier to administer, while leaving local industry relatively well protected from import competition and from higher average tax burdens. Measures to make the incentives environment more competitive are to be progressively implemented only gradually over a five period. Needless to say that the pace at which these measures can be implemented and. their success overall, will depend on the discipline of UDEAC-member countries and on their ability to improve their macro-economic environment over the same period. S. Next Steps 29. The signing of the Protocol of Understanding between the six UDEAC-member countries on a minimum platform of regional trade and tax reform measures in November 1991, and the subsequent modification of the Treaty of Brazzaville in December 1991, based on the Green Cover version of this report, was a major step forward (see para 5 above). However, a 2/ Chad and Gabon are the only two exceptions. In Gabon, the indirect .tax burden on the tobacco company is already very high (65%), and in Chad it is high on the drinks and cigarette manufacturing firms (between 50 and 53%). In both cases, the post-reform rates will need to be chosen such that this burden does not increase, or else revenues may actually fall through a switch by consumers to illegal imports. Taz.Gmy¶. -Xiv - number of preparatory steps need to be taken before the reforms can be launched. 30. The legal texts that will govern the implementation of each of the measures comprising the minimum platform need to be finalized and adopted at the regional level. These comprise: (a) A text specifying the modalities for applying: (i) the new CET, including its basis, its rate structure, and the precise classification of each of the Harmonized System's tariff lines into categories I, II and III; (ii) the proposed temporary surtax; and (iii) the preferential tariff; (b) A text laying down the modalities for applying: (i) the new sales tax (TCA), including its basis and the list of products exempt, the dispositions providing the option to each country for introducing a system of deductibility (and thereby, of moving to a system of a value added type consumption tax); and (ii) the proposed excise levy, including its basis and the list of products to be subject to it; and (c) A text revising Act 13/65 of the UDEAC Customs Code, and specifying more restrictive criteria for the award of import duty exemptions. 31. It is recommended that an extraordinary session of the UDEAC Management Committee be convened as soon as possible to adopt the finalized version of these various texts. Following that, each country will need to incorporate the specific measures of the regional reform program into its next Finance Law. In parallel, efforts will have to be made to disseminate the content of the reform program to the private sector through a well coordinated publicity campaign. Some training will need to be provided for the personnel of the tax and customs administrations of each country, especially in order to familiarize them with the modalities for the application of the TCA and the preferential tariff. Finally, provision will have to be made for the timely printing of the new Customs Tariff and of the documentation needed for operationalizing the TCA and the preferential tariff. It is suggested that UDEAC-member countries identify requirements for technical assistance so that appropriate donor assistance can be sought to facilitate the execution of this work program, 32. Responsibility for monitoring the progress of the reforms should lie with the Management Committee, which brings together the Ministers of Finance and of Development of all member countries on a bi- annual basis. The implementation of the RRP does not, therefore, warrant the creation of any new institutional structures. The UDEAC Secretariat should, however, be reorganized in order to better provide support to the Management Committee. In this regard, it is recommended that account be taken of the administrative and financial audits of the Secretariat recently commissioned by the UDEAC Council of Heads of State and by the French Ministry of Cooperation. TaM.OyG I. CONTEXT A. Historical Backaround 1.1 The countries of present day Central Africa share a long history of cooperation. The seeds for an institutional framework for this cooperation were sown in the colonial era, with the creation of French Equatorial Africa (AEF) in 1910. The AEF brought together the colonial territories of Moyen Congo, Oubangui-Chari (present day Congo and the Central African Republic respectively), Gabon, and Chad, into one inter-territorial unit, sharing a single currency, and headed by the Governor General in Brazzaville. The AEF was designed to be a loost federation. Its aim was to unify a number of common activities wit in the framework of substantial economic and administrative autonomy fur each territory. In principle, this cooperation applied to defense, postal services and communications, roads, and the centralized collection of customs duties. In practice, the central adminiatration grew considerably in strength because of the reliance on the federal budget to effect transfers to the poorer territories. 1.2 Upon attainment of independence, the newly-formed nation states opted to continue their collaboration by signing a protocol of agreement in 1959, creating the Equatorial Customs Union (UDE). The UDE adopted much of the structure that preceded it. Beginning in 1960, an extension of the cooperation was marked by the rapprochement between the four signatory states of the UDE and the newly independent Federal Republic of Cameroon, which, since the end of World War II, had been a French administered United Nations territory. After prolonged negotiations, the five heads of state signed a Convention in June 1961 covering exchange control and the establishment of a commission to flesh out the details of various instruments of regional cooperation. Following this Convention, the five signatories entered into an agreement with France to create the Central Bank of Equatorial Africa and the Cameroon, renamed the Central Bank of Central African States (BEAC) in 1972, to replace the AEF's Institut des Emissions, and to grant this institution the sole right to issue currency. In December 1964, the Treaty of Brazzaville was signed creating the Customs and Economic Union of Central Africa (UDEAC). The Treaty became effective as of January 1, 1966. 1.3 Membership of the structures of the Central African regional grouping has expanded beyond the original signatories of the Treaty and associated conventions. Equatorial Guinea, an overseas province of Spain until 1968, acceded to membership of UDEAC in December 1984, and became part of the Franc zone upon joining the BEAC in 1985. The UDEAC- member countries now include six countries sharing the same currency, and the same official language 1/. B. Characteristics of Member Countries 1.4 Together the six countries of UDEAC cover a vast geographical area of over three million square kilometers, i.e. 14% of the total land area of Sub-Saharan Africa. This area remains, nevertheless, thinly populated; with a total of about 22 million 1/ English is the second official language in Cameroon, and French is only the second official language in Equatorial Guinea, Spanish being the first. Tam.OtG inhabitants, it accounts for only 5t of the population of Sub-Saharan Africa. 1.5 The member countries are diverse in the extreme, both in physical as well as in economic size (Tables 1.1-1.7 in Annex I). In terms of geographical size, Chad is the largest, covering over one-third of the total land area of the UDEAC subregion, but its population density is the lowest. Equatorial Guinea is the smallest, with less than four hundred thousand inhabitants, and a total land area of 28,000 square kilometers. Despite their small populations, Congo (2 million inhabitants) and, in particular, Gabon (less than 1 million inhabitants), account for a relatively important share of the subregion's economy thanks to their petroleum reserves. Nevertheless, Cameroon is clearly the dominant power in the subregion with 50% of the population and 60% of the GDP 2/. 1.6 None of the economies of the region are very diversified, depending in large part on mineral resources and/or cash crops for foreign exchange earnings. Of these countries, Congo and Gabon lie on the one extreme given their heavy dependence on the petroleum sector. In Congo, petroleum accounts for 47% of GDP, 72% of earnings from merchandise exports and 50% of total government revenues. In Gabon, it accounts for 44% of GDP, over two-thirds of merchandise exports and 57% of total government revenues. Gabon is endowed with a wider natural resource base than Congo, which provides it with some additional revenues from manganese mining (for which the country accounts for a quarter of the world market), iron ore, and uranium. Since the discovery of substantial oil reserves in the 1970s, however, the share of the non-oil extractive sector in Gabon's GDP has become small. 1.7 The contribution of the agricultural sector to GDP and export revenues has been reduced to very low levels in both these countries, which remain net food importers. In Congo, agricultural GDP has stagnated since 1979, with the result that its share of GDP has declined to less than 12%, and its share of exports has fallen to less than 1%. Likewise, the country's forestry sector, which accounted for over 60% of export value in the early 1960s, now accounts for barely 4% because of a secular decline in timber production. A somewhat similar evolution is characteristic of Gabon where the tradition of smallholder agriculture is even less developed than in the Congo. As in the Congo, agriculture's share cf GDP has fallen steadily over the years and now stands at about 4.5%. The forestry sector's contribution has also been declining and is presently estimated at 1.5% of GDP down from about 4% in the early 1970s. 1.8 At the other end of the spectrum, Equatorial Guinea's economy depends almost entirely on agriculture, fisheries and forestry. These sectors combined constitute about 60% of GDP, employ 80% of the labor force and account for virtually all of the country's exports. Subsistence agriculture :redominates but cocoa, coffee and timber provide monetary income, foreign exchange and government revenues. Equatorial Guinea is only now recovering from the isolationist Nguema regtme (1968-1979). By 1979, cocoa, coffee and forestry production were down to almost half, and the fishing catch down to less than a third, of their pre-independence levels. Production levels have only recently begun to rise again. In 1986, cocoa and forestry products accounted for 37 and 34% respectively of the country's export earnings. Although food 2/ All figures based on 1989 data. Tm.Gwy'ng - 3 - crops production has recovered somewhat, the country continues to experience shortages of basic food stapleo, for which it relies substantially on imports. 1.9 Like Equatorial Guinea, Chad is just emerging from a traumatic period of instability and conflict. From 1979 to 1982, unrest escalated into war, resulting in a GDP decline of 30% as industries reduced or suspended activity, banks closed down, the public administration ceased to function, and much of the country's infrastructure was either destroyed or drastically deteriorated. Chad is fundamentally dependent on agriculture; crop cultivation and livestock account for half of the country's GDP and provide a living for 90% of its population of 5.2 million. Cotton is the single most important segment of the economy. The government revenues depend heavily on this sector, which also accounted for 48% of export earnings in 1988. 1.10 The Central African Republic (CAR) is also essentially an agriculture based economy, but its structure is a slightly more diversified than that of Chad. Agriculture and forestry contribute 42% of the Central African Republic's GDP, and about 58% of the country's annual merchandise export earnings. The Central African Republic's agricultural export earnings are divided fairly evenly between three commodities, i.e., coffee, cotton and timber. The two major cash crops, coffee and cotton contribute 40% of the country's annual merchandise export earnings, while forestry accounts for 18% of export earnings. Besides, the Central African Republic is also able to generate an additional 20% of its export earnings from diamond exports. During the 1970s, cotton production fell more than 50% due to declining yields and real producer prices, and has not entirely recovered since. The forestry sector's contribution to export earnings has been declining -- its share of export earnings declined from 28% in 1981 to 18% in 1986. 1.11 Of all the countries of the UDEAC region, Cameroon is the most diversified. Despite the discovery of oil in 1978, petroleum accounts for a relatively modest 18% of GDP. Its share of export earnings, however, is still a high 54%. Prior to 1978, agriculture accounted for 40% of GDP. It nevertheless remains the key sector of the Cameroonian economy, absorbing about two-thirds of the population, contributing a quarter of the country's GDP, 40% of its export earnings and 20% of its government revenues. Smallholders produce 90% of agricultural output, mainly food crops and livestock products for domestic consumption, and coffee, cocoa (of which it is the fifth largest exporter in the world, with 6% of world supply), cotton, and rubber for export. Other traditional agricultural exports include palm oil, bananas and tobacco, produced in large part by state-owned plantations. 1.12 The share of non-petroleum manufacturing activity in the GDP of UDEAC countries ranges from about 2% in Equatorial Guinea to 13.9% in Cameroon. Compared to the rest of the countries of the subregion, Cameroon's manufacturing sector is very large -- it is more than twice the size of the manufacturing sectors of all the other countries put together -- and it is the most diversified. The sector is dominated by a number of foreign and government owned enterprises, the latter's share in the sector's value added amounting to 40%. For the rest, the sector is comprised of a number of small and medium scale local enterprises. Although value added is concentrated mostly in consumer goods such as processed food (including sugar), beverages, cigarettes, textiles, footwear, and wood products, there are a number of firms spread over such sub-sectors as paints, plastics, cosmetics, and simple engineering TaO6fq and metal products. Outside of the petroleum sub-sector, the only heavy industry in the country is cement and an aluminum smelter. Manufacturing activity in the country is in general inefficient and uncompetitive, characterized by a high cost structure and high and varied rates of effective protection (see para 2.17). A very small proportion of manufactured products are exported, and those mainly to other UDEAC countries. 1.13 In Congo, the Central African Republic and Gabon, manufacturing activity accounts for about 7-8% of GDP, whereas in Chad it accounts for a relatively high 12.5%, due to the importance of cotton processing 3/. In each of these countries, the manufacturing sectors are essentially comprised of a handful (between 7 to 20) of foreign or state-owned enterprises, benefitting from generous tax and other privileges (see para 2.40). There is little small and medium scale manufacturing activity. What is striking is how similar the manufacturing sectors of these countries are to one another -- the result of costly policies of import substitution. Thus each country has, for the most part, some manufacturing capacity in just the following sub-sectors: beer, soft drinks, cigarettes, textiles, sugar, edible oil, flour milling, and saw-milling. Of these, the beverage and tobacco sub-sectors are in private hands, and the rest tend to be mixed or state-owned. There is negligible manufacturing activity in Equatorial Guinea. 1.14 In all countries of UDEAC, including Cameroon, manufacturing activity has been stagnating, if not declining, over the last few years. The trend has been particularly marked in the case of Congo, Gabon and the Central African Republic. This has been due partly to the recession following the crash in commodity prices, but also because of the fierce competition from Nigerian products in particular, penetrating the markets of UDEAC countries legally and illegally. 1.15 Finally, the characteristic that is particularly striking about the economies of the subregion is the enormous income differential between them. Chad and Equatorial Guinea, with annual per capita incomes of less than US$150 each, are the poorest countries in the region, and amongst the poorest in the world. The Central African Republic, with a per capita income of US$260 is not much better off. Congo and Cameroon, each with per capita GDPs of about US$1000, are regarded as middle income countries by world standards. At the other extreme, at US$2970 per head, Gabon enjoys by far the highest per capita income level in the region, and is the highest in Sub-Saharan Africa. C. Oblectives. Evolution and Performance of UDEAC 1. Treaty of Brazzaville 1.16 The main objective of the 1964 Treaty of Brazzaville was an sventual economic union between member states and a regionally balanced industrial structure. To this end, the Treaty provided for the creation 3/ The turnover of Coton Tchad, the state-owned cotton processing firm, was CFAF 27 billion, almost equal to the turnover of all the rest of the manufacturing sector put together (CFAF 30 billion). TU.0mytg of a custome union, UDEAC, with a common external tariff 4/ and no intra-Union trade barriers. Goods originating in one member state and transferred to another state were to be exempt from all import and export dutieo. In addition, the Treaty provided for a Taxe Uniaue (see paras. 2.37-2.43) system to specifically promote the creation of regional manufacturing capability and trade in marufactures. The Treaty aleo provided for the coordination of national industrial development plans through consultation and a common UDEAC Investment Code for the subregion, coordination on transport sector issues, the progressive harmonization of internal fiscal systems, and the free intra-Union movement of labor, services and capital. 1.17 Several administrative structures were created to implement this policy agenda: rupreme authority over common activities was vested in the Council of the Heads of State; a Management Committee, comprised of the ministers of finance and economic development, was charged with making the decisions on the rates of the common tariff, on fiscal harmonization, and coordination of industrial plans. The UDEAC Secretariat, with the statute of a public international institution, was charged with managing daily operations without being vested with any decision-making authority. All decisions made by the Management Committee or the Council of Heads of States require unanimity; total consensus, therefore, was, and remains, the prescribed principle for decision-making in the Union. In addition, the Treaty made provisions for the common collection of tax revenues from import duties collected by a common customs service on the basis of the criteria of consumption, i.e., the revenue collected in member countries by the customs authorities of the UDEAC was to be allocated to the budget of the state in which the consumption of the goods was declared to have occurred. 2. Central Bank 1.18 In parallel with the creation of a customs union, the objective of the protocol of agreement creating the Central Bank of Equatorial Africa and Cameroon, now known ae the Bank of Central African States (BEAC), was to ensure exchange rate stability for all members of the regional grouping and the harmonization of monetary policies between them. BEAC was given the exclusive right to iasue currency in its member countries. The monetary unit established was the Franc de la CooR6ration FinanciAre en Africue Centrale (CFA franc). The Convention of Monetary Cooperation between BEAC-member countries and France provided for a fixed exchange rate between the CFA franc and the French franc at the rate of 50 CFAF to the French franc. Unlimited convertibility into French francs is assured through the overdraft facilities on the BEAC's Operation's Account with the French Treasux-y, in which the pooled foreign exchange reserves of all member countries are held. Financial transfers, through the intermediary of the BEAC, were to be freely allowed within the fraac zone and between member countries and France. Provisions were made for uniform criteria determining the allocation of credit to each country. It was envisaged that member countries would move progressively towards the harmonization of interest rates and policies pertaining to commercial bank operation and supervision so that eventually, resources could move freely within the region in accordance with the dic-ates of the regional marketplace. 4/ As a temporary measure, to help individual countries tide over the fiscal impact of adopting a common external tariff, the Treaty provided for a complementary country-specific import duty, to be charged only on imports of out-of-Union origin. Taz.Gis9. 1.19 Like the UDEAC Secretariat, the BEAC too is a multinational public institution. Its Board consists of 13 directors, four from Cameroon, two from Gabon, one each from the other member countries, and three from France. Unlike the Management Committee of the UDEAC, however, most decisions of the BEAC Board are taken on the basis of a simple majority, which gives Cameroon considerably more clout than its regional partners. However, decisions regardiLg such issues as the rediscount rates and refinancing ceilings require a three-fourths majority. 3. Diuapoginting Record 1.20 With a common external tariff and a common central bank and currency, UDEAC clearly has, compared to most other groupings in Sub- Saharan Africa, including the West African Economic Community (CEAO), the most advanced structures for regional integration. Even so, the, actual performance of UDEAC over the last twenty-five years of its existence has been disappointing, and the goal of an integrated regional market-place has remained elusive. 1.21 Intra-Union trade. Official intra-Union trade flows in UDEAC remain low a/, and such industrial development as has taken place in member countries, has been largely inefficient. It appears that in 1983, the share of intra-Union trade in UDEAC's total trade was a low 2%. Of late, the situation seems to have improved. The most recent (1987) estimates of ihtra-regional trade in UDEAC puts its share in the Union's total trade in the order of 8% 6/. Such officially recorded intra-regional trade as exists in UDEAC is concentrated in manufactures, which account for almost 80% of the value of the total, and is dominated by Cameroon. Trade between the other mambers of the Union remains limited. 1.22 Factor mobility. Progress in terms of labor mobility has also been poor. Although there are a fair number of Cameroonians and Equatorial Guineans in Gabon, their status is not secure, and cross- border labor movements are far from officially accepted, unlike in the case of the CEAO, where remittances of migrants to the coastal countries account for as much as 8 percent of Burkina Faso's GDP. As concerns capital flows, restrictions still apply to inter-bank transfers of funds within the BEAC zone, with the re.'ult that the zone remains fragmented despite a common currency. 1.23 The relatively poor record of UDEAC reflects, in large part, the evolution of its structures and the centrifugal tendencies of its member countries in the post-independence era, tendencies that were exacerbated by the commodity price boom of the 1970e which incited the oil-exporting member countries in particular to pursue ambitious agendas independently of their neighbors. i/ No reliable information is available on the extent of unofficial intra-Union trade. While such trade is probably quite substantial, it appears that the bulk of it is in products of non- Union origin -- unofficial intra-Union trade seems to be restricted to such low value items as vegetables and fresh fruit. 6/ Data for 1983 and 1987 are from different sources, which could, in large part, account for the apparently substantial change between the two years. TuOLGM - 7 - 1.24 AllocAtion of Union revenues. The UDBAC Treaty was more or less applied in accordance with ite original spirit until the late 1960s. The first setback to its smooth functioning came with the departure from UDEAC of Chad and the Central African Republic in 1968, following a dispute over the allocation Union revenues. Chad rejoined the Union but only in 1984, after emerging from a crippling conflict with Libya. Although the Central African Republic was persuaded to rejoin almoot immediately, continuing problems concerning the distribution of Union customs revenues led to the collapse of the system of common customs duty collection in 1972. It seems that the Central African Republic, wary of the systematic re-export into its borders of goods of non-Union origin without the corresponding customs duties being allocated to it, began charging full customs duties on all products of non-union origin entering its borders, irrespective of whether or not they had already paid entry duties in another member state. This put an end to the common customs service and to the principle of the free movement of goods within the Union. 1.25 Inward focus of member countries. Buoyed by revenues from the boom in commodity prices, member countries decided to embark on country-specific strategies of import substitution in the 1970s, in large part through ambitious programs of public investment and parastatal development. The Treaty of Brazzaville was modified in 1974 in Yaound6 to accommodate these national concerns. While retaining all the original instruments of Union policy (such as the common external tariff, agreements regarding fiscal harmonization, common investment. code, single tax, etc.), these revisions had the effect of undermining and distorting their objectives, in particular by making the provisions for intra-Union trade considerably more restrictive than originally intended. Thus, the revised Treaty restricted the scope of free intra- Union trade to just raw materials and unprocessed agricultural produce; trade of all other products of Union origin was prohibited unless they had access to the single tax regime 7/. The single tax, or the Taxe UniSUe_ (TU) as it is called, therefore became an instrument for restricting preferential treatment on intra-Union trade to only a select number of products manufactured by a select number of firms (see para. 2.42). 1.26 Moreover, as member countries continued to pursue inward- looking strategies of industrial development, they each turned to all manner of devices and supplementary instruments outside the rigid framework of the Treaty to further their own specific objectives. Over the years, the accumulation of incremental modifications to the instruments of the Treaty and the introduction of ad-hoc country- specific measures outside of the scope of the Treaty arrangements themselves, have created a highly distortionary incentives environment. 1.27 Thus, the complementary tax, which was envisaged by the original signatories as a temporary mechanism to deal with the fiscal impact of apl.lying the common external tariff, has become, in many cases, an instrument for country-specific protection, and tariff rates have become very high and dispersed across countries as well as within them. The problem has been compounded by the growth in non-tariff barriers, not just to intra-Union trade, but to trade in general. 1/ As of 1984, this provision has been relaxed somewhat -- intra- U.aion trade in locally manufactured non-TU products is no longer prohibited, but the importing country can turn these products away or apply essentially the same import duties that it would apply on similar products of non-Union origin. Tm,GyPr Official barriers to labor mobility have become more stringent, particularly in Gabon, which has sought to restrict entry of migrants into its high wage market. Fiscal structures have become exceedingly diverse and complex as countries have sought to impose numerous taxes outside the framework of existing agreements for fiscal harmonization. Each country has developed its own Investment Code and its own set oL fiscal and other privileges to promote national industries. All this has helped sustain high cost, uncompetitive, and duplicative manufacturing activity in the subregion, and has contributed quite considerably to the phenomenal growth in tax evasion and customs fraud. 1.28 Weak institutional status of Central Bank. The institutional status of the BEAC headquarters has remained weak. Notwithstanding its Board, the functioning of the BEAC has been highly decentralized, with the National Monetary Committees comprised of the director(s) for the various countries, their respective alternates, along with three government-appointed persons, defining and implementing in large measure the monetary and credit policies in each country. As a result, criteria for the determination of credit ceilings in each country have been unclear and have not always been based on appropriate macro-economic considerations. Each country has also been able to maintain fairly diverse interest rate structures and barriers to the inter-country flow of funds. Moreover, with little regional oversight, supervision of banking activity in member countries has been lax, and satisfactory precautionary steps to protect the portfolios of banks from deterioration have gone unimplemented. This has in large part contributed to the severe liquidity crisis that the financial sectors of most of the zone's member countries are now facLng. D. Recent Developments and Reform Efforts 1. Economic Crisis 1.29 Since about the mid-19809, all the six members of the Union have been faced with severe economic difficulties brought to a head by the sharp decline in commodity prices and the depreciation of the US dollar. Between 1985 and 1987, oil prices in CFAF fell 65%. Likewise, cocoa, coffee and rubber prices plunged 24%, 43%, and 24% respectively over the same period. Meanwhile, cotton prices fell precipitously by 67% between mid-1984 and mid-1986. This collapse of commodity prices, compounded by chronically poor macro-economic management, plunged the economies of the region headlong into deep recession, undermined their financial and economic viability, and exposed serious structural deficiencies. 1.30 Cameroon, which suffered an almost 50% deterioration in its terms of trade, suffered a 9% decline in GDP in 1987-1988, investment levels declined to less than 50% of their pre-1985 levels, government revenues declined 32% over the same period, leading to a buildup of domestic arrears that, in turn, precipitated a severe liquidity crisis in the banking system. A somewhat similar story occurred in Congo, where in 1987, oil revenues were less than 15% of their 1985 levels, with total public sector revenues down 55% over the s.,me period, and a real GDP decline of almost 13%. In Congo. the situation was further aggravated by the country's debt overhang created by its borrowing after the second oil shock. In 1986, Congo's debt service accounted for 78% of its government revenues. In Gabon, the government's oil revenues declined from CFAF 400 billion in 1985 to 65 billion in 1987, GDP fell almost 17% in real terms, and despite a 48% reduction in government investment, the fiscal deficit remained 8% of GDP. Tax.O.y%g - 9 - 1.31 The impact of the decline in commodity prices, although severe, was not quite as dramatic in the case of the non-petroleum exporting countries, i.e., the Central African Republic, Chad and Equatorial Guinea. In the Central African Republic, government revenues dropped 10% from 1985 to 1987, and the total fiscal deficit rose to 9% of GDP. GDP growth did, however, manage to keep up with population growth in 1985-1986, although in 1987, per capita incomes are estimated to have declined 3.5%. In Chad, the fall in cotton prices led to GDP decline of 5.8% in 1984. Although improved climatic conditions led to the near doubling of cereal production the next year and contributed to a miraculous recovery, the government's principal revenue base lay ravaged, and its key cotton parastatal in serious financial trouble. In 1986, government revenuoe declined 20% and GDP growth once again became negative. Although in absolute terms, Chad's external debt service is very small, in 1986 it accounted for 25% of the government's budget. 1.32 Finally, in the case of Equatorial Guinea, inappropriate macro-policies led to increasing pressures on the balance of payments, inflation, and unsustainable external debt service ratios over 1980- 1984. By 1985, the country's debt service ratio reached 93%. In that year, the country joined the CFA zone and went through a de facto devaluation of 82%, which helped mitigate the impact of the fall in cocoa prices. The economy remains extremely sensitive to international developments, and government revenues declined 21% in 1986 as a result of the developments in the international market for cocoa; per capita incomes in Equatorial Guinea declined 2.5% in 1986. 2. Stabilization and Structural Adiustment 1.33 The structural problems that have surfaced as a result of this crisis are broadly similar in each of these countries: weak domestic resource mobilization and a narrow government revenue base; a vulnerable current account, hostage to an insufficiently diversified export base; hinh and wasteful public expenditure; an inefficient public enterprise sect(r; an uncompetitive domestic production base with a high wage cost structure; and a distorted incentives environment. The banking system in a number of the member countries of the BEAC zone is also in distress, and half its loan portfolio is compromised and a third of its banks in liquidation. 1.34 To deal with these problems, all six countries of the region embarked on programs of stabilizat' n and adjustment. The objective of these country-specific programs hab been to tackle the problem of macro- economic imbalances, as well as to create the enabling environment for efficient, productive investment and sustained growth. On the stabilization side, these programs have supported efforts to restore and maintain fiscal discipline through a combination of cost-cutting and improved public finance management. on the adjustment front, they have been trying to improve the efficiency of current resource use and, given a fixed nominal exchange rate, have focussed on a variety of internal measures to gradually shift the real exchange rate in favor of the tradeable sector. This has entailed public enterprise reform through liquidation, divestiture and restructuring; liberalization of labor market regulations in an effort to reduce real wage levels; rationalization of agricultural price setting and marketing arrangements in an effort to boost agricultural productivity; reduction of regulatory obstacles and rationalization of the incentives structure of the countries in a bid to promote private commercial activity, particularly in the export sector; and, in some countries, financial sector restructuring, in order to tackle the collapse of bank portfolios. TUx.Gm'a& - 10 - 1.35 With member countries trying to respond to the needs of adjustment, the problems and deficiencies of the existina instruments of UDEAC have become evident. There is now an awareness amongst all member countries that the instruments of UDEAC have not evolved to keep pace with changes in the economic environment. In particular, existing instruments of UDEAC will require substantial overhaul if their efforts to improve the incentives framework and mobilize additional resources in their respective countries are to succeed. Besides, the excessive rigidity of the instruments of UDEAC has become counterproductive from the point of view of structural adjustment in individual countries, for it has circumscribed the ability of each to proceed with important reforms at a pace most appropriate to its own circumstances. E. Future Priorities and the Regional Reform Program 1. Sianificance of UDEAC 1.36 Given the experience of the past twenty-five years, a number of questions can be raised about the structures of UDEAC. Is the goal of economic union through the progressive elimination of all barriers to product and factor mobility between the six member countries desirable or feasible in the context of UDEAC? Is the design of the structures of UDEAC satisfactory? Are these structures an encumbrance to the process of adjustment in each member country? What should be the future direction for the structuras and instruments of UDEAC? In addressing these questions several factors need to be borne in mind. 1.37 eirst, the question of the desirability and feasibility of economic union in UDEAC is a complex one, and the issue as much political as it is economic. Whatever the potsntial economic merits of greater factor mobility between member countries, none of these will be realized unless the member countries demonstrrete a much greater degree of political willingness than in the past to strengthen the functioning of the BEAC zone a..d make intra-Union labor mobility a reality. 1.38 Second, as concerns trade policy, member countries of UDEAC now realize that an inward-looking policy of imtort substitution behind high national or regional protective barriers in not a viable or desirable option and that existing regional ins -uments, such as the common external tariff and taxe unicoue will, acesurdingly, need to be fundamentally restructured. Besides, a number of these instruments have also proven to be too rigid in design, and this hea been counter- productive. 1.39 Third, while the existing UDEAC framework may inhibit the Pace of countrv-specific reforms in certain areas. it could. with some chances, also serve to facilitate and accelerate reforms in others. Thus, for example, the framework of UDEAC offers the opportunity of using peer pressure to advance trade policy reforms in the subregion in the future (see paras. 3.9-3.10). Also the current economic crisis in the subregion has made the need for revitalizing regional cooperation on some critical issues very clear. The problem of high transport costs and inefficient transit trade is one issue that affects all countries of the subregion and which can best be tackled at the regional level in the context of the UDEAC Treaty. 1.40 Fourth, while many of the instruments of UDEAC have been flawed in design and implementation, the UDEAC Treaty has important redeeming features. The UDEAC Treaty's 1974 provisions for functional cooperation in areas such as human resource development, training and research have, for example, yielded concrete results of benefit to all TaxGMty - 11 - member countries. Thus, a regional training school set up in Bangul for customs officials is still functioning well; a technical institute established in Libreville to provide training in project evaluation technic-lea has provided much needed technical expertise to government officials of member countries; an institute of ,emography, set up with assistance from United Nations Fund for Population Activities (UNFPA), has become one of the premier institutes of its kind in all of Africa; and a regional Development Bank (BOBAC), created in 1975, has financed a number of large projects all over the subregion, and although faced with some difficulties today, the institution has the potential for providing valuable support for cross-border investments in the UDEAC region much like the West African Development Bank (BOAD) in West Africa. 1.41 Finally, whatever the record of the particular structures of UDEAC, these structures still retain an important political and historical significance to member countries. It is significant that although Chad left UDEAC in 1968, it never relinquished its membership of BEAC and the CFA zone; it maintained throughout, bilateral trade links with the remaining members of UDEAC, and it became a shareholder in BDEAC upon its inception in 1975. It is also significant that, after having emerged from a debilitating conflict with its northern neighbor, Chad felt the need to forge closer links with its historical partners by acceding once again, after 15 years, to the Treaty obligations of the UDEAC. The UDEAC Treaty is, therefore. important as a political framework that binds member countries together. 1.42 The challenge for the future will be to reorient the existing framework of UDEAC in a constructive manner. Past experience of UDEAC countries suggests that the mere adoption of the theoretically recommended structures and instruments of regional economic policy does not necessarily lead to meaningful regional integration. In fact, the preamature adoption of such instruments can be counterproductive because of their excessive rigidity. Regional integration is an evolutive process, and the instruments of regional policy must evolve over time rather than be imposed from the start. In the future, therefore, the accent must be on pragmatic cooperation in areas of obvious benefit to member countries, while making the existing structures and instruments that bind each country into a needlessly rigid framework for regional integration more flexible. Prooerlv restructured. the framework of UDEAC could be turned into a powerful and effective instrument for intercountrv cooDeration in the subregion. 2. Rationale and Obiectives for a Regional Reform Progra 1.43 In line with the above, discussions have been ongoing with member countries of UDEAC for the adoption of a Regional Reform Progr,. (RRP) that aims at reforming and even phasing out some of the instruments of the Union that have proven to be counterproductive, while encouraging and supporting those of value. The Procram would Dromote such regional reforms as are necessary to deepen the ongoing adjustment efforts in individual member countries. It would tackle only those issues that are critical to the adiustment process in each eountry. but which by their nature. or due to the provisions of existina treaties and conventions, can only be tackled at the reaional level. 1.44 Trade Policv. It is now recognized by countries of the subregion that the strategies of state-led import substitution and inward orientation pursued by them in the 1970s were a costly mistake, and efforts are now ongoing in each country to liberalize and rationalize their respective trade regimes. Thus, quantitative restrictions (QRs) are being progressively dismantled in member Tmoy - 12 - countries. However, UDEAC's regional instruments such as the common external tariff and the single tax have not been reformed in this direction. Incremental and somewhat ad hoc modifications to these instruments have, in many cases, only rendered -hem distortionary. Besides, some of these instruments have proven to be excessively rigid in design -- their lack of flexibility has turned out to be counterproductive from the point of view of enabling individual countries to respond to the needs of adjustment. Given the importance of these instruments to the structure of trade taxes in each country and to the binding provisions of the UDEAC Treaty, it is not possible to proceed with a rational and effective trade policy reform in each country. A priority for the future must be to re-orient these instruments so as to help member countries become more efficient and outwardly oriented, and care must be taken to ensure that the objective of import substitution is not now pursued at the regional level, having failed at the national level. The RRP could be the vehicle to ensure this. 1.45 Fiscal Dolicy. A priority concern in each country is the mobilization of domestic resources. This necessarily involves fiscal reforms. However, country-specific efforts in this direction have been curtailed by the existing regional conventions on fiscal harmonization. In consequence, efforts in each country have so far been limited to improving fiscal administration and to some extent, to reducing exemptions. The structure of taxes is in need of overhaul, and the RRP would pave the way for comprehensive country-specific reforms by working out a new and more flexible agreement on fiscal harmonization in the subregion. 1.46 Financial Dolicv. The most pressing issue in the area of financial policy is the insolvency of commercial banks that has brought the financial sectors in most BEAC zone countries to a virtual standstill. Poor bank supervision has contributed in large part to the present crisis. While country-specific reform programs have been focussing on expediting the liquidation of unsalvageable banks and the restructuring of others, the issue of bank supervision is best taken up at the regional level. The BEAC, in fact, offers an almost unique opportunity to address the pervasive problem of political interference in bank supervision by transferring responsibility in this area from the national level to the regional level. There are other needed reforms, such as a less distorted interest rate structure and less directed jredit, that cannot be tackled on a country-specific basis. Provisions of the BEAC convention require decisions on these issues to be taken by the Central Bank's multicountry Board of Directors, and so this matter could be handled effectively through a regional mechanism such as the RRP. 1.47 Transport and transit poligv. There are certain issues that are critical to each individual country, and which, by their very nature, can only be dealt with through a multilateral approach. Transport and transit policy is one such critical area. High regional transport costs and inefficient transit corridors are a serious problem that penalizes not just the landlocked member countries, but also the coastal states of the Union. So far, country-specific reform programs have focussed on issues such as reform of transport sector parastatals and road-user charges for domestic traffic. However, important problems pertaining to customs and other regulations and road-user charges for transit traffic can only be resolved multilaterally and could be taken up in the context of the RRP. T^x.GM\D& - 13 - F. Preparation of a Reaional Reform ProaraA 1.48 It is clear that without a region-wide effort, adjustment in each member country of UDEAC would be severely limited -- something that would not be to the benefit of member countries either individually or collectively. The need for regional cooperation has, therefore, never been more compelling, and it is in recognition of this that the Heads of State of the six countries of the subregion endorsed, in December 1990, a call for a program of regional reforms to help deepen and consolidate the process of adjustment already begun in each country 8/. This has been followed-up by the adoption, at the regional level, of a series of reform measures in the area of financial policy 9/, and the endorsement by the Finance Ministers of the six member countries at a meeting held in Yaounde in October 1990, of a broad framework of reform IQ/ in the areas of trade and tax policy and transport and transit policy. 1.49 A first workshop, organized jointly by the World Bank and the EEC, was held at the UDEAC Secretariat in Bangui l1/ in March, 1991 to discuss specific reform proposals presented in two reports, one on trade and tax policy (prepared by the World Bank), and the other on transport and transit policy (prepared jointly by the EEC and the World Bank 12/. 1.50 This report presents recommendations for a program of regional trade and tax reforms, finalized following the Bangui workshop and bilateral discussions with the authorities of each UDEAC-member country held between May and September 1991. The report, in Green Cover, was the basis for the deliberations of a second workshop held in Libreville on November 14-22, 1991. This workshop, organized jointly by the World Bank, the EEC and the French Ministry of Cooperation, brought together delegations from UDEAC-member countries and from the UDEAC S/ Communiqu6 of the Council of Heads of State, Bangui, December 14, 1989. 9/ See decisions taken by the Board of Directors of the BEAC at their meeting of October 16, 1990. At this meeting a number of measures were adopted that were proposed by the World Bank and the French Treasury in the context of ongoing policy dialogue with UDEAC member countries. These proposals are summarized in a separate report (see Note de R6flexion sur les iolitiaues de la Monnaie et du Credit. et la Supervision Bancaire dans la Zone BEAC, Industry and Energy Division, Occidental and Central Africa Department, World Bank, July, 1990). 10/ See ComDte Rendu Sommaire: Reunion sur le Proqramme d'Aiustement Structurel R6aional, Yaound6, October 18, 1990. This meeting was organized at the initiative of the World Bank. 11/ This workshop was financed by the EEC, and it brought together high-level technical delegations from all six member countries along with the other principal interested donors, including the French Ministry of Cooperation, the African Development Bank (AfDB), UNCTAD, and UNDP. 12/ See Proposition de R6forme des Tarifs et des Imi8ts Indirects dans lea Pays Membres de 1UDEAC, World Bank, March 1991; Volet TransDort et Transit du Programme d'Aiustement Structurel R6aional, EEC/World Bank, March 1991. TUx.Omi%n - 14 - Secretariat. it culminated in the signing of a Protocol of Understanding between the Finance Ministers of the six member countries on a program of regional trade and tax reforms based on the recommendations of the Green Cover (see Annex 11). The Protocol was subsequently adopted by the Council of UDEAC Heads of State on December 8, 1991, and the Treaty of Brazzavi$le modified in line with the substance of the Protocol (see Annexes 12A and 12B). Tu.G-/W It. UDEAC TRADERREGIME & INDIRECT TAXESE EXISTING STRUCTURE & KAIN ISSUES A. Introduction 2.1 Indirect taxes in UDEAC-member countries are comprised essentially of five types: import taxes, export taxes, taxes on sales of domestic goods and services, and specific taxes (mostly on consumption of petroleum products) 13/. Aside from this, each country uses a varied range of minor taxes and levies, the overall revenue contribution of which remains relatively small. 2.2 Table 1 shows the dependence of UDEAC countries on indirect taxation as a source of revenues. Indirect taxes typically account for between 60 to 80% of non-oil fiscal receipts. In the case of Equatorial Guinea, these taxes account for an even larger share of tax revenue -- over 90% of the government's total tax revenues in Equatorial Guinea come from indirect taxes. The contribution of each type of indirect tax varies across countries, but in all cases, import taxes are the most important source of non-oil tax revenue 14/. Of the major categories of these taxes, sales taxes on local products contribute the smallest share, which is only to be expected, given the relatively small manufacturing base of each country. 2.3 A critical feature of indirect taxes is their regional nature, a large proportion of them being subject to regional protocols and provisions of the Treaty of Brazzaville. Three of the four principal import taxes applied by UDEAC countries (see para. 2.27 below) form part of the Common External Tariff (CET), and are outside the jurisdiction of individual countries. Likewise, the sales tax on domestic goods and services, l'Imp8t sur le Chiffre d'Affaires Int6rieur (ICAI), is subject to the provisions of regional agreements on fiscal harmonization, and is therefore only in the partial control of individual countries. Each country has the right to fix the rate of the ICAI, but it cannot unilaterally alter the basis for their application. In addition, all member countries apply the Taxe Uniaue (TU) regime, which is a complex incentives regime that favors eligible regional firms in the application of indirect taxes on their imported inputs, and their sales within the region. The various taxes that are subject to regional decision-making on average account for 55% I5/ of the indirect tax revenues in these countries. No comorehensive reform of the indirect tax structures in these countries can, therefore. be undertaken on a country-specific basis. la/ Stamp duties and fees and charges (timbre et curatelle) also constitute a form of indirect taxation in these countries in that the amounts due vary in direct proportion to sales. Such levies contribute negligible revenues. 14/ The one exception be4ng Equatorial Guinea, where in 1990 the specific tax on petroleum products became the most important indirect tax in the country. 15/ Represents the average contribution of the CET, the TU and the ICAI based on data for 1989 and 1990 for each country (see Table 1). Of these, taxes for which individual countries cannot even determine the rates on their own (the CET and the TU), account for an average of 41 % of indirect tax receipts in each country. TsGuY* table I Indirect Taxes 1/ (Excluding taxes an exports of petroleum products) (Taxe uiique on sales (Other taxes on (ICAI on (Transactions (Specific taxes (Other Indirect *ear Cotntry (Indirect taxes)/ (Import taxes)/ of local products)/ local sales of services)/ tax/(Total an petroletm taxes)/ (Total non-ail (rotal indirect Total products)fCTotal (Total indirect ifdirect productsl(rotal (Total tax receipts) taxes) indirect taxes) 2/ indirect taxes 3/ taxes taxes) indirect taxes) indirect taxes 1990/91 CAIEROON 0.75 0.32 0.17 0.06 0.09 - 0.19 0.17 1990 CAR 0.69 0.36 0.15 0.01 0.07 0.05 0.21 0.15 1990 CHAD 0.77 0.29 0.09 0.09 0.08 0.01 0.20 0.24 1990 caNW 0.62 0.53 0.18 - 0.08 0.11 0.09 0.01 P 1990 EQ. GUINEA 0.94 0.30 - 0.07 - 0.39 0.24 1989 GA01N 0.65 0.49 0.02 0.03 0.16 0.05 0.12 0.13 Sourc: Fimice Ninistry in each country if These include atl (q.rt taxes; the UITIP/TCI; the ICI; tAere relevant, the TT/TIT; stamp duties; cntimes aitiortels; and export taxes (except an petrolema products); 2V I.e., ICAI on sales of local goods * TIPITCI/TIC 3/ NaInly export taxes, stop dutfes and other miscellaneous indirect taxes and parafiscal levies - 17 - B. General Overview 2.4 There are three important characteristics of the existing indirect taxes and trade regimes that need to be highlighted: (a) their low and declining yields; (b) their distortionary impact on w.he incentives structure; and (c) their substantial variability across member countries, notwithstanding the regional character of a large proportion of them. 1. Declinina Tax Yields and Fiscal Receipts 2.5 The trend in all six countries has been for total non-oil fiscal revenues as a percentage of GDP to decline (see Figure 1) 16/. In this context, what is remarkable about the tax structures of all countries is that they are very inefficient -- despite high average legal rates for all indirect taxes, their yields are very low. This is particularly the case for import taxes. While the weighted average legal rates of 'mports taxes range from 44% to 59%, the receipts from these taxes on a7erage amount 17% of their tax base, i.e. of the c.i.f. value of imports (Table 2). There are no reliable figures available on the tax base for indirect taxes on local sales of goods and services, but it is clpar that the coverage of these taxes is low and declining. 2.6 Exemptions. While it is true that negative real GDP growth rates and lower commodity prices have seriously eroded the tax base of UDEAC countries over the last few years, this alone cannot explain the trend of declining yields. One explanation is the widespread and growing use of exemptions. Figure 2 indicates to what extent exemptions have cut into the revenue base of imports taxes. On average, about 71% of all officially recorded imports are wholly or partly exempt from import duties in UDEAC countries. The situation is particularly acute in Chad where 91% of imports are estimated to be exempt in one way or another. What is worse is that the extent of these exemptions has been increasing over recent years. In Cameroon, for example, the proportion of exempt imports increased an estimated 12% between 1987/88 and 1990/91; and in Chad it increased over 2% between 1989 and 1990, reducing the yield from import taxes in this country to a paltry 7% of the value of officially recorded imports. The problem is even more acute than these figures suggest because a substantial volume of imports in each country goes unrecorded. Reliable estimates of unrecorded trade are hard to come by, but in Chad, for instance, it is estimated that actual imports could be as much as 20% higher than recorded imports. 2.7 Figure 2 also provides an indication of the breakdown of exemptions in each country. On average, exemptions under special regimes such as the TU and the Investment Code account for one quarter of total imports, or over 40% of the exemptions granted on imports. The remaining miscellaneous exemptions include exemptions provided to imports under government procurement contracts, imports by the military, imports by petroleum companies (particularly important in Gabon and Congo), imports under project and food aid (very significant in Chad), exemptions provided per the generous provisions of Act 13/65 of the 16/ The one exception is Chad, but there too, recent political developments seem to have had a devastating impact on the state of public finance. TazOu0 Table 2 Nominal & Effective Tariff Structures A. Average Nominal Rates (X) Consumer goods Country All lmports Essential consumer Raw materials Other consumer to be subject *o Year goods and capital goods goods excise taxes 1987/88 CAMEROON 1/ 59 33 58 58 159 1990 CAR 2/ 52 43 50 54 150 1990 CHAD 2/ 48 44 51 55 73 1990 CONGO 2/ 51 43 49 54 153 1989 EQ. GUINEA1/ 44 32 44 49 90 1989 GABON 1/ 54 34 50 55 210 B. Effective rates tX) 3/ Consumer goods Year Country All Imports Essential consumer Raw materials Other consumr to be subject to goods and capital goods goods excise taxes 1987/88 CAMEROON 23 6 14 41 45 1990 CAR 12 33 6 24 127 1990 CHAD 7 0 4 13 10 1990 CONGO 16 25 7 25 54 1989 EQ. GUINEA 17 7 11 24 24 1989 GABON 25 10 20 40 100 Source: Customs Directorate in each country. See Amex II for more detaif s. 1/ Weighted by the value of each category of inmports 2/ Unweighted 3/ (Recefpts from taxes on Imports)/(c.I.f value of official imports) 68618 6 8861 L86L NOVe VY3NinO'3 OUNOO avHO UVO NOOU3WVYO %OZ 68-L86L dG!D/(senUOAGJ x} I!O-UON) sldia39H l8oSi1 I!O-UON l 9Jfl6IJ Figure 2 Structure of Imports by Type of Fiscal Regime Non-exempt imports 31% Investment code Miscellaneous exempt 14% 28% Miscellaneous exempt 23%a TU/TIP import Intra-UDEAC 22% 7% TU2TIC imports Investment code 20% 19% Non-exempt imports 36% Cameroon (1990/91) CAR (1 990) 64% of imports part/wholly exempt 91% of imports part/wholly exempt Source: Customs Directorates, World Bank Estimates Figure 2 (contd.) Structure of Imports by Type of Fiscal Regime TU imports Miscellaneous exempt 15% Investment code 52% Non-exempt imports 9% '4ra-UDEAC 1% Investment code 6% Miscellaneous exempt ~~~TU/TIC imports 71%10 Non-exempt imports 32% Chad (1990) Congo (1990) 91% of imports part/wholly exempt 68% of imports are part/wholly exempt Source: Customs Directorates, World Bank estimates Figure 2 Structure of Imports by Type of Fiscal Regime Noni-exempt imports 31% Investment code Miscellaneous exempt 14% 28% Miscellaneous exempt 23% TU/TIP import ....DIntra-UDEAC 22% 7% TU/TIC imports Investment code 20% 19% Non-exempt imports 36% Cameroon (1990/91) CAR (1990) 64% of imports part/wholly exempt 91% of imports part/wholly exempt Source: Customs Directorates, World Bank Estimates - 23 - UDEAC Customs Code 17/, and "ad hoc exemptions" awarded on the basis of administrative discretion. 2.8 Exemptions are not restricted to imports -- they extend also to domestic indirect taxes on goods and services. Typically, the Investment Codes in each country provide for tax holidays from sales taxes and other levies. Similar exemptions are granted to certain categories of highly privileged enterprises, such as petroleum and TU companies. Thus, in Gabon for example, no sales taxes are levied output of the formal manufacturing sector that is consumed by the petroleum companies. 2.9 Such widespread use of exemptions is not surprising given the high burden of legal tax rates under common law. The average nominal import duty rates on raw materials and capital goods is over 40% in UDEAC-member countries (Table 2). It is not surprising, therefore, that local firms are forced to seek exemptions on imported inputs. In fact, apart from the Cameroon, in no other country is there a single formal-sector enterprise that is not exempt from a sizeable proportion of indirect taxes that it would normally have to pay under common law. Table 2 illustrates nominal and effective import duty rates by type of products -- the gap between nominal and effective rates is the largest for raw materials and capital goods, indicating that the bulk of exemptions are granted for this category of products. 2.10 Evasion. Although there is no way of quantifying it with exactitude, it seems clear that tax evasion has been rising in UDEAC countries -- this has contributed to the trend of declining tax yields. In Cameroon, for example, receipts from the domestic sales tax fell 65% over the two-year period 1986/1987-1989/1990 18/. This sharp downfall exceeds what one might expect from the downturn in economic activity over this period, and can only be explained by rising de- fiscalization. 2.11 The high level and comRlexity of existing tax structures lends them to pervasive fraud and abuse. The average nominal import duty rate on such luxury items as cigarettes and alcohol is over 130% in UDEAC-member countries (Table 2). With such high rates and relatively porous borders, even small increases in marginal tax rates have led to a decline in revenues 19/. The complexity of the tax structure in UDEAC countries starts with the multiplicity of rates for both import as well as domestic indirect taxes. At present, per the UDEAC tariff code, 17/ This Act provides for blanket exemptions on imports fuz certain privileged users, for imports of any goods used for "educational, scientific or cultural purposes", for certain industry groups such as chemicals etc.. Reliable data on the exact value of goods imported under this Act are hard to come by, but discussions with customs officials in all countries suggests that this category of exemptions is important and subject to frequent abuse. 18/ Source: Les recettes fiscales au Cameroun: analyse et possibilit6 de reformes, IMF, March 1991. 19/ This is true for import duties on alcohol in the case of Gabon. It is also the case for duties on certain textile products in Cameroon, on which the average nominal rate exceeds 350 %. TaLOybg - 24 - each country applies an average of 116 different rates depending on product categories 20/. 2.12 More important than the multiplicity of rates, however, is the difficulty of enforcing the Customs Code when so many goods can claim legal exemptions. It is impossible for the customs directorates of each country to police a system in which the vast majority of importers do not expect to pay import duties. Computerization of customs data gathering may help some, but even in the countries which already have computerized systems 21/, it is difficult to come by reliable figures on imports and exemptions because exempt imports are not recorded in a systematic manner. 2.13 Poor administrative capacitv. A third explanation for declining tax yields has been the limited capacity of tax administrations in all countries. The inadequacy of tax administration in these countries seems all the more acute given the growing tendency towards delinquency in times of recession. 2.14 Customs departments in UDEAC countries are not only responsible for levying all import taxes, which on average account for about 40% of all revenues from indirect taxes, but they are also responsible for the TU regime and other tax regimes such as the internal production and consumption waxes (Taxe Interieure a la Production or Taxe Int6rieure a la Consommation) that mimic the TU, which together typically generate an additional 12% of indirect tax revenues (see Table 1). The latter impose a heavy administrative burden on customs departments. In Cameroon, for instance, of the over one hundred firms that are subject to the TU regime, the customs department is able to monitor only a handful -- for the rest, there is very little oversight over the extent of these firms' duty-free imports, which in theory must be limited to raw materials and packing materials used directly in production. 2.15 There is also little or no coordination between the customs and tax departments and the authorities that award exemptions, with the result that in no country is it possible to get even a list of all the beneficiaries of privileged fiscal regimes. It is virtually impossible under the circumstances to ensure the orderly and correct award of exemptions. 2. Distorted Incentives Structure 2.16 Manufacturing activity in UDEAC countries is most uncompetitive relative to other countries. The sha-e of manufacturing exports from these countries has been declining. High real wages and low labor productivity contribute to this lack of competitiveness. Over the years, howaver, the distortions of the incentives regime have also taken their toll on the competitiveness of local industry, which faces a strong anti-export bias. 20/ The Central African Republic has the largest number of rates (177) and Equatorial Guinea the smallest (54). The number of rates differ across countries because of the complementary tax which applies to different categories of products at different rates specific to each country. 21/ Cameroon with the PAGODE system, Gabon with the SINDARA, and Congo and the Central African Republic with the SYDONIA system. Tu.Gayles - 25 - 2.17 The best indicator of the extent of distortions to the existing incentives environment are estimates of effective rates of protection (ERPs). Precise estimates of rates of effective protection by type of activity are difficult to compute given the system of firm- specific exemptions and the use of ad hoc exemptions 22/. Some indicative rates are, however, presented in Table 3. In none of the UDEAC countries is manufacturing activity very diversified -- in Equatorial Guinea (which is not included in the Table), there is hardly any manufacturing capacity at all outside of some wood-processing. In the rest, the dispersion of ERPs across the main existing activities is striking. In Cameroon, sectoral ERPs range from 22% in textiles to over 3600% in cement. Of the 10 sectors for which rates were calculated, three have negative value added at world prices 23/. In Chad, which is particularly vulnerable to customs fraud, ERPs vary from 6% in textiles to over 300% in the drinks sector. In the Central African Republic, the dispersion is even wider, with ERPs varying between 74% in textiles, to over 860% in paints. 2.18 ERPs vary greatly not only from one activity to another, but also from one country to another. In the drinks sector, for instance, the Central African Republic and Congo have negative value added at world prices, while the ERPs in the other three countries range from 228% in Cameroon to 580% in Gabon. In cigarettes, ERPs range from a low of 55% in Chad, to a high of about 260% in Cameroon. In sugar manufacturing all countries have negative value added at world prices, except Chad, where illegal imports result in an estimated ERP of 81%. What this indicates, is the great difference across countries not only in the cumulative nominal tariff structure, but also in the structure of exemptions and susceptibility to fraud. 2.19 Confusion of instruments and obiectives. One of the contributing causes of distortions to the existing tax and tariff structures is the confusion of instruments and objectives. The essential problem is that import taxes are often used for revenue generation and not protection, and certain sales taxes in effect provide huge margins of protection to domestic manufacturing activity (see para. 2.36 below). 2.20 Fraomentation of the incentives structure. By far the most important cause of the distortions in the incentives structure is the extreme fragmentation of the fiscal privileges to the extent that tax and tariff structures are almost tailor-made on a firm-specific basis. Not only is the burden of import taxes very unequally distributed, but effective rates of protection in the manufacturing sector are also very highly dispersed. The combination of high tax rates on the one hand and the widespread use of exemptions on the other, has resulted in a hiahlv uneven distribution of the tax burden between economic agents which penalizes a small segment of taxpayers while leaving other segments almost completely exempt. 2.21 In Chad, an estimated 86% of official imports pay no duties at all, while 9% of imports pay an average cumulative duty rate of 73%. The average indirect tax burden on the country's formal manufacturing sector is 11% of domestic sales (Table 4). In the Central African 22/ The situation is further complicated by the continued existence of quantitative restrictions (see para 2.22). 23/ The dispersion is of course wider if firm-wise ERPs are considered (see Annex III, Table 111.1). TMx.GtsybV Table 3 Indicative Effective Rates of Protection Cameroon CAR Chad Congo Gabon Sector (1989) (1990) (1990) (1990) (1990) Sugar 1/ * 1/ 811/ * 1/ * 1/ Flour -*11 * J/ Concentrated milk 161% 1/ - - - Edible Oil * 1/ 115% *1/ * 1/ *1/ Drinks 228% * 307% * 580% Cigarettes 257% 673 X 55 % 242% * Textiles 22X 1/ 74 % 6 % 168% 39 % Paint 165% 865X 78% 683X 198% Non-ferrous metal products 120% - - * 6% Cement 3694% 1/ - - * * 1/ Source: This table is based on data collected through company interviews. See Annex III for details. 1/ Subject to quantitative restrictions * negative value added at world prices - does not exist - 27 - Republic, 43% of all official imports pay no duties, while 31% pay an average of 42% (Table 4). The estimated indirect tax burden on the formal manufacturing sector (29% of domestic sales), is the highest in UDEAC, and wlthin this sector the distribution of the fiscal burden is even more unequal, with just two firms contributing over 14% of all indirect tax revenues in the country. In Gabon, 40% of official imports pay no duties, while another 40% pay an average entry duty of 65%. on the whole, the manufacturing sector in Gabon has a relatively light fiscal burden of 8% of domestic sales. This, however, masks great inequities -- just five firms of the tobacco and drinks sector contribute 8% of all indirect taxes, with the bulk of local manufacturing firms enjoying a negligible fiscal burden. In Cameroon, the situation is not so extreme, but here too, 50% of imports enter free of all duties, and another 36% of imports pay an average cumulative duty of 52%. The country's formal manufacturing sector has an average fiscal burden of 18% of turnover. 2.22 Ouantitative Restrictions (ORsI. Although the bulk of QRs have now been dismantled in the UDEAC countries, there are still certain sectors that are protected through a variety of non-tariff barriers such as outright prohibitions, twinning arrangements (that force importers to buy a certain proportion of their needs from local firms), and restrictions on who can import. In no country do these QRs cover more than 1% of tha total number of tariff lines (60 tariff lines of a total of about 5,400 at the 6-digit level of harmonized tariff code), and the proportion of the value of total imports affected by them is similarly small 24/. The sectors covered by these QRs do, however, represent a significant proportion of the value added in local manufacturing. These sectors include the following: sugar, edible oils, textiles, and cement (see Table 3) 2_5/. QRs have the effect of providing very high protection to most of these sectors, which are by and large comprised of very inefficient firms, with negative value added at international prices. In many cases, firms have been granted the monopoly to import their own competing products duty-free. This has, in effect, turned many of them into privileged trading companies that buy their products at the international price and sell them at a premium on the domestic market 26/. This is costly to consumers, and sooner or later member countries will be forced to restructure the sectors presently artificially propped up by QRs. 24/ Less than 1% in the case of Gabon, for example. 25/ In Cameroon, QRs on concentrated milk and cement have recently been replaced with compensatory tariffs. Edible oils, sugar, textiles, tea, maize and rice remain subjoct to QRs. The QRs on these products, designated as "strategic goods" are expected to be removed shortly in the context of the country's ongoing structural adjustment program. In the Central African Republic only sugar is still subject to QRs, while in Chad, aside from sugar, imports of certain textile products and soap are also subject to non-tariff barriers. In Congo and in Gabon, sugar, flour, cement, and palm oil are all subject to import restrictions. In Gabon, the import of cement is, in addition, prohibited. 26/ This is the case with the sugar, palm-oil, cement and flour manufacturing firms in Congo. It is also the same situation with the sugar manufacturing firm in the Central African Republic. TaM.ONq Table 4 Burden of Indirect Taxes ........................................................................... ........................................................................................................................ .. .... . .... Weighted average Average rate of Average rate Average burden of Average effective Year Country effective import the TU/TIP/TCI of TU on intra- indirect taxes tariff rate on tariff rate 1/ on local sales UDEAC imports on imports and non-exempt imports 3/ of goods local sates of goods 2/ 1990/91 CAMEROON 14X 181 381 10% 521 1990 CAR 13X 291 351 161 421 1990 CHAD 7X 11X 191 81 731 1990 CONGO 161 181 - 181 521 1990 EQ. GUINEA 15X - - 151 621 OD 1989 GABON 25X 8X 22% 23X 62X Source: Customs department of each country ------ WorLd Bank Staff Estimates See Annexes IV - IX for details 1/ (Receipts from taxes on imports)/(c.i.f. value of recorded imports) 2/ Measured by the following index: (Import tax receipts and receipts for indirect taxes on local sales of goods)/(c.i.f. value of recorded imports + value of local sales of goods net of taxes). 31 (Receipts from import taxes)/(c.i.f. value of non-exempt imports) c:tb4.wkl - 29 - 2.23 Not all existing QRs are binding. In the textiles sector in particular, despite the imposition of QRs, existing firms in all countries are faced with negative or low rates of effective protection. Many firms in this sector are barely functioning, or are close to liquidation 27/. Similarly, Chad appears particularly vulnerable to illegal imports, and none of the QRs applied in this country appear to be able to provide any protection. In such cases, the use of QRs appears to be redundant. 3. Variability of Tax Structure Across Countries 2.24 The policy of harmonizing tariff and taxes has, so far, been a failure in UDEAC. In fact, fiscal structures across countries have grown increasingly diverse over time, as gaps between the economies themselves have widened. Table 1 indicates how differently the fiscal structures in each country have evolved. The dependence of individual countries on import taxes varies from 29% of indirect taxes in Chad to 53% in Congo. The relative importance of the TU also varies greatly across countries. Thus, while in Congo, the TU contributes 18% of all indirect tax receipts, in Gabon it accounts for only 2%. 2.25 Riaiditv of regional instruments. The variability of the revenue contribution of taxes subject to regional Treaty arrangements, is in part a reflection of the extent to which individual countries have sought to supplement their revenues through the creation of instruments outside the framework of the Treaty. In this context, the rigidity of the instruments of regional UDEAC policy has proven to be counterproductive, for it has led to the mushrooming of a wide and disparate array of taxes and parafiscal levies that have only added to the incoherence and complexity of the overall incentives environment in each country (see paras. 2.49 to 2.53 below) and undermined the regional objectives of the UDEAC framework. The transactions tax, which is used in the Central African Republic, Chad, Gabon and Congo is an example of such a tax. So far, this tax has provided negligible revenues in Chad. In the Central African Republic and Gabon, on the other hand, it now contributes about 5% of indirect taxes, while in Congo it accounts for 11% of receipts from indirect taxes (see Table 1). 2.26 In what follows, the structure and problems with the major indirect taxes, with the exception of export taxes and specific taxes on petroleum products, are analyzed in greater depth. Export taxes p=imarily consist of exit duties on primary commodity exports outside the UDEAC region. These taxes, as also the specific taxes on petroleum products are entirely in the jurisdiction of each country, and are, therefore, not targeted at this time for inclusion into a regional reform program 28/. 27/ This is the case of the textile firms in virtually all the countries except Cameroon and Gabon, where the firms in this sector seem to show signs of having adapted to stiff international competition. 28/ In addition, the taxation of petroleum products raises a series of issues about transport policy and about the status of national refineries and/or petroleum distribution companies that are outside the scope of this report. Tuk.Gmywn - 30 - C. ImDort Taxes 2.27 The UDEAC Treaty provides for a Common External Tariff (CET) as its main instrument for regional trade policy. The CET is in fact the sum of three different import taxes, namely the customs duty or Droits de Douane (DD), entry duty or Droits d'Entrde (DE), and the turnover tax on imports or Taxe sur Chiffre d'Affaires a l'Importation (TCAI). 2.28 Non-uniform avolication of the CET. There are serious flaws in the design and structure of the CET as it presently stands. It must be recognized that the CET is in fact hardly a common tariff, for it is not applied uniformly across member countries, and its objectives are often undermined by individual countries who use a variety of devices outside of its framework to meet their specific fiscal and other objectives. 2.29 First, the base on which the CET is applied is not the same across all countries. While some countries apply the DD and DE of the UDEAC tariff code on the c.i.f. price of imports, in others such as the Cameroon, import duties are assessed on a schedular value, which in aggregate is 10% over the c.i.f value. 2.30 Second, each country retains the right to suspend the CET or some of its component taxes on specific products. Moreover, each country has resorted to the ubiquitous use of duty exemptions, outside the provisions of the UDEAC Customs Code, to favor different local constituencies using Imported products. Thus, each member country is in fact only applying the CET on a selective and highly individualized basis. 2.31 Third, the use of the complementarv tax (CT) continues to undermine the objectives of the CET. The CT is a supplementary country- specific import tax, the determination of whose rates and the range of its application is left to each member country. This tax was intended as a transitory measure to help individual countries overcome the fiscal impact of applying the common external tariff. Far from disappearing, it has in fact grown in importance, and has become increasingly diverse across countries, ranging from an average of 5% in Equatorial Guinea to 12% in Gabon. Its product coverage also varies considerably from country to country. In Gabon it covers 94% of the tariff lines, whereas in Equatorial Guinea and Chad it is barely applied 29/. In many cases the CT is now used as a means of providing extra protection, over and above the CET, to certain specific national industries. In others,. it is used as a vehicle through which the equivalent of excise duties are imposed on imported products for purposes of revenue generation and public policy. In any event, in most countries of the region, with the exception of Equatorial Guinea and Chad, the CT contributes a significant proportion -- on average 18% of revenues from import taxes and its continued existence runs contrary to the objectives of the CET (see Table 5). 2.32 Fourth, many countries apply additional levies on imports outside the framework of the regional agreements concerning the CET and the CT. Thus the Cameroon, for example, applies a perequation levy on certain products for which it seeks special protection. The Caisse Autonome d'Amortissement in Chad, applies a supplementary levy on selected imports that is outside the framework of regional agreement on 29/ Source: UDEAC Tariff Code. TV.GmVV Table 5 Import Taxes by Type 1/ (Percentage of total import tax receipts) .. ............................................ ....................................................................................... .................................... Year Country Customs Duty Entry Duty TCAI Conplementary Other 1I Total tax (billions CFAF) 1990/91 CAMEROON 172 392 222 15X 62 59.0 1990 CAR 12X 38X 16X 13X 212 8.5 1990 CHAD 192 47X 192 72 9X 6.4 1990 CwGO 292 352 192 17X 25.8 , 1990 EQ. GUINEA - - - - 8X 1.5 1989 GABON 172 41X 202 20X 22 60.7 Source Finance ministries of each coontry, World Bank staff estimates 1/ Excluding specific taxes on petroleum products 2/ TU on intra-UDEAC trade, statistical levies, etc. c:tb5e..wk Figure 3 Nominal and Effective Tariff Structure Percentage rate 300 250 ..... ...... 200-_. 150-. 0°° rr7fl e-- - - L 0 20 40 60 80 100 Product category code Nominal rate I Effective rate Cameroon (1987/88) Aggregated to 2-digit level - 33 - import taxes, and Gabon and Cameroon apply a special fee on imports to finance the computer services of the customs department. 2.33 High level and dispersion. The rates of the CET are on average high and very dispersed. They range from a low of zero to a high of 142%, with about 55% of the tariff lines being subject to rates between 43 and 54%, 25% of the tariff lines to rates between 54 and 142% 30/. 2.34 The use by individual countries of supplementary tax instruments outside the framework of the CET has of course added considerably to the complexity and burden of the import regimes in UDEAC countries. Inclusive of the CT and other import levies applied by individual countries, the mean (weighted by import shares) cumulative nominal duty rate in each country is in excess of 40%, with average rates on raw materials and capital goods varying between 44 and 58%, and those on consumption goods between 32 and 210% across countries (see Table 2). The dispersion of tariff structures is also much aggravated due to the use of these supplementary taxes. In Chad, the Central African Republic and Gabon the cumulative import duty ranges from zero to 60%. In Cameroon the dispersion is from zero to 500% (from zero to 280% when aggregated to the two-digit level -- see Figure 3). 2.35 Inflexibility of the CET. The fact that the CET is, in practice, still not truly common, is hardly surprising considering how different the member countries of the UDEAC are in terms of their fiscal requirements, and how their fiscal and developmental priorities have evolved over time. The CET is much too inflexible in its design. Because of the difficulty of trying to modify it, the CET has remained more or less frozen since its introduction in 1964. Tariff structures in UDEAC countries have not, therefore, been able to keep pace with their own changing needs, and each country has found it easier to circumvent the CET through the use of the various devices identified above in order to meet their immediate fiscal and other objectives. 2.36 Flawed design. Aside from being rigid, the structure of the CET itself is also flawed. In particular, the protection and revenue generation functions of its components are not clearly distinguished from one another. In theory, only the customs duty is supposed to have a protective function. The purpose of the entry duty has never been quite clear, but in practice it serves a protective function. The TCAI, on the other hand, was intended to serve as a purely revenue-generating tax, which is why it is applied at a flat rate "0% on the cumulative DD and DE inclusive price of imports. In practice, however, there being no harmonization between the TCAI and the turnover taxes levied in each country on domestic production, even the TCAI has served as an import tax. The result of this confusion of targets and instruments is an unnecessarily complex rate structure and a distortionary incentives regime. D. The Taxe Uniaue Reoime 2.37 The TU regime was designed as an instrument for promoting manufacturing activity to supply the regional marketplace. It has proven to be a particularly distortionary instrument of Union policy. For a firm conferred TU status, a privilege that can only be awarded by the Management Committee of the UDEAC Secretariat, the TU regime replaces all other indirect taxes on inputs and outputs. The sales of 30/ Source: UDEAC Tariff Code. TuGisyIg - 34 - TU firms are in fact subject to two different taxes depending upon where the product of the firm is consumed. The Taxe Unicrue on local sales (TUL) is applied on that part of the TU firm's sales that are local, i.e. in the country in which it is located. The Taxe Unicue on imports (TUI) is applied to that portion of the firm's output that is consumed in another UDEAC-member country. The former is levied by the Customs Directorate of the country of the firm's location, and it is collected at the factory gate -- it is the conceptual equivalent of a turnover tax. The latter is applied by the customs authorities of the importing country, and is collected from the importer at the point of e.'try into the country 31/ -- it is the conceptual equivalent of an import duty. 2.38 TU status benefits the firm in two ways. First, in the country of its location, the firm faces a significantly lower indirect tax burden than other firms because it pays the TU on the local sales of goods instead of the normal domestic turnover tax, the ICAI, and duties on imported raw materials. The average effective (i.e. collected) rate of the TU on sales of local products in the Central African Republic, Congo and Cameroon ranges between 8 and 29% of domestic sales (see Table 4). If these firms were to be subject to taxes under ordinary law, they would be applied an average rate of about 50% on imported raw materials plus the normal ICAI. Imported raw materials account for an estimated 40 to 45% of the turnover of TU firms, which n ans that under ordinary law these firms would be paying 30% to 40% of their turnover in import and domestic sales taxes 32/. TU firms, therefore, enjoy higher levels of effective protection. 2.39 Second, TU status confers preferential access to the beneficiary firm's exports to other UDEAC-member countries, because the TU on imports that is levied by the importing country serves in effect as a preferential tariff that is substantially lower than the normal entry duties in those countries -- on an average, the TU rate applied by importing countries on products of TU firms is only 29% (Table 4), compared to an average cumulative import duty of 51% levied on similar products of non-Union origin. 2.40 Revenue losses from the TU. Out of some 200-odd TU firms in the six countries of the Union, an estimated 142 are still functioning 33/. If the TU has been at all successful at promoting manufacturing activity in the region, it has done so at significant costs. Exoneration of all duties and taxes on inputs in the producing country over an indefinite time period 34/ under the TU regime has resulted in important revenue losses for the governments concerned. Cameroon, 31/ In this case, the TU firm itself does not pay any indirect taxes. 32/ Source: Company interviews and the customs directorates of concerned countries. 33/ Source: Ministries of Industry and customs directorates in each country. The bulk of Tu firms are in Cameroon -- about 80 of the 142 odd firms region-wide that are still operating; Congo and Gabon have 28 and 21 functioning TU firms respectively; CAR and Chad have seven each; and EQG has none. 34/ Although the TU regime provides for periodic reviews of benefits accorded to eligible firms, in practice most TU firms enjoy complete relief from duties and taxes on imports on what amounts to a permanent basis. In most cases, however, the regime can, upon decision of the UDELC Secretariat, be revoked. Tmx.Owyi - 35 - for example, has the largest number of TU firms, the revenue foregone due to exemptions accorded to imports of these firma amounted to over 30 billion CFAF in 1988/1989, or a little less than half of the country's total receipts from import taxes in that year. 2.41 Distortions from the TU. The fact that the TU regime is awarded on a firm-specific basis has rendered the incentives regimes in UDEAC countries very distortionary. Two firms manufacturing the same product in the same country and exporting to the same destination within the region, can be subject to different tax rates, and to different degrees of preference in intra-Union trade. The fragmentation of the incentives regime that has resulted from the use of the TU regime has meant that the profitability of any venture in these countries is at least as much the result of its success in acquiring a preferred tax status as in producing and marketing efficiently. This has resulted in the allocation of scarce resources to firms with a lucrative tax status, rather than to firms that effectively use national resources. Besides, since access to TU status is regulated and subject to a high degree of administrative discretion, only a few large companies, often entirely foreign-owned, have managed to gain access to TU status. 2.42 TU and intra-Union trade. The TU has been a failure as an instrument for promoting intra-Union trade in manufactures. Although TU firms are expected to export a part of their output to other member countries, in practice they export little, if anything. Moreover, it is paradoxical that the 1974 revisions to the UDEAC Treaty, by restricting preferential tariff treatment on intra-Union trade only to products of TU companies, in effect turned the TU regime into a tool to restrict such trade 35/. 2.43 Complexitv of the Tl. ;, 4f the structure of import taxes in each country was not already - anough, the TU regime adds a very considerable administrative burQcm. on customs services. TU factories with permission to import duty-free are scattered over a wide geographical area in each country, and almost none of those interviewed during the course of preparing this report had any physical barrier delimiting the duty-free production and storage area. It is not practical to have customs agents on site in so many industrial locations. The customs services have limited means to verify whether the firm is accurately reporting its sales, and they lack the technical knowledge of how much material is needed for a given volume of output. The correct assessment of TU liability is further complicated by the fact that, in many instances, TU firms are also involved in other activities not subject to the privileges of the TU regime. Under the circumstances, opportunities for abuse are many, the problem being particularly acute in Cameroon which has a large number of TU firms. 35/ Prior to 1974, all locally manufactured products could circulate duty-free within the Union. Products of TU companies were favored only in the sense that TU status conferred relatively greater levels of effective protection. Since 1974, only the manufactured products of TU companies benefit from preferential treatment in intra-Union trade -- all other locally manufactured products are subject to the full weight of the importing country's import duties. Tax.GS - 36 - E. Domestic Sales Tax on Goods and Service.s ICAI! 2.44 The structure of domestic indirect taxes is also complex, the principal tax being the domeetic turnover tax (ICAI). This tax is subject to the provisions of regional agreements on fiscal harmonization, per which, member countries are expected to levy the ICAI on the same banis and subject to the same criteria, although the determination of the rates is left to the jurisdiction of each country. The ICAI is applied on the sale of all domestic services (including on the exercise of professions such as the legal profession) 36/ and is not deductible -- it has, therefore, a cascading effect. The ICAI on goods is applied only at the point of the first sale, but it too has a cascade effect due to the fact that its conceptual counterpart, the turnover tax on imports (TCAI) is not deductible even if the imports are used as inputs in local production. The ICAI does not, on the other hand, apply on the resale of imported goods. Most countries have at least three rates for the ICAI, depending on the type of activity or product. 2.45 Distortions from the ICAI. The ICAI that is applied on the sale of domestic goods is distortionary because it is, in most cases, different from the TCAI applied on competing imports. The former is set by individual countries at rates varying from 9 to 14%, whereas the latter, being part of the CET is fixed at a flat rate 10% of the duty inclusive price of imports in all countries. 2.46 Further, the system, as it stands, systematically discriminates against locally made products. For instance, a piece of furniture manufactured locally under the common law could, if the ICAI is applied as it is meant to be under the common law, bear a fairly heavy tax burden that would include the ICAI on the wood, the ICAI on the transport of the wood to the factory, and the ICAI on the furniture sold by the factory. By comparison, the only sales tax paid on imported furniture would be the TCAI paid at the point of entry, on its import duty inclusive c.i.f. price. 2.47 ExemDtions and coverage of the ICAI. The importance of the ICAI as a source of revenue varies a great deal across countries, ranging from 7% of total fiscal r3ceipts in Equatorial Guinea to 16% of non-oil fiscal receipts in Cameroon. In all countries, however, it is clear that almost all of the receipts from this tax come from services, not from the sales of domestic products, which are in large part exempt from the ICAI, either due to the TU regime or to the privileges of investment codes in each. These exemptions seem unavoidable, for very few manufacturing firms, if any, could support the cumulative burden of indirect taxation under the ordinary law in these countries. 2.48 The responsibility for collecting the ICAI lies mostly with the tax department in each country. For some activities though, collection is done by another governmental agency, such as the transport regulatory authority in the case of transport services, on behalf of the tax department. The ICAI is paid on a spontaneous basis. In most countries it is difficult to get reliable information on who actually pays the ICAI. The capacity of the tax administration being very limited, it is evident that in practice, the ICAI covers only a limited proportion of its theoretical base. 36/ Banking services are also subject to the ICAI. The ICAI is tacked onto the interest charges on bank credit. In Congo, a separate tax, the Taxe sur les Cr6dits, is levied on bank credit. Tox.Om*. - 37 - F. Other Domestic Indirect Taxes 2.49 In a bid to generate incremental revenues, many countries have resorted to the use of additional domestic indirect taxes outside the framework of the existing agreements on fiscal harmonization. The most important such tax is the transactions tax (TT/TIT) in Gabon, the Central African Republic, Chad, and Congo. The rates of the transactions tax vary greatly across countries, as does its contribution to revenues. Some countries have multiple rates, others have single rates. In Congo, for example, the TIT contributes 11% of all indirect tax receipts, whereas in Chad the receipts from the TT are negligible (see Table 1). 2.50 Cascading effect of the TT. In Gabon and the Central African Republic, these taxes are meant to apply to all local sales, including on those of imported products, irrespective of whether or not these have paid the TCAI at the point of entry. In Chad, the TT is presently applied only to the sales of local wholesalers, and in Congo the TIT is applied on all services covered by the ICAI, and at the point of the first sale of all goods whether locally produced or imported. In all cases, these taxes add to the cascade of the ordinary law tax structure and aggravate its distortionary nature. In practice, these taxes weigh mostly on formal sector trading and retailing activity (there being hardly any manufacturing activity under ordinary law), and this in turn, makes the informal marketing chain more attractive. 2.51 Parafiscal levies. Aside from the transactions tax, many UDEAC countries also use parafiscal levies, which are just added onto the ICAI 31/. The revenues generated from such levies are, in general, earmarked for specific uses, such as local authorities and/or special funds. These taxes only add further to the complexity and burden of the common law tax structure while generating only negligible incremental revenues. 2.52 Non-petroleum specific taxes. Only Gabon and Cameroon have so far made use of excise duties on the local sale of goods other than petroleum products as a source of revenue 38/. Specific taxes on tobacco products accounted for 1.4% of the country's indirect tax receipts in 1988/1989. The experience of Gabon shows that consumption taxes on the local sales of certain products could be a useful means of generating revenue without endangering the financial position of local 37/ In Chad for example, aside from the normal indirect taxes, an additional ad valorem tax on imports and the turnover of some local firms is levied by the Caisse Autonome d'Amortissement (CAA). In Cameroon and Chad, there is the system of the centimes additionnels, revenues from which go to municipalities. In Congo, an ad valorem levy on account of the Fonds National d'Investissoment is added onto the ICAI. 38/ Cameroon has only very recently introduced a consumption tax on the local sales of alcohol. TaL0mys - 38 - firms 39/. These, however, have not been explored sufficiently by other countries. 2.53 Internal oroduction and consumption taxes (TIP/TIC/TCI1. Some member countries have rendered their indirect tax regimes even more complex by introducing indirect taxes that mimic the TU. Since TU status is granted only by the UDEAC General Secretariat, access to it is difficult. A number of governments have set up parallel single tax regimes, such as the internal production tax, or Taxe a la Production Int6rieure (TIP) regimes in Cameroon, the internal consumption tax (I x Int6rieure & la consommation - TIC/TCI) in the Central African Republic, Gabon, and Congo. These regimes provide comparable privileges to firms, but access to them is much easier because it is determined by the national government itself. Like the TU, such regimes lead to significant revenue losses and make the incentives structure in theae countries into largely a firm specific affair -- in Cameroon revenue losses from the TIP regime amounted to 20% of the country's receipts from import taxes in 1988/1989 40/. 39/ In 1989, when the specific tax on cigarettes were introduced in Gabon, the tax burden (indirect taxes as proportion of turnover) went up dramatically to over 60%. The bulk of this increase was absorbed by consumers in the form of higher prices, and while demand for cigarettes shrank initially, it very soon climbed back up to original levels. 40/ Source: Cameroonian Customs and Ministry of Finance. Tm.Gm,4 III. OBJECTIVES AND FRAMEWORK OF PROPOSED REFORMS A. Objectives 3.1 Based on the foregoing, any proposal for reforms must have certain well-defined objectives. First, the yield of the existing system of indirect taxation in all countries is low, and in most, has been declining. The reforms must aim at improving the revenue generating capacity of member countries' tariff and tax structures. The only way in which to substantially increase customs revenues in UDEAC countries is to cut the nominal tariff rates, and thereby reduce the incentive to fraud and make possible a phased reduction in the plethora of exemptions currently awarded. 3.2 Second, the existing incentives regimes are fragmented and the incidence of the tax burden is distributed unequally across economic agents. Formal domestic manufacturing activity is, in some sectors, so heavily protected that it is inefficient; and in other sectors, it is so heavily penalized by illegal cross-border trade and the burden of the common law tax structure, that it barely survives. The reforms must aim at improving the efficiency and competitiveness of domestic manufacturing activity, while spreading the burden of taxation more uniformly across sectors and firms. 3.3 Third, the rigidity of the CET and the existing framework for fiscal harmonization have forced member countries to resort to a variety of supplementary tax instruments in order to meet their evolving fiscal needs. The use of such instruments has only aggravated the distortions of the overall tax structures in each country and added to their complexity. Under the circumstances, an important objective of reforms must be to make the regional instruments of tariff and indirect tax policy more flexible so that the diverse needs of the member countries can be accommodated in a more rational manner. 3.4 Finally, tax and customs administrations in all countries are overburdened by the complexity of the existing structures. This has contributed to low and declining collection efforts, and the growth of tax fraud region-wide. The reforms must aim at simplifying tax structures as much as possible, and thereby make them more easily administrable and transparent. B. Framework of Proposed Reforms 3.5 In what follows, the principal elements of the proposed reforms are laid out. These reforms represent a medium-term target for each country, to be achieved over a maximum recommended period of five years (para. 3.10 below). Table 7, at the end of this Chapter, presents a summary of the proposed reform framework and its implications for firms presently subject to the privileged fiscal regimes of the TU/TIP/TIC/TCI. 1. Reform of Import Taxes 3.6 Removal of TCAI from TEC. Existing import taxes will need be lowered and restructured so that they are designed to fulfill primarily the function of providing rational and uniform protection for local economic activity, rather than also serving as an instrument for revenue generation. This would involve separating the TCAI, i.e., the turnover tax on imports, from the CET and merging the latter's remaining Tax.Guy - 40 - components into a simpler and more uniform import tariff 41/. The former would be harmonized with the existing ICAI on the sale of local products to constitute a new generalized turnover tax on goods (TCA), that would be applied at the same rate on imported as well as domestic goods (see para. 3.22 below). This would give each country a much more powerful fiscal instrument than has been hitherto at their disposal, enhancing the flexibility of the regional framework to enable each to meet their respective fiscal needs in a non-distortionary manner. 3.7 Abolition of CT and simplification of imDort duty rate structure. Simultaneously with the above, the complementary tax will need to be abolished, leaving only the one unified import tariff as the instrument for protection in each country. This import tariff would comprise essentially three rates, applying to three broad category of imported products, i.e., essential consumption goods (Category I), raw inaterials and capital goods (Category II), and other consumption goods (Category III) (see Table 6 for a suggested categorization). The categorization of tariff lines into the three suggested groupings would be negotiated and agreed upon by all countries at the regional level. In addition, all countries would agree on a common rate structure for all three cateaories of Products, to be implemented by each country in a phased manner over a regionally determined maximum transition period (see para. 3.10 below). This overall structure would reduce the wide dispersion of effective protection rates that exists today and simplify implementation by the customs administration. 3.8 Dismantling of remaining ORs. It is proposed that member countries eliminate remaining QRs progressively, starting with those QRs that are currently redundant. Other QRs could be removed, as countries adopt parallel measures to liquidate those firms that cannot be salvaged, while restructuring those that can. To make the transition easier, a t Pnorary surtax, at a regionally determined rate over the normal impc. : duty for Category III products, could be awarded on the basis of cariff equivalency considerations, for a select list of products, such as sugar and edible oils. 3.9 Phased imnlementation. It is proposed that all countries start the reform process by simultaneously adoptingt (a) a minimal flat- rate duty of 5% on Category I products; (b) a common rate for Category II products that is low enough (a maximum of 15%) to facilitate the phased elimination of exemptions on imported raw materials and capital goods; and (c) a common rate for Category III products that provides a reasonable margin of protection to existing firms in each country. All countries would be called upon to bring this last rate down together, 41/ The implications of this proposal for the obligations of UDEAC countries under the General Agreement on Trade and Tariffs (GATT) were discussed with the GATT Secretariat. First, the GATT encourages its members to unify their import taxes under one tariff column. The proposed merger of the customs and entry duties is, therefore, perfectly consistent with GATT objectives. Second, UDEAC countries belong to a group of GATT contracting parties for which tariffs are not bound. Thus, the fact that the rates recommended here for the combined import duty (see para. 3.9) would, for some products (mostly essential consumer goods that have a zero impo-t duty at present), be higher than the existing cumulative level of import taxes, does not in any way undermine these countries' obligations under the GATT, and no special dispensation is required for the proposed rate structure to be implemented. Tax.cmyg - 41 - Table 6 Suggested Classification of Imported Products Into Three Categories 1/ Category I Essential Category it Raw Materials Category IiI General Consumers Products and Capital goods Goods and Luxuries .................... .................................. ............................... Tariff Description Tariff Description Tariff Description Code I of Product Code of Produict Code I of Product ................................. .................................. ............................... 04 Milk and Milk products 12 Industrial & Medicinal plants 01 Live Animals 30 Pharmaceutical products 25 Cement 02 Meat 90 Surgical Equipment 26 MineraLs 03 Fish 27 Petroleum products 05 Other Animal products 28 Inorganic Chemical Products 06 Live Plants 29 Organic Chemicals 07 Vegetables 31 Fertilizer 08 Fruits 32 Paints and Varnish 09 Coffee and Tea 35 Glue and Enzimes 10 Cereal 38 Miscellaneous Chemical products 11 Flour and MilL products 40 Rubber 13 Grain and Resin 44 Wood and Coal 14 Other Vegetable Extracts 45 Cork and Cork products 15 Edible Oils 46 Cane and Cotton products 16 Meat and Fish products 47 Wood Pulp 17 Sugar 48 Paper and Paper products 18 Cocoa and its products 49 News Printing & Publishing 19 Cereal Based products 50 Silk 20 Vegetable and Fruit products 51 Uool 21 Other Food Processirg 52 Cotton 22 Drinks & Alcoholic Beverages * 53 Other Natural Fibres 23 Animal Feed 54 Artificlal Filaments 24 Tobacco products * 55 Synthetic Fibres 33 Cosmetics * 56 Ropes and Hemp products 34 Soap 57 Other Fibres 36 ExpLosives 72 Steel 37 Photographic Equipment 73 Steel products 39 PLastic products 74 Leather 41 Animal Skins 75 Nickel 42 Leather products 76 Aluminum 43 Animal Furs and Pelts 78 Lead 58 Special Fabrics 79 Zinc 59 Other Textile products 80 Tin 60 Hats and Accessories 81 Other Metals 61 Garments 84 Electrical and Non-Electrical 62 Other apparel Machinery 63 Other Textile products 85 Sound and Video Equipment 64 Footwear 86 Ralt Transport Equipment 65 Hair and Hair products and Vehicles 66 ULmbrellas 67 Artificial Flowers 68 Stone products 69 Ceramics A3 44mg products 71 Precious Metals * 82 Metal Tools 83 Other Metal products 87 Road Transport 88 Equipment and Vehicles 89 Water Transport Equipment 91 Watches * 92 Musical Instruments * 93 Arms and Munitions 94 Metal Furniture 95 Sports Equipment 96 Miscellaneous 97 Antiques & Art Objects * 1/ Chapter nurbers are per the 1988 Edition of The UDEAC Tariff Code Ci.e. per the Harmoonised System of classification). Chapter 77 is undefined, being reserved for future use -- It is, therefore, not included. * Items marked with asterisk are designated as excisable products. - 42 - and in a progressive manner, until it reaches a regionally determined target rate. The pace at which member countries move towards this regionally fixed target rate would depend on their macro-economic situation. It is proposed that a target maximum time-period of five years be agreed upon regionally, but that this target be oubject to periodic regional review and, if necessary, to modification in light of the evolving macro-economic circumstances of member countries. On the other hand, no product would be eligible for the introduction of a surtax after the end of the third year from the date of the start of the reforms, and this surtax, if introduced in any country, would be phased out within a maximum period of three years thereafter, irrespective of the macro-economic situation. 3.10 Ideally, all member countries would reduce import duty rates in a simultaneous manner through the transition period to arrive at the target medium-term rate structure. In any event, whatever the exact modalities of the transition, it is important at a minimum that no country be permitted at any time to raise import duty rates. and that they each converae to the common taraet medium-term rate by the end of the target transition period. 3.11 Choice of rate structure. The choice of a precise rate structure will depend not only on its potential. impact on existing firms and the incentives structure in general, but also on its implicatiors for revenues and for the trade balance. The determination of specific duty rates is further complicated in the context of the UDEAC by the fixed parity of the CFA Franc. Under the present circumstances, special care will need to be taken to ensure: (a) that the new tariff structure does not further erode the revenue base of import taxes; and (b) that it does not lead to a deterioration of the trade balance. At present, despite high nominal tariff rates, the average effective tariff rates are low across all countries due to widespread customs fraud on the one hand, and ubiqu..tous exemptions, on the other. Under the circumstances, the sensible target would be to reduce average nominal tariff rates while simultaneously eliminating duty exemptions, in a manner so as to maintain, if not raise, the averace effective tariff in each country. Such a strategy would help raise the yield of import taxes, maintain a reasonable level of protection for local productive activity, and not raise aggregate import demand, even as average nominal import duty rates come down. 3.12 Exemptions reduction. As the nominal duty rate on Category III products is brought down over the transition period, e:semptions, particularly on imported raw materials and capital goods, will also have to be progressively reduced, so as to avoid net revenue losses from the reform process, and to maintain the average effective tariff above existing levels. This would be done through a combination of measures, chief amongst which would be: (a) abolition of TU and other similar privileged regimes such as the TIP/TIC/TCI; (b) allowing Investment Code privileges to lapse without further renewal 42/; and (c) revision of the Act 13/65 of the UDEAC Customs Code to restrict the scope of exempt products. 42/ In fact, in this regard it is recommended that once the new rate structures, with low duties on imported raw materials and capital goods have been adopted, future awards of Investment Code privileges be restricted to temporary suspension of non-trade taxes -- under the new rate structures, exemptions of duties for raw material and equipment imports should become redundant. Taz.OMyQg - 43 - 3.13 The reduction of exemptions is key to the success of the reforms. The measures outlined above constitute but the minimum requirements in this regard. In view of the chronic need in all UDEAC countries to generate additional tax receipts, it would be useful for each to introduce, in addition to the measures set out in para 3.12 above, a 5% minimum imposition on all imports without exception 43/. Such a measure would establish the principal that no imports be completely exempt and would thereby close an important avenue for customs fraud. 2. Reform of Taxe Unique on Local Sales/TIPITCI/TIC 3.14 Replacement with TCA. The system of the TU on local sales and similar national regimes such as the TIP in Cameroon, TCI in the Central African Republic and Gabon, a. d TIC in the Congo, should be abolished. Instead of these taxes, current beneficiary firms would be called upon to pay the proposed new and harmonized TCA on the value of their domestic sales (see para. 3.22 below), and they will each have to operate without duty exemptions on imported inputs. The rates of the new TCA will have to be chosen with regard to fiscal considerations and with regard for their net impact on the fiscal burden of existing firms. The replacement of these various taxes by the generalized TCA would go a long way towards eliminating the fragmentation of the existing incentives regimes in each country and inject an important element of uniformity. 3.15 Transfer of administrative resionsibilitv. At present, the above taxes are the responsibility of the customs directorates in each country, while the sales tax on local goods is the responsibility of the tax departments. The replacement of the TU/TIP/TCI with the TCA would, therefore, relieve the customs authorities of a very considerable administrative burden, and make the tax departments entirely responsible for levying sales taxes on local goods and services. Responsibility for levying the TCA on imports would, of course remain with customs. Care will have to be taken that no dislocations occur as a result of this transfer of administrative responsibilities which should be undertaken in a gradual manner. 3. Reform of Taxe Uniaue on Imports 3.16 Introduction of a generalized preferential tariff. The TU on imports, which is currently applied by the importing country on products of TU firms in lieu of the import duties that would normally apply to similar products entering from outside UDEAC, would be abolished. In its place, it is proposed that a generalized preferential tariff be introduced, that would apply at a uniform rate to intra-Union trade in all locally manufactured products, the latter being defined per a regionally negotiated "rule of origin" or some other appropriate eligibility criteria 44/. 3.17 It is proposed that intra-Union trade of any product, the manufacture deemed of UDEAC origin by virtue, for example of a minimum 43/ This will require tax-inclusive accounting for donor financed imports (grants or loans), and the setting up of an appropriate administrative mechanism to make this operational. 44/ Intra-Union trade in unprocessed products will of course continue on a duty-free basis per the existing provisions of the UDEAC Treaty. TM.GCY'Mg - 44 - of 30% local value added, be subject to the preferential tariff. The rate of preference provided by this tariff would be set through regional agreement and would be the same for all products and all countries. The generalized preference margin suggested is 25% of the normal import duties, excluding the TCA 45/. Thus, for any given product, the preferential tariff applied by the importing country would be equal to 75% of the normal import duty that would be applied by that country on a similar product of outside-Union origin. 4. Reform of ICAI and Other Domestic Indirect Taxes 3.18 The cuestion of the value added tax IVPT). There has been a long-standing debate over the introduction of a value added tax in UDEAC countries. The VAT eliminates the penalizing cascade effect of a regular sales tax such as the ICAI and TT, and is, therefore, undoubtedly a desirable tax from the incentives point of view for all member countries. However, the case for the introduction of a generalized VAT must depend upon a number of other considerations, the most important of which are the revenue im;plications and administrative requirements for its implementation. These are considerations that render certain UDEAC-member countries hesitant about the supporting the introduction of a VAT. 3.19 A VAT is often said to be self-enforcing, but this can be misleading in countries without a system to effectively verify claims about taxes paid at earlier stages. In the absence of proper administrative preparation and systems of coordination between the customs and tax departments, the VAT could open new avenues for fraud, through claiming excess deductions. Experience with the VAT in other countries suggests that there is, in most cases, an immediate drop in revenues. Moreover, given the poor state of tax administration in most UDEAC countries 46/ and their current macro-economic situation, overcoming administrative hurdles is likely to take some time. Under the circumstances, UDEAC-member countries would be well advised to first complete the computerization of their respective customs and tax administrations, before moving to introduce a VAT. 3.20 Member countries could and should consider a phased introduction of the VAT, starting with a VAT for industry and imports only, not for general trade and services. In any event, each country must be left the freedom to proceed in the direction of a VAT at its own pace, and the regional agreements for fiscal harmonization should be sufficiently flexible to allow for this country-specific evolution. 45/ At present, the average preference margin implicit in the TU on imports is about 45 % (the average rate of the TU on imports is 55 % of the average nominal import duty rate). A proposed preference margin of only 25 % for the new tariff is intended to compensate for its much wider product coverage than the TU on imports. 46/ See, for example, the results of the audit of the Cameroon tax administration conducted by a mission of the French Ministry of Cooperation (Audit des Services Fiscaux: ProDositions Tendant & l'Am6lioration du Fonctionnement de l'Administration Fiecale Camerounaise, 24 January, 1991.) Tu4G ys - 45 - 3.21 Meanwhile, the medium-term reforms proposed for the ICAI and other indirect taxes must not be prejudicial to the eventual introduction of a VAT in member countries, and should start with a focus on goods as opposed to services, with the objective ofs (a) eliminating the presently unequal treatment of local goods relative to their competing imports; and (b) reducing the cascade of the existing common law tax structure on goods through devices not as administratively cumbersome as a VAT. With this in mind the following reforms are proposed: 3.22 TCAI on goods. A clear distinction would be made between indirect taxes on goods as opposed to services. In this regard, the TCAI and the ICAI that is applied to the sale of domestic goods would be abolished, and replaced with a new generalized turnover tax on coods, the Taxe sur Chiffre d'Affaires (TCA), which would be applied at the same flat rate on imports and locally produced products. Each country would be free to fix its own rate for the TCA. The TCA on imported goods would be applied on their duty inclusive c.i.f. value by the customs services at the point of entry only -- subsequent sales of imported products further along the retail chain would not be subject to the TCA. The TCA on domestic goods would be levied by the tax department, like at present, only at the point of the first sale. 3.23 Not all products would be subject to the TCA. Imports or domestic sales of a few essential consumer goods (a subset of products classified under Category I), could be exempt from the TCA. Exports, not being for domestic consumption, would be automatically exempt. In addition, capital aoods and raw m.terials imports of local firms, for which satisfactory evidence can be presented that they are for use in local production, would be exempt from the TCA. For ease of administration, this benefit could be restricted to just the firms under TU/TIP/TCI/TIC or other privileged regimes under existing Investment Codes. For at least these firms, therefore. such a provision would have the same effect as the introduction of a limited VAT 47/. 3.24 TCA on services. The existing ICAI on services would be replaced by a TCA on services which, for the time being, could continue to be applied at the same rates and on the same bases as the existing ICAI 48/. Over time, the rate structure of this tax would be simplified by restricting the number of rates in each country to a maximum of two. 47/ It is true that this proposal would discriminate against small firms and the use of domestic inputs. It should be noted, on the other hand, that: (a) TU/TIP/TCI and other Investment Code firms account for the overwhelming bulk of manufacturing value added in these countries; and (b) the reform proposals, globally, would certainly reduce the discrimination against the use of local inputs compared to the existing situation. A less discriminatory alternative could be to simply exempt from the TCA a regionally determined list, albeit a restricted one, of capital equipment, irrespective of the end-user. Such ex-ante exemptions on raw materials would, however, lead to serious revenue losses. For these inputs, therefore, a system of deductibility could be applied to a limited number of eligible firms in each country. 48/ Issues pertaining to the ICAI on transport services and bank credit are quite complex and are outside the scope of this report. Tax.G.hy - 46 - 3.25 Abolition of suRPlementarv taxes. Supplementary sales taxes such as the TT in Gabon, the Central African Republic, Chad and Congo would be phased out, as would also all para-fiscal levies that are currently tacked onto the ICAI (such as the centimes additionnels in Cameroon), or applied in parallel (such as the CAA in Chad). The timing and sequence for abolishing these taxes will, however, need to be examined on a country-specific basis depending on how important the contribution of these taxes is at present, and what are the degrees of freedom available to compensate the revenue loss from eliminating them. 3.26 Excise duties. Each country would introduce excise taxes on selected products from a regionally agreed upon list of products, that would, at a minimum, include tobacco products and alcoholic and non- alcoholic beverages. By definition, such a tax would be levied on both imports and the domestic sales of locally manufactured products, the former portion being collected by the customs, and the latter by the tax department. At present, only Gabon and Cameroon use such a tax, and in Gabon it is applied just on tobacco products. Such taxes would serve as an instrument for generating revenues in a non-distortionary manner, and would provide each country with an important additional margin of flexibility in order to meet their respective fiscal objectives. C. Imolementation Issues and Imolications for the UDRAC Treaty 1. Protocol of Understanding en a Minimum Platform of Measures 3.27 The above plan calls for major reforms of existing national incentives regimes and regional policy instruments. All countries cannot be expected to adopt all the suggested reforms at the same pace, although there are clearly some measures that require simultaneous action of all member countries. 3.28 To make the reforms a success, an implementation mechanism is needed that combines peer pressure with an element of flexibility. To this end, it is proposed that reforms be implemented within the broad framework of a orotocol of understanding between all member countries, laying down the key elements of tariff and indirect tax reforms, such as that described in the foregoing, and spells out a minimum Platform of only those specific measures that require simultaneous action by all countries. Such a protocol, signed by the Ministers of Finance of UDEAC-member countries, would have the effect of binding member countries to a common framework of reforms, while leaving each with a margin of flexibility with regard to tax rates and the pace of implementation. 3.29 The minimum olatform would include the measures such as the removal of the TCAI from the CET by all countries; abolition of the complementary tax; the discontinuation of the TU regime; the adoption of the generalized preferential tariff; agreement on the classification of tariff lines into the three suggested categories; agreement on the immediate-term 49/ commoni import duty rate structure to be adopted by all countries; agreement on a target medium-term import duty rate structure and maximum transition period for its implementation; agreement on the list of products that could be subject to a temporary surcharge, and on the ceiling for such a surcharge; and agreement on the list of products eligible for application of excise taxes. 49/ i.e at the start of the reform process. TaX.Onft - 47 - 3.30 Beyond this, each country would implement the remaining elements of the broad framework of reforms at its own Race, and per its own fiscal and administrative reauirements. Thus, for example, each country would be left to tackle such taxes as the TIP on an individual basis. More significantly, each country would proceed with the abolition of the remaining QRs and with the reform of sales taxes at its own rhythm, and there would be no regional obligation on any country to introduce a VAT. On the other hand, those countries that consider that they have the administrative capacity to implement the VAT without substantial revenue losses, would face no legal impediment to going ahead. 2. Legal Preoaration for the Reforms 3.31 The reforms cannot be implemented in all their aspects with just the signature of a protocol of understanding between all member countries -- this requires legal adoption of the reform program at the regional level. For this purpose, the Treaty of Brazzaville itself must be modified in order to incorporate all the provisions of the minimum platform of reform measures. In particular, articles of the Treaty that pertain specifically to the TU, intra-UDEAC trade, the CET and the provisions for fiscal harmonization have to be redrafted. The modified Treaty, once adopted by the UDEAC Council of Heads of State would, in effect, constitute the legal basis for the reform program 50/. In practical terms, however, the reform measures could not be implemented without additional regional legislation spelling out technical details, and laying down the modalities for the application of the various components of the minimum platform. This legislation can be prepared by the UDEAC Secretariat, and adopted by the UDEAC Management Committee, which is vested with the authority to legislate on regional trade and fiscal matters. Finally, regional legislation pertaining to the reform program will need to be incorporated at the national level, through the respective Finance Laws of each of the member countries. 3. Monitoring of the Reforms 3.32 Once the modified Treaty has been adopted, and all regional legislation pertaining to the minimum platform of measures are finalized, the responsibility for actually implementing the successive phases of the reform package within the stipulated time-frame will fall on the administrations of each country. Monitoring and coordination at the regional level will of course still be necessary. Responsibility for this should lie with the UDEAC Management Committee of the UDEAC, for the Committee brings together the Ministers of Finance and Development from member countries on a bi-annual basis. In any event, no new institutional structures need be created in order to implement the proposed reforms. The UDEAC Secretariat should, however, be reorganized in order to better provide support to the Management Committee. In this regard, it is proposed that account be taken of the administrative and financial audits of the Secretariat recently JQ/ The UDEAC Heads of State have the mandate to take decisions pertaining to the modification of the Treaty of Brazzaville on behalf of their countries. Implementation of these decisions can begin, pending eventual ratification by the legislatures of each country. T.z.Gwylq - 48 - commiesioned by the UDEAC Council of Heads of State 51/ and by the French Ministry of Cooperation. 4. Macro-economic Polices and Timing of Reforft 3.33 All UDEAC countries are still in the midst of a severe stabilization crisis in which they have experienced a substantial lose of competitiveness, economic activity is weak, the balance of payments are in deficit, and budget deficits are difficult to control. In no country have short-term tax measures succeeded in narrowing the financing gap. In recent years, revenues have continued to decline as the use of exemptions have become more indiscriminate, and tax structures have become more complex and irrational. This situation serves only to reinforce the diagnostic of Chapters I and II that successful adjustment requires a complete overhaul of the tax systems in these countries without the rationalization and simplification of tax structures, the revenue generating capacity of these countries will remain seriously impaired. The package of reforms proposed here is, therefore, of utmost urgency, and should be launched as soon as possible. It is important, however, that the design and pace of the reforms complement the requirements of macro-economic stabilization in UDEAC countries. 3.34 In this context, it needs first to be emphasized that the policy prescriptions of this report are based on the assumption that present exchange rate arrangements of UDEAC countries would continue. The proposed trade policy measures are designed not to contribute to a deterioration in the trade balance of any UDEAC country during the reform process. Although the average nominal import duty rates are to decline post-reform in all countries, the average effective duty rate in each (import receipts as a proportion of the value of imports) would be the same, if not higher than it is presently, due to the parallel reduction of import duty exemptions. As a result, the post-reform price of imports would be higher for some importers and lower for others, and the net impact on the trade balance is expected to be negligible (see para. 4.37). 3.35 Second, the proposed tax structures are designed to be revenue-positive in all countries through all phases of the reform program (see para. 4.16). Every effort has been made to ensure the robustness of the revenue projections upon which the recommendations are made. Indeed, if the reforms contribute, as they are expected to, in reducing fiscal fraud, their contribution to revenues could exceed the projections of this report. 3.36 Third, the suggested pace of reforms is based on the assumption UDEAC countries will continue to face macro-economic difficulties in the short-term, and that they then will gradually regain competitiveness through deflation and internal adjustment measures. Thus, it is proposed that the reforms start with measures that are implementable under present macro-economic circumstances. These immediate-term measures seek primarily to render the structure of incentives and indirect taxes simpler, more uniform and easier to administer, while leaving local industry relatively well protected from import competition and from higher average tax burdens. Measures to 51/ These comprise three reports prepared by Ernst and Young: Raport our les comotes annuels du Secr6tariat G6n6ral de 1'UDEAC (June 1991); Ranport sur l'oraaniaramme (June 1991); and RaoDort sur la Taxe Communautaire de l'Intdiration (April 1991). Ta.Omnq - 49 - make the incentives environment more competitive are to be progressively implemented only gradually over a five period. Needless to say that the pace at which the reforms can be implemented and their success overall, will depend on the discipline of UDEAC-member countries and on their ability to improve their macro-economic environment over the same period. T_VY Table 7 FRAMEIORK OF PROPOSED REFORYS A. STRUCTURE OF TRADE REfilME AND INDIRECT TAXES 1/ Present Post-reform ......................................................................... ...............----------.-----------------------...------....--------.......--------------...----_......---.......... .. Tax Jurisdiction Tax Jurisdiction .. ............................................ .................. ...--------------------------------------.----.......-.-.....-----------,--_-_-....... 1. Import Taxes Customs duty Regional (part of CET) Reptaced with unified import duty Entry duty Regional (part of CET) to be applied at three rates 2/ Regional depending upon product category TCAI Regional (part of CET) Replaced with TCA (goods) 3/ National Ccptnleentary tax National Eliminated TU on intra-UDEAC trade Regional (TU regime) Replaced with preferential tariff Regional Specific taxes on National Replaced with excise tax National, but with regionally en selected consumer goods4/ restricted list of goods 0 Other taxes on imqorts (statistical levies, Caisse Autonome, etc.) National Eliminated 11. Domestic Indirect Taxes ICAI 5/ National Replaced with TCU (goods) 3/ NationaL and TCA (services) 61 Other taxes added Phased out National onto the ICAI National (centimes additiomnels, etc, Fonds National d'Investissements, etc) TT/TIT 7/ National Phased out National TIP/TCI/TIC S/ National Replaced with TCA National TU on sales of local products Regional (TU regime) Replaced with TCU National Table 7 (contd.) Present Post-reform Tax Jurisdiction Tax Jurisdiction II. Domestic Indirect Taxes tcontd.) Specific taxes on Replaced with excise National but with regionatly seLected consuner goods National restricted list of luxury goods Specific taxes on conswption of petroleum National Unchanged National products Ill. Exemptions TU Regime Regional Eliminated TIPITCI Regime National Eliminated Investment Code National Allomed to lapse National Act 13/65 of UDEAC Regional Reduced coverage Regional Customs Code Other ad hoc National Reduced progressively National IV. Non-Tariff Barriers n *Rs National Phase out remaining ORs National 1/ Excluding taxes on exports. 2V Applied on c.i.f. value of imports in all countries. A temporary surcharge in effect comprising a fourth rate, could be applied on a regionally restricted list of "strategic goods" for a period not to exceed the duration of the regionally set maximma transition period. 3/ The TCA on goods will apply uniformly to all products whether imported or locally manufactured. In the case of imports, it is to to be applied to their duty inclusive price, and in the case of the local manufactures, it is to be applied on the value of their sales net of taxes. Only such imported inputs as are used in local production and petroleum products would be exempt. Each country would have the option of replacing the TCA with a VAT. 4/ These are used only in Gabon on tobacco products and in Cameroon on drinks. 5/ This is applied on both the sale of local products and services at various rates depending upon the type of product/service. 6/ This tax is to be applied at the same rates and on same basis as the existing ICAI on services. 7/ Transactions tax used in CAR, Congo and Gabon. 8/ Domestic equivalent of the Taxe Unique used in Cameroon, CAR and Congo. Table 7 (contd.) SUMMARY OF FRAMEWORK OF REFORM B. SITUATION OF TU/T!P/TCI/TIC ENTERPRISES ......... .................................................................... . --------------------------------------------------------------...----.......--............. . Nature of Tax Present Situation Situation post-reform nmport duty on equipment High lmvel of the CET (Custom Duty+Entry Duty+TCAI) Significantly lower ifport duty (15X) and exemption (unless exempt under investment code provisions) from TCA; phasing out of investment code privileges Inport duty o -aw Exempt Import duty, but with exemption from TCA materials Indirect taxes on TU on donestic sates of goods TCA (goods) at nationally determined local sales of goods TIP/TCI/TIC on domestic sates rates of goods. Indirect taxes on local TU firms are exempt; others are expected to pay inputs the ICAI except if subject to special privileges. TCA (goods), TCA (services) at nationally determined rates c:tb7e.wkl IV. RECOMMENDED POST-REFORM RATE STRUCTURES AND THEIR PROJECTED IMPACT 4.1 This Chapter examines the impact of various rate structures for the taxes to be addressed by the reform framework presented in Chapter III. on the basis of analyses of: (a) their revenue implications for each country; (b) their potential impact on existing firms; (c) their impact on the incentives structure in general; (d) their implications for tax and customs administration; and (e) their likely impact on the trade balance, recommendations are made for rate structures most appropriate to each country, and for an action plan for their phased implementation. A. Methodoloqv 1. Simulations of Revenue Imoact 4.2 For each country, simulations were conducted for the revenue implications of adopting alternative rate structures. These simulations were done as follows: First, the existing base of the various taxes to be reformed, i.e. import taxes and domestic indirect taxes on goods 52/, was estimated in each country. For import taxes, this involved obtaining data on officially recorded imports, by type of product and by type of fiscal regime. In particular, it was important to establish what proportion of these imports are currently subject to different kinds of duty exemptions. In the case of Cameroon, Congo, Gabon, and Equatorial Guinea, data on recorded imports were available from customs, and this has been used for the simulations. In these countries, the data were available at a high level of disaggregation 53/, and so provided a detailed picture of the structure of imports. In the case of Chad and the Central African Republic, no reliable import figures were available from customs, so BEAC data and IMF estimates of recorded imports were used. In the case of the Central African Republic, Department of Statistics data were used to estimate the structure of imports across product categories. In the case of Chad, the structure of imports had to be estimated using United Nations trade data. 4.3 Data on intra-UDEAC trade in manufactures was not consistently available across countries. In Cameroon, Equatorial Guinea and Congo, these data were obtained from customs. In the other countries, this information was gleaned from company interviews. In all cases, such trade accounts for low to negl3-ible proportions of total recorded imports. 4.4 Data on import duty exemptions were gathered from a variety of sources in each country. The Cameroon and Congo collect very detailed computerized information on different types of exemptions for each disaggregated product category. In the other countries, less disaggregated information was available from customs, but in each case additional independent sources were used, including: (a) BEAC for data on imports of petroleum companies and donor financed imports; and (b) 52/ The proposed reforms assume domestic indirect taxes on services to remain pretty much as they are at present. The reforms would, therefore, not impact the receipts from these taxes, and so these taxes are excluded from the revenue impact analysis. 53/ Cameroon, Congo and Gabon were able to provide dzta up to the 10 digit level of disaggregation (classified per the Brussels Trade Nomenclature). TMYCS - 54 - company interviews for data on the value of imports by TU companies and under the Investment Code. At a very aggregate level, it was possible to get a fair idea of the overall extent of exemptions in each country by comparing the average effective tariff with the estimated average nominal tariff. 4.5 Data on the potential tax base for domestic indirect taxes were generally poor. In all countries, this base was assumed to comprise the domestic sales of TU/TIP/TCI/TIC companies, information on which was available either from customs or through company interviews. The implicit assumption in each case was that firms that are currently exempt from the ICAI on local goods, or that evade it altogether, would remain outside the tax base post-reforms. This is a conservative assumption designed to ensure that the simulation analysis is not based on over-estimates of the potential tax base of the taxes to be reformed. 4.6 Second, a post-reform revenue target was established for each country. In all cases, the target used was 5% over the receipts generated by the taxes to be replaced/affected by the reform in a chosen base year. In the case of the Central African Republic, Chad, Congo and Equatorial Guinea, the base year used was 1990. In the case of Gabon, 1989 was used as the base year at the request of the authorities. In the case of Cameroon, the base year used was 1990/1991. Information on receipts by type of tax was largeLy put together from data sources in the Ministries of Finance and the IMF. In all cases, information on actual receipts were used, as opposed to amounts committed. 4.7 Third, several combinations of tax rates were examined under various hypotheses concerning the phased reduction of exemptions. Only those scenarios that corresponded to reasonable assumptions with regard to the ability of each country to progressively reduce exemptions were short-listed 54/. 2. Firm Level Analysis 4.8 The above revenue simulation analysis was supplemented with a firm-level analysis of effective rates of protection. A total of 86 manufacturing firms were interviewed in five countries 55/. Of these, sufficient data was available for 76. The sample of firms was chosen so as to cover the principal sectors of formal manufacturing activity in these countries. Effective rates of protection were estimated using the Corden approach, under a variety of different post- reform scenarios and rate structures, under various alternative hypotheses with regard to the evolution of customs fraud, an important issue particularly in the land-locked member countries of UDEAC 56/. 54/ Further methodological clarifications are provided in Annexes IV to IX which present the detailed results of the simulation analysis by country. 5/ No firms from Equatorial Guinea could be included in the sample. In any event, this country has negligible formal-sector manufacturing capacity. Interviews in Cameroon, Gabon, Chad, the Central African Republic and Congo were conducted with assistance from two experts of the French Ministry of Coop6ration. 56/ Further methodological details are provided in Annex III which reports the firm-specific results of the ERP analysis. T.z.GWy - 55 - B. Recommended Rate Structures 4.9 Of all the various scenarios regarding tax rates examined, only the four deemed most appropriate for each country are presented in the report. The recommended rate structures by country under each scenario are presented in Table 8 (see rows I (a) to (e)). For any given country, the four scenarios represent different stages in the reform process, and together they comprise a phased implementation plan for each country. The first three scenarios are the most important for they represent the recommended evolution of tax rate structures over the medium-term, i.e., over a five-year period. Scenarios A, B, C represent the recommended rate structures for adoption in the immediate-, short-, and medium-term, respectively, in each country. It is recommended that all countries start the reform process together by adopting the common import-duty rate structure of scenario A, and that they converge simultaneously, per a regionally agreed time-table, to the rate structures of scenario C over a maximum period of five years. 4.10 ImDort duty rate structures. The import duty rates for Category I and II products are assumed to remain fixed at 5% and 15% respectively through all the phases of the reform up to the medium-term -- only the import duty rate on Category III products is assumed to decline progressively over time, from 70% in the immediate-term to 35% in the medium-term. A certain degree of dispersion of nominal import duty rates is, therefore, assumed to persist into the medium-term. 4.11 No recommendations are made for the introductior of temporary surtaxes. However, it is suggested that surtaxes should: (a) have a regionally determined ceiling of 15% over the import duty rate for Category III products at any time; (b) be limited to a restricted list of regionally selected products; (c) be introduced within a maximum period of three years from the start of the reform program only to replace existing QRs; and (d) if introduced, be eliminated within three years thereafter. 4.12 While scenarios A, B, and C propose rate structures that provide greater protection for non-essential consumer goods (Category III products) than for raw material and capital goods (Category II products), Scenario D assumes a uniform import duty rate of 30% for all product categories. From the economic efficiency point of view, Scenario D is clearly the most desirable, for it would provide uniform effective protection rates of 30% across all activities and would thus be the least distortionary. However, such a tariff structure may prove to be difficult to implement any time soon for political economy reasons. For one, effective protection that this rate structure provides in all countries, though uniform, is on the low side. Second, in most countries, the uniform rate scenario results in post-reform average import duty rates on non-exempt imports that would be too burdensome for existing firms (twice the level proposed in all of the other scenarios) -- this would undoubtedly make the reduction of exemptions that much harder. While it is suggested, therefore, that the rate structures of scenario D be regarded as a desirable long-term objective in each country, no specific recommendations are offered as to the time horizon for their application. 4.13 TCA and excise duties. Under each of the scenarios the rates of the TCA and excise duties vary across countries. The rates of these taxes are determined under the fiscal requirements of each country. Under the immediate-term scenario (scenario A) for example, the recommended rates of the TCA range from a low of 4% in the case of the Central African Republic, to 13% in Cameroon. Likewise, the excise TM.GMyb - 56 - levies proposed for the immediate term range between 8% in the Central African Republic to 48% in Gabon for tobacco products, and between 15% in Cameroon and 45% in Chad for alcoholic beverages. 4.14 In the case of Cameroon, the rate structure proposed for the medium term (i.e. the rate structure under scenario C) assumes the adoption of a generalized VAT instead of the TCA. A fourth scenario (scenario A*) is also presented for Cameroon to demonstrate the implications of adopting a generalized VAT instead of a TCA right at the start of the reform process. C. Impact of Recommended Rate Structures 4.15 The main results of the analysis of the impact of the various recommended rate structures are presented in Tables 8 to 11. The impact on fiscal receiphs, tax burdens, and the implications for the customs and tax departments are summarized in Table 8 (rows III - VII); Table 9 explains the assumptions concerning exemption reductions that correspond to each scenario; Table 10 shows the impact on effective rates of protection for the principal existing sectors of economic activity under different scenarios; and Table 11 traces the more general implications of the various scenarios for the overall incentives structure in UDEAC-member countries. More detailed results are to be found in Annex III, which presents results of the ERP analysis on a firm-specific basis, and in Annexes IV to IX, that present the results of the simulation exercise by country for all six countries 57/. 1. Implications for Fiscal Receipts 4.16 The recommended rate structures yield under all scenarios yield revenues that are at least 5% over the base year receiots from the taxes targeted by the reform program (see row III of Table 8). It needs to be emphasized that every attempt has been made to ensure that the revenue results are on the conservative side. The import tax base used for each simulation is the value of officially recorded imports -- no reduction in customs fraud is assumed. A conservative estimate of the taxable turnover of only the TU and TIP/TCI/TIC enterprises 58/ has been used as the tax base for domestic indirect taxes on goods. Moreover, a sensitivity analysis for each country of the impact on revenues of different assumptions concerning price elasticities of import demand indicates that the results are robust. In the case of Cameroon, Gabon, Equatorial Guinea and Congo the revenue results presented in Table 8 correspond to an assumption of zero elasticity of import demand. In all these cases, however, even a high price 57/ Annexes IV-IX are all organized the same way. Each has a consistent set of tables for a different country, presenting: (a) the import and indirect tax base; (b) existing receipts by type of tax; (c) the existing rates and exemptions structure; (d) alternative rate structures post-reform, and their respective implications for receipts; and (e) the _mplications of each reform scenario for tax burdens on different categories of economic agents, and on the tax collecting responsibilities of the customs and tax departments. SS/ Except in Gabon, where companies of the drinks sector, that do not benefit from TU regimes, have also been included. Tax.Gmlag - 57 - elasticity assumption 59/ would lead to a less than 5% revenue loss compared to the zero price elasticity case. This is because after the proposed reforms (which would change rates as well as widen the tax base through the reduction of exemptions), the category of general consumer goods would face a lower price, while that of raw materials and capital goods would face a higher price. The combined effect is quite moderate. For the Central African Republic and Chad, the revenue results presented assume moderate price-elasticities of import demand 60/. Here again, even under a high price elasticity assumption, the resulting receipts meet the minimum target of revenue neutrality. 4.17 Post-reform, several taxes are to be eliminated. These taxes include the complementary tax, the transactions tax in some countries 61/, the TU and the TIP/TCI/TIC, and where relevant, parafiscal levies such as the tax of the Caisse Autonome d'Amortissement in Chad. These taxes together account for an average of 23% of indirect tax revenues at present -- their share ranges from 5% in Equatorial Guinea to 38% in Congo 62/. The revenue losses that would occur from the elimination of these taxes would have to be compensated from other sources in the post-reform situation. There are two instruments that are critical for enabling these revenue losses to be more than compensated for post-reform: (a) the TCA and excise duties; and (b) the enlargement of the import tax base through the reduction of duty exemptions. 4.18 Role of the TCA and excise duties. In the immediate-term, the TCA and excise duties would together contribute on average 16% of the total indirect tax revenues, which would cover over three-quarters of the revenues from those taxes that are to be eliminated. The relative importance of the excise duties on the local sales of luxury goods will vary somewhat across countries depending, in part, upon the relative size of the existing tax base for such taxes in each country. In general though, in the immediate-term, excise duties would help make 59/ -2 for consumption goods; -1 for intermediate goods; and -0.5 for capital goods. 60/ -1 for essential products; -0.25 for raw materials and capital goods; -1.25 for general consumption goods; and -1.5 for luxury goods. 61/ In the case of Gabon, the situation is a little more complex than in other countries because: (a) the current contribution of the TT is very important; (b) the bulk of the sales of the local manufacturing sector (outside the tobacco and drinks sectors) are subject to a very low rate of indirect taxes; and (c) petroleum companies account for a very large share of import-duty exemptions. There is, therefore, little room for manoeuver, and it is not feasible to immediately compensate for the important revenue losses that would occur from elimination of the transactions tax. Under the circumstances, it is suggested that the TT be retained in Gabon until such time as the tax base can be enlarged beyond what is projected in the scenarios presented in Table 8, either through a greater effort to reduce import duty exemptions, or by taxing the sales of local manufacturing firms, particularly in the agro-processing sector, that at present pay almost no taxes at all. 62/ Source: Annexes IV-IX. TM.OGMY~ Table 8 Suemsry Results of Simulation Analysis Coeutry CANEROS CAR Sase Year (1990/91) (1990) Scenarlos A B C D A* A 8 C D 1. Rate Structur *. (X) Custoe duty mn category I proects I/ S 5 5 30 5 5 5 5 30 b. (X) Customs dty on category 1i prodects 15 15 15 30 15 15 15 15 30 c. tX Custos duty an category III products 70 S0 35 30 70 70 50 35 30 d. tX) TCA (goods) 2/ 13 15 28 12/ 22 12/ 15 12/ 4 6 8 5 e. (X) Excise tax on alcoholic drinks 15 20 30 22 24 22 28 30 30 on tobacco 15 20 30 22 24 8 12 12 10 on other products 4/ 15 20 30 22 24 22 28 30 30 II. (X) Prqportion of iwports totally and part exeqpt 5/ present 64 64 64 64 6 69 69 69 69 1 post-refors 37 31 25 25 37 64 61 57 57 Ln OD 111. Receipts from taxes to be reformed (billiors of CFAF) present 6/ 107.1 iO7.1 107.1 107.1 107.1 13.4 13.4 13.4 13.4 post-reform 169.3 13/ 169.3 13/ 170.6 13/ 170.8 13/ 171.2 13/ 14.8 14.9 15.0 15.0 IV. Average burden of Indirect taxes on production of tobacco and drink coopanies (X) 7/ presen- 37 37 37 37 37 32 32 32 32 post-reform 40 45 44 38 32 28 35 37 40 V. Average burden of Indirect taxs on proaductfn of other TU/TIP/ICI enterprife (S) 4/ present 23 23 23 23 23 10 10 10 10 poet-reform 25 25 22 22 24 13 15 16 17 VI. Average effective tariff on non-exeopt Iqports (X) 9/ present 52 52 52 52 52 42 42 42 42 post- reform 48 40 38 43 52 42 39 32 34 VII. Average effective tariff on altl iqorts (X) IO/ preset 19 19 19 19 19 13 13 13 13 post-reform 30 28 29 32 34 20 19 18 18 Vill. Receipts frm taxes subject to reform cotlectel 88 88 88 88 88 90 90 90 90 by Customs (X of total receipts from these taxes) 11/ 70 64 66 74 78 86 81 78 82 Source: Amxes IV - IX Table 8 (contd.) Sunmery Results of Sioulation nalysis Coumtry cHAD CONO Base Year (1990) (1990) Scenarios A a C 0 A a C 0 I Rate Structure D. (Z) Custos duty on category I products If 5 5 5 30 5 5 5 30 b. (X) Customr duty on category II products 15 15 15 30 1S 15 1S 30 c. (X) CuBtOa duty on category IIIpro cts 70 50 35 30 70 S0 35 30 d. CX) TCA (goods) 2/ 11 11 11 7 6 7 10 5 e. (X) Excise tax on alcoholic drinks 45 45 45 45 25 30 32 25 on tobacco 15 15 15 15 15 20 22 15 on other products 4/ 15 1S 15 15 15 20 22 15 It. CX) Proportion of isports totally and part exexpt S/ present 91 91 91 91 69 69 69 69 post-reform 76 76 71 71 51 4S 35 35 1 VI M. Receipts from taxes to be reforeed (billions of CFAF) present 6/ 10.3 10.3 10.3 10.3 39.7 39.7 39.7 39.7 post-reform 11.2 11.1 12.0 11.9 42.0 42.2 41.9 42.5 IV. Average burden of indirect taxes on productfon of tobacco and drink conidnies (X) 7/ present 52 52 52 52 30 30 30 30 post-reform 51 48 47 47 34 43 45 39 V. Average burden of Indirect taxes on prodectfon of other TU/TIP/TCI enterprise CX) 8/ present 9 9 9 9 16 16 16 16 post-reform 10 11 10 12 22 23 32 22 VF. Average effective tariff on non-exempt Iqworts CX) 9/ present 73 73 73 73 52 52 52 52 post-reform 38 34 30 35 45 38 31 35 Vil. Average effective tariff on all imports (X) 10/ present 7 t 7 7 16 16 16 16 post-reform 7 7 8 9 22 21 20 23 VII. Receipts from taxes sublect to reform collected 100 100 100 100 87 87 87 87 by CustomsCX of total receipts from these taxes) 11/ 53 51 56 66 84 79 77 85 Source: Annexes IV - IX Table 8 (contd.) Swuary Results of Simulation Analysis Country EQUATORIAL GUINEA GABON Base Year (1990) (1990) Scenarios A B C 0 A B C 0 I. Rate Structure a. (X) Customs dty on category I products I/ 5 5 5 30 5 5 5 30 b. (X) Customs duty on category II products 15 15 15 30 15 15 15 30 c. (X) Customs duty on category III products 70 50 35 30 70 50 35 30 d. (X) TCA (goods) 2/ 10 13 16 16 9 13 14 6 e. (X) Excise tax on alcoholic drinks 25 35 65 65 1g. 17 18 22 on tobacco 25 35 65 65 48 44 46 47 on other products 4/ 25 35 65 65 45 45 45 45 II. CXM Proportion of imports totally and part exefipt 5/ present 70 70 70 70 61 61 61 61 post-reform 61 61 61 61 53 48 38 35 Ill. Receipts from taxes to be reformed (billions of CFAF) present 6/ 1.5 1.5 1.5 1.5 68.5 68.5 68.5 68.5 post-reform 2.4 2.4 2.4 2.4 72.4 72.0 72.4 72.4 IV. Average burden of indirect taxes on production of tobacco and drink companies (21 7/ , present: 3- - - 2 32 32 32 post-reform - - 38 40 40 43 V. Average burden of indirect taxes on production of other TU/TIP/TCI enterprise (x) 8 present 7 7 7 I post-reform - - 16 20 21 20 VI. Average effective tariff on non-exeapt imports (X) 9/ present 62 62 62 62 62 62 62 62 post-reform 59 60 47 49 57 49 40 36 VII. Average effective tariff on all ilports (M) 10/ present 15 15 15 15 25 25 25 25 post-reform 25 25 25 25 25 25 25 25 Vill. Receipts from taxes subject to reform collected 100 100 100 100 92 92 92 92 by Customs (X of total receipts from these taxes) 11/ 100 100 100 100 85 82 81 85 Source: Arnexes IV - IX c:tb8e.wkl - 61 - TABLE 8 (Cont'd) N O T E S 1. Tariff rates on intra-UDEAC trade are 75% of the rates for product category. The cLassification proposed (see Table 6) is based broadly aLong the foLLowing criterion: Category I = essential products Category 11 raw material and capital goods Category III = general consumer goods (including excisable goods). 2. To be applied at same rate on aLl products whether imported or locally manufactured. Applied on duty inclusive price of imports and on the value of sales, net of taxes, of locally manufactured products. The TCA does NOT apply to imported inputs that can be shown by the importing firms to be used in its local manufacturing activity. The TCA does NOT apply to petroleum products. The TCA DOES apply to intra-UDFAC imports. 3. To be applied as same rate on imports (on their c.i.f. value + customs duty) and locally manufactured products (on the value of their sales net of taxes). 4. Applies only to certain products (drinks, tobacco, precious metaLs, antiques/art objects, cosmetics and music/video equipment). 5. Proportion of total imports paying no duty or a reduced rate. 6. This represents the NINIUM TARGET level of revenues to be generated by reformed taxes. 7. (Indirect taxes paid by these firms on their purchases and sales of goods)/(turnover of drinks and tobacco firms). 8. (Indirect taxes paid by these firms on their purchases and sales of goods)/(turnover of other TU/TCI/TIC firms). 9. (Import duties + turnover tax + special levies on imports receipts from duties on part exempt imports)/(non-exempt imports c.i.f.). This ratio is an indicator of the tariff burden on those imports that do pay all legal entry duties. 10. (Total receipts from all duties/taxes on imports)/(total imports c.i.f.). 11. Assumes that Customs will NOT have responsibility for applying the new TCA and excise levies on TU/TIP/TCI enterprises as they presently do for collecting the TU/TIP/TCI. The transfer of responsibility from Customs to the Tax Department is, however, not critical to the reforms and could be deferred if it is likely to cause too much administrative disruption. In the long run though, it would be desirable for Customs not to be re;ponsible for any domestic indirect taxes. In any event, Customs would continue to collect the TCA or VAT on imported goods. 12. A Value Added Tax (VAT) is applied in lieu of the TCA. 13. This total is 5% larger than the receipts - CFAF 161 billions - (from taxes to be reformed) targeted by the Cameroonian authorities in 1991/92 as part of the IMF program. C:Tab8e.ftn - 62 - up for about a third of the revenue losses from the elimination of taxes targeted under the reform program. 4.19 Reduction of exemi,tions. The TCA and excise duties alone cannot be expected to make up the revenues from taxes earmarked for elimination -- the reduction of duty exemptions is just as essential for satisfactory post-reform revenue results. Table 9 explains the assumptions that have been made under various scenarios for exemptions reduction in each country. Exemptions are projected to decline progressively over time in parallel with the projected decline in the nominal import duty rates. Although detailed information on the exact composition and extent of exemptions is not available in all countries, every effort has been made to try and ensure that the assumptions with regard to exemptions reduction are realistic and easily implementable over the short- to medium-term, it beina understood that the ultimate obiective remains that of the total elimination of exemDtions. 4.20 The immediate-term scenarios for the Central African Republic and Chad assume only that duty exemptions currently granted on the import of raw materials and packing material3 under the TU regimes will be eliminated 63/. In the case of these countries, just the elimination of this regimes would raise the additional revenues necessary for the proposed rate structures in each to generate the targeted revenues. 4.21 In Equatorial Guinea, no exemptions reductions are deemed necessary in the immediate-term. In Congo and Gabon on the other hand, the introduction of the TCA and excise duties at the proposed rates and the elimination of TU exemptions alone would not generate sufficient revenues. In the case of these countries, therefore, it is assumed in addition to the elimination of exemptions for imports under the TU regime, that exemptions to imports under the TIC/TCI regimes, miscellar.eous exemptions (excluding those to petroleum companies) granted on the basis of administrative discretion or under the generous provisions of Act 13/65 of the UDEAC Custois ode will also be eliminated. The elimination of these exemptions would reduce the proportion of imports totally or partially exempt from 68 to 51% in Congo, and from 61 to 53% in Gabon (see Table 9). 4.22 In Cameroon, the scenario for immediate adoption assumes the elimination of the TU and TIP regimes, an 80% reduction of import duty exemptions accorded under regimes A, B and the small and medium scale enterprise regime of the Investment Code, and a 5% reduction of exemptions granted per Act 13/65 of the UDEAC Customs Code. These measures would reduce from 64 to 37% the proportion of imports totally or partially exempt. That the implementation of such measures is administratively and legally feasible has been demonstrated by the Cameroonian authorities who will, beginning in the fiscal year 1991/1992, began to apply a minimum flat-rate duty on all Investment Code related imports, as well as on those of TIP firms. As for the TU regime, the privileges under this regime are not guaranteed for any specific duration, and the Management Committee of the UDEAC is empowered to revoke these benefits at any time. 63/ In the Central African Republic exempt imports of TU firms represent an estimated 5% of total imports. In Chad, these imports constitute about 15% of total imports (see Table 9). T=x.GUyvg - 63 Table 9 Structure and Coverage of import Exefptfons Pre and Post-Reforms (as percentage of total imports) Type of Exemptlon C A M E R O O N C A R Pre-reform Post-reform Pre-reform Post-reform Scenario Scenario Scenario Scenario A C A C 1. MisceLlaneous 28X 27X 20X 23X 23X 23X of which: Public administration reLated, petroleum products, diplomatic, publfc investment program 1/ (5K) (5C) (SX) (9X) (9X) (9X) Customs Code and other misc. 2/ (23X) (22K) (15S) (14X) (14X) (14X) Petroleun companies 3/ - 2. Intra-UDEAC 4/ OX OX OX 7X 7X 7X 3. Reduced rate imports under Investment Code 14 10X 5 19X 19t 19. 4. Taxe Unique/TIP/TCI/TIC imrports 22X OX OX 20X 15X 8X 5. Total all exemptions 64% 37X 25X 69X 64X 57X 6. Proportion of imports non-exempt 36K 63K 75X 31K 36X 43X 7. Total Imports 100X 100K 100 lOOX tOOK 100X Source: Customs Directorates on each country, staff estimates See Annexes IV - IX for details. 1/ These include: exemptions for military equipment, exeaptions for donor financed imports, duty-free imports of government agencies, inports under government contracts, imports of petroleum products exempt from the TCAI and the customs and entry duties. In the case of Congo, exeptions accorded to priority sector imports (4K of total) are also included. 2/ Exeaptions related to Act 13/65 of the UDEAC Customs Code, and those accorded on the basis of administrative discretion. 3/ Duty-free inports of petroleun prospecting and exploration companies. 4/ TU3 type customs declarations. S/ Reduced rate or duty-free imports other than under the TU/TIP/TIC/TIP regimes. - 64 - Table 9 tcontd.) Structure and Coverage of Import Exemptions Pro and Post-Reforms (as percentage of total Imports) Typo of Exemptfon C N A D C ON a O Pre-reform Post-reform Pre-roform Post-reform Scenario Scenario Scenario Scenar1o A C A C 1. Miscellaneous 71X 71X 68X 52 45X 35X of which: Public administration reLated, petroleum products, diplomatic, public investment program 1/ (601) (601) (601) (81) (8X) (4X) Customs Code and other misc. 2/ (61) (61) (3X) (7X) (01) (01) Petroteun companies 3/ (51) (5OM (5X) (37X) (371) (31X) 2. Intra-UDEAC 4/ 1% 1X 1X 01 0 OX 3. Reduced rate imports under Investment Code 41 41 21 61 6X OX 4. Taxe Unique/TIP/TCI/CIC imports 151 OX OX 101 0 0 5. Total all exemptions 911 761 711 68X 51X 35S 6. Proportion of 1mrports non-exempt 91 241 29 32 49X 65X 7. Total Imports 1001 1001 1001 1001 1001 1001 Source: Customs Directorates on each country, staff estimates See Annexes IV - IX for detailts. 1/ These include: exemptions for military equipment, exemptions for donor financed fmports, duty-free imports of goverraent agencies, niports under goverromnt contracts, fmports of petroleun products exempt from the TCAI and the customs and entry duties. In the case of Congo, exeptions accorded to priority sector Imports (41 of total) are also included. 2/ Exemptions related to Act 13/65 of the UDEAC Custom Code, and those accorded on the basis of administrative discretion. 3/ Duty-free Imports of petroleum prospecting and exploration companies. 4/ TU3 type customs declarations. S/ Reduced rate or duty-free imports otner than utnder the TU/TIP/TIC/TIP regimes. _ 65.. Table 9 Ccontd.) Structure and Coverage of Import Exemptions Pro and Post-Reforms (as percentage of total aiports) Type of Exemption EQUATORIAL GUINEA 0 A a 0 N Pro-reform Post-reform Pre-reform Post-reform Scenario Scenario Scenario Scenario A C A C 1. Miscetlaneous 60X 60X 55X 30X 26X 20X of which: Public administration related, petroleum products, diplomatic, public investment program 1/ (55X) (55X) (55X) (4X) (4K) (4K) Customs Code and other misc. 2/ (5X) (5K) (OX) (4X) (OX) (oK) Petroleum companies 3/ - - - (22X) (22K) (16X) 2. Intra-UDEAC 4/ 6X 6X 6X 0X 0X 0X 3. Reduced rate imports under Irvestment Code - - - 27X 27K 18K 4. Taxe Unique/TIP/TCI/TIC imports - - 4X 0X oX 5. TotaL all exemptions 66X 66X 61X 61X 53% 38X 6. Proportion of imports non-exempt 34K 34X 39X 39X 47X 62X 7. Total Imports 100 100 100% 100X 100 100 Source: Customs Directorates on each country, staff estimates See Annexes IV - IX for details. 1/ These include: exemptions for military equipment, exemptions for donor financed imports, duty-free imports of government agencies, imports under government contracts, Imports of petroleum products exempt from the TCAI and the customs and entry duties. In the case of Congo, exeptions accorded to priority sector imports (4K of total) are also incLuded. 2/ Exemptions related to Act 13/65 of the UDEAC Customs Code, and those accorded on the basis of administrative discretion. 3/ Duty-free imports of petroleum prospecting and exploration companies. 4/ TU3 type customs declarations. 5/ Reduced rate or duty-free imports other than under the TU/TIP/TIC/TIP regimes. - 66 - 4.23 The medium-term exemptions reduction targets assumed in the simulations can be met in most countries essentially by allowing existing Investment Code privileges to lapse without renewal, and by reducing the scope of the exemptions accorded under the existing Act 13/65 of the UDEAC Customs Code, which is currently vulnerable to considerable abuse 64/. In the case of Cameroon, for example, the proportion of imports totally or partially exempt is projected to decline from 34% in scenario A to 25% in scenario C. This target could be achieved just by allowing existing Investment Code privileges regarding duty exempt imports lapse without further renewal, and by reducing the miscellaneous exemptions under Act 13/65 by a third. In Congo and Gabon, due to the large size of petroleum company imports that are currently exempt, aside from allowing duty exemptions privileges under the Investment to lapse, these countries will need also to reduce duty exemptions to these companies (see Table 9). Scenario C requires duty-exempt imports of petroleum companies to be reduced by 20% in Congo and by a quarter in Gabon, compared to their current levels. 2. ImDact on Existing Firms 4.24 The food processing (mainly suaar and edible oils), textiles, tobacco and drinks sectors reprefent the bulk of the value added in the formal manufacturing sectors of all UDEAC countries. Table 10 summarizes the implications, by country, of the recommended immediate- and medium-term rate structures for nominal and effective protection cates to existing firms in each of these sectors. 4.25 Nominal imoort duty rates. In each country, compared to the existing situation, there is a progressive and substantial decline in the nominal rate of protection accorded to all sectors (see Table 10.A). In the food-processing sector, for example, compared to existing levels, nominal rates decline on average 26% under scenario A, and 63% under scenario C. It is expected that this secular reduction of nominal rates would reduce the incentive for customs fraud and smuggling. The dispersion of import duty rates will also desline significantly and this should help render the distribution of the tax burden more uniform post- reform. 4.26 Effective rates of protection. Of the sectors analyzed, the food-processing sector in almost all countries is currently the most protected sector due to the use of QRs and is also very inefficient sector (see Table l0.B). In some countries, firms in this sector are barely functioning (Congo), or are very heavily subsidized (Gabon, Cameroon). This sector is likely to be the most vulnerable to the proposed reforms, for, assuming that all remaining QRs are dismantled, there would result a substantial decline in ERPs. The political economy of this change in trade regime may prove to be difficult to manage, given the relatively large share of formal sector employment that this sector generates, and the fact that most of these firms are partly state-owned. To facilitate the transition, it is proposed that the removal of QRs be accompanied: (a) by temporary import-duty surtaxes as discussed in para. 3.8 above; and (b) a program of public enterprise 64/ What is apparent from this is: (a) that each country will need to revise its Investment Code once the new import duty rate structures are adopted, so that firms in the future are no longer eligible for import duty exemptions of any kind; and (b) that the Act 13/65 of the UDEAC Customs Code will need to be revised to make it more restrictive with regard to the award of import duty exemptions (see Annex 10 for specific proposals in this regard). Tsz.Gny* - 67 - reform that seeks to liquidate those firms that cannot be salvaged and to restructure those that are potentially competitive 65/. 4.27 At present, only textile firms in Gabon and Cameroon are doing reasonably well. In the other countries, firms in this sector are close to liquidation. Unlike in food processing, the incidence of illegal imports being particularly widespread, the textiles sector is not highly protected in all countries, despite the use of QRs. The proposed reforms would provide greater protection to the textiles sector only if there is a reduction in cust^ns fraud. If the post-reform reduction of nominal duties does not lead to reduction in illegal imports of textiles, then textile firms are likely to be subject to greater international competition. The experience of textile firms in Cameroon and Gabon shows, however, that they can survive very stiff competition. Textile firms in these countries are, therefore, expected to adapt to the post-reform incentives environment. On the other hand, the textile firms in Chad and the Central African Republic are most inefficient, and it is difficult to see how they could be salvaged no matter what fiscal or trade regime benefits are accorded to them. 4.28 The drinks (mainly beer) and tobacco sectors are both heavily protected in most countries. Both sectors are also doing very well at present 66/. Post-reform, these sectors will see a progressive reduction in their ERPs to much more reasonable levels, ranging from 40 to 80% in the former, and from 10 to 170% in the latter 67/. At present these sectors benefit from ERPs ranging from 130 to 600% in the case of drinks, and from 50 to 670% in the case of cigarettes. These firms are, however, robust enough to be able to adjust to the post-reform incentives environment. 4.29 Fiscal burden on firms. Rows IV and V of Table 8, provide an indication of the aggregate impact of the post-reform rate structures on the fiscal burden (indirect taxes paid as proportion of turnover) of the principal manufacturing firms in each country. The results of the cigarette and drinks companies, which are to be subject to excise levies in all countries are presented separately from those of the remaining companies. What is noteworthy is how disparate the tax burden currently is between type of activity and across countries. The current fiscal burden on drinks and tobacco firms ranges from a low of 30% of turnover in Congo to a high of 52% in Chad. For non-tobacco and drinks companies, the fiscal burden ranges from a low of 7% in Gabon, to a high of 23% in Cameroon. 65/ Although it is not discussed here, a similar approach would be appropriate to the heavily protected cement sectors of Cameroon, Congo and Gabon. 66/ Despite the incidence of some illegal imports, the tobacco company in Chad has retained a stable share of the local market and is functioning profitably. 67/ Post-reform ERPs could be lower than this for cigarettes if illegal imports do not decline post-reforms (see Table 1O.B). Cigarette smuggling is, however, sensitive to the legal price of imports, and as this declines, illegal cigarette imports can also be expacted to decline. Tuawy* Table 10 COMPARISON OF PRE AND POST REFORM INCENTIVES FOR EXISTING FIRMS A. Coqparison between Pre and Post Reform ERPs Sector Food processing Textiles Drinks Tobacco ,....................................... ........... ..................... .......................................... .. ..................... .. .. . Nominal Tariffs Nominal Tariffs Nominal Tariffs Nominal Tariffs ..... ...... .......... ................... ............ I....................... ................ ............................... .. .......................... ................................................... ..... .................................... Pre- Post- Pre- Post- Pre- Post- Pre- Post- Reform Reform Reform Reform Reform Reform Reform Reform Country Scenario A Scenario C Scenario A Scenario C Scenario A Scenario C Scenario A Scenario C ................................... ....................................................................... ................................... ..................................................................... ............................................... Cameroon 110.02 70.02 35.6X 135.0X 70.02 35.02 142.02 70.02 35.02 42.0X 70.0X 35.01 CAR 90.02 70.ox 35.02 80.0X 70.02 35.02 200.02 70.02 35.02 100.02 70.02 35.02 c, Chad 90.0X 70.02 35.02 80.02 70.02 35.02 81.02 70.02 35.02 75.02 70.02 35.02 I Co"go 90.02 70.02 35.02 85.02 70.02 35.02 180.02 70.02 35.02 125.02 70.0X 35.02 Gabon 100.02 70.02 35.02 86.02 70.02 35.02 174.02 70.02 35.02 219.0X 70.02 35.02 Source: Customas Directorates, WEAC Custows Cade, and conpany interviews. See Annex II for details. 1/ These are weighted average nominal tariffs of firms interviewed in each country in each sector. Equatorial Guinea is not Sncluded because of negligible formil manufacturing activity in that country. Table 10 (contd.) ClPARIS0N OF PRE AND POST REFORI INCENTIVES FOR EXISTING FIRNS B. Coqurison betwen Pro and Post Reform ERPs Sector Food processing Textiles Drinks Tobacco ERP ERP ERP ERP .............................. ............................................................. ..... ........ ......... ................. ..................................................................................................................... Pre- Post- Pre- Post- Pre- Post- Pre- Post- Reform Reform Reform Reform Reform Reforp Reform Reform Country Scenario A Scenario C Scenario A Scenario C 3cenario A Scenario C Scenario A Scenario C .......................................................................................................................................................................... CAroon 359X 2/ 261X 71X, 66X 2/ 1242 492 228X 81X 402 2572 52 X 11 X CAR *2/ - 74X 93X 38X - 6732 511 2 172 X Chad 81X 2f 1852 77X 6 2/ 92 92 1352 l9X 492 552 1292 55 ° (-78) (-91) (94) (37) (-15) (-59) ° Cml. * 2/ - 1692 225X 74X * - - 2422 136X 502 (-115) (-13) (53) (-16) Gabon V2/ - - 392 104 46U 5802 195X 812 * .............................. .................................. ....... ............ ..... ........ .. ....... ........... .. .. . ... .. .. .. ... ... ........... Sourace: Coapany Interviews; based on more detalled results in Amex III a* newtive value added at world prices Pote: ti) For firms with negative value added world prices, it is not possible to calculate meaningful post-reform ERPs. til) Post-reform ERP#s assums that remaining OR's mill have been lifted. (Mii) Figures in parentheses indicate post-reform ERP's under assumption that sectors presently subject to widespread fraud will continue as at present. I/ Thae are weighted average ERPs of firm. interviewed in each country in each sector. Equatorial Guinea is not included because of negligible formal manufacturing activity in that country. - 70 - 4.30 Most firms will see the cost of their imported inputs rise post-reform due to the elimination of duty exemptions. The net impact on fiscal burden of firms will, however, depend on the rates of the new sales tax that each country would introduce in place of the existing TU/TIP/TIC/TCI. The rates of these taxes have been so designed as to limit the immediate fiscal impact on firms of formal manufacturing sector to a minimum. Thus, in most cases, the global average fiscal burden for the formal sector would remain close to current levels in the immediate-term, i.e. after the adoption of scenario A 68/. Even so, whatever the rate structure of the sales tax that is chosen, given that one of the objectives of the reforms is to improve the distribution of the fiscal burden across firms, taken individually, some firms will certainly see their indirect taxes rise, while others will see them fall. 4.31 Over the medium term, the fiscal burden of tobacco and drinks companies will rise in almost all countries §9/, and in relative terms, it will rise most in those countries, such as Congo, where these sectors are currently subject to low taxation. It is expected that these firms will be able to pass on a good proportion of the tax increase onto consumers, without losing significant market share to illegal imports. Beer is, in any case, less vulnerable to customs fraud because of the high transport cost to value ratio. Demand for cigarettes is likely to be more price-elastic, and care will need to be taken to ensure that excise levies on this sector are not too high. However, the recent experience of Gabon in this regard is encouraging. Despite a very heavy excise levy (cumulative taxes amounting for 65% of turnover), the local cigarette company in this country was able to maintain market share. 4.32 As concerns firms in sectors other than drinks and tobacco, the medium-term rate structures were chosen in order to limit the fiscal impact on these to the extent possible. In the case of Cameroon and Chad, the global average fiscal burden on these firms would remain close to existing levels. In the case of Congo, Gabon and the Central African Republic, on the other hand, it would be apDreciably higher than at present, though the rise would be smaller t.aan that for the firms in the tobacco and drinks sectors of those countries. 68/ Gabon and Congo are the exceptions. In these cases, the global average fiscal burden would rise substantially upon adoption of scenario A. This is because the current average fiscal burden on formal sector manufacturing activity in these countries is exceptionally low due to the preponderance of a few very large firms in the agro-processing sector that pay very little in taxes. A more divaggregated firm-wise analysis shows that for over two- thirds of the firms of the non-tobacco non-drinks formal sector, the post-reform rate structure would either reducEt fiscal burdens or raise them by a modest amount (1 to 4 percentage points); it is only for the remaining third that fiscal burdens would go up substantially -- a price that will have to be paid if the distribution of the tax burden is to become more uniform. 69/ Chad and Gabon are the only two exceptions. In Gabon, the indirect tax burden on the tobacco company ic already very high (65%), and in Chad it is high on the drinks and cigarette manufacturing firms (between 50 and 53%). In both cases the post- reform rates will need to be chosen such that this burden does not increase, or else revenues may actually fall through a switch by consumers to illegal iwsorts. TszGmy - 71 - 3. Implications for the Incentive Structure 4.33 Dispersion and level of effective protection rates. Table 11 traces the implications of the post-reform rate and exemptions structures for the general incentives environment in each country, The table computes the theoretical ERPs that the new rate and exemptions structures would accord to hypothetical activities with different value added. In the immediate-term, the dispersion of possible ERPs would remain quite high in all countries, ranging between 85 and 1050% in Cameroon, for example, and between 60 and 700% in the Central African Republic. In all cases, however, the situation would still represent a considerable improvement over the present. In Cameroon, for example, ERPs currently vary from less than 1% to over 4000%, and likewise, in the Central African Republic they vary from 70% to over 870% 70/. Over time, the average level and dispersion of possible ERPs in each country, post-reform, would decline progressively. Thus, by the medium term, i.e. under scenario C, the dispersion of theoretical ERPs in Cameroon, for instance, would be down to between 40 and 450%, and in the Central African Republic to between 30 and 330%. 4.34 For any given activity, inter-country variations in ERPs would persist into the medium-term, despite the adoption by each country of the same structure of nominal import duties. This is because differences across countries in the extent and structure of exemptions would remain, leading to different structures of effective import duty rates in each country (see Table 11). In this regard, it is noteworthy that for any given activity, average ERPs in Chad, and the Central African Republic, would be substantially lower than in the other countries, because of the relatively higher incidence of exemptions on finished good imports in these countries. 4.35 Incentive for fraud. Although it is very difficult to project what the implications of the post-reform rate structures might be on the extent of customs fraud, it is expected that reducing the tax burden on non-exempt economic agents should help reduce the incentive for fraud. In all cases (see Table 8 row VI), the proposed rate structures would in fact reduce the tax-burden on non-exempt imports quite substantially. Moreover, as exemptions are reduced and the dispersion of nominal import duty rates cut down, the distribution of the burden of indirect taxes is likely to improve -- this too should help reduce the incentive for fraud. 4. Imnlications for Tax and Customs Administration 4.36 The proposed rate structures would be much simpler to administer than the existing system for both the tax and the customs administration, but particularly the latter. The elimination of the TU/TIP/TCI/TIC regimes and their replacement by a TCA will, moreover, imply a certain degree of redistribution of responsibilities between the customs and tax departments. At present, customs have responsibility for tvying the TU and TIP/TCI/TIC. After the reforms, the responsibility for levying all domestic taxes on goods and services, would normally be restored to the tax department. This transfer of responsibilities is not critical to the success of the reform, but is a desirable long-term organizational objective. As such, the transfer need not occur immediately or brutally, and could be phased in a manner most appropriate to the administrative realities and constraints in each country. Row VIII of Table 8, shows to what extent the responsibilities 70/ Source: Annex III. Tm.uyiz Table 11 POST-REFM THEORETICAL EFFECTIVE RATES OF PROTECTION 1/ . .................................. ..................................................... .................................. .......................................................... .. Post-reform effective irport duty rate structure by country Colmtry CAhEROON CAR CNAD CONGO EGJTtRIAL GJINEA GACBO Scenario A C A C A C A C A C A C ........ ............. .................................... ........................................................................... .................................................................. Average effective duty rate an finished consuwr pro&cts Z/ 592 312 382 212 11X 82 312 19X 28 16X 47X 252 Average effective dity rate an irputs 3/ 8X 102 32 5s 42 42 52 8x 32 42 72 102 Range of corresponding theoretical effective protection rates across activities with different value added 4/ CouLtry CAMEROON CAR ClAD CONGO EQUATORIAL GUINEA GAB W Scenario A C A C A C A C A C A C ........................................ .................................................................................................. Value ed as proportion of tumover at international prices 0.05 1028X 4302 703x 3252 144 84x 5252 22ax 5032 2442 8072 3102 0.20 2632 1152 1782 852 392 242 1352 632 1282 642 207X ass 0.30 1782 802 1202 s58 272 172 92X 452 862 44X 140X 60x 0.40 136X 63X 912 452 222 142 702 362 662 342 1072 41X 0.50 11ox 52x 732 372 18 12X 572 30X 53X 282 872 402 0.65 862 422 57x 30X 152 1OX 452 25X 41X 222 69x 33 1/ This table presents theoretical ERPs calculated for different hypotheses of value added at international prices, using the average effective rate structures for categories I and 11 scenarios A and C in each country (see Annexes IV-IX for country-specific details). The average effective rates will differ across countries because of differences in their exeoptions structure. z/ Effective rate on category III products of reform framework under scenarios A and C. 3/ Effective rate on category 11 products of reform framework under scenarios A and C. 4/ Coiputed using the Cordon aWroach. Value added at domestic prices = (1effective rate on finished product)-CI minus international value added) '(effective rate on ir4uts) - 73 - of customs would change in each country (measured as the.r contribution to the receipts from the taxes targeted in the reform program) under scenarios A to D. In all cases the share receipts collected by customs would decline, and that of the tax department would rise, as responsibility for collecting the TCA and excise levies on domestic sales is assumed by the latter, and the TU and similar taxes such as the TIP/TCI/TIC are abolished. S. Imoact on the Trade Balance 4.37 Given the CFA zone's loss competitiveness in the 1980s, it is important to design reforms to the trade regime such that they do not lead to a deterioration of the trade balance. To this end. one of the broad objectives was to ensure that the post-reform effective duty rate on imports (import receipts as a proportion of the value of imoorts) is at least as high as, if not higher Post-reform. than at present (see para. 3.34 above). Row VII of Table 8, presents the projected average effective duty rates corresponding to the various recommended rate structures for different countries. These results show that it is Possible to maintain, and even raise. the effective duty rate on imports in UDEAC countries, despite substantial reductions in averaae nominal imoort duty rates. through the parallel reductions of exemotions. Thus, in Chad and Gabon, the post-reform effective duty rates would be the same or a little higher than current levels under -ate structure scenarios. In Cameroon, the Central African Republic, Congo and Equatorial Guinea, post-reform effective duty rates are projected to be an average of 49% higher than existing levels. 4.38 In addition to the above, a sensitivity analysis was undertaken to estimate the impact on import values of alternative rate and exemptions structures under different assumptions of elasticities of import demand. The results indicate that the recommended rate structures have very little net impact on the value of imports, even under assumptions of high elasticity, because while on the one hand, the price of imports to previously non-exempt users declines post-reform, on the other hand, the price of imports previously exempt goes up 71/. 21/ In the case of the Central African Republic, for example, under an assumption of medium elasticity (1 for Category I products, 0.25 for Category II products, 1.25 for Category III products, and 1.5 for excisable products), the rate structures of scenarios A to D results in import values that range from CFAF 62.7 to 67.2 billion, compared to base year imports of CFAF 65.6 billion. Likewise for Chad, under an assumption of medium elasticity, import values corresponding to scenarios A to D range from CFAr 82.6 to 84.6 billion, compared to base year imports of CFAF 89.6 billion. T.z.Guyb V. RECOMMENDATIONS AND NEXT STEPS A. Recommendations 5.1 Based on the presentation in Chapter III of the proposed framework for reform, and on the analysis of Chapter IV, it is possible to make concrete recommendations concerning measures to be undertaken in the context of the regional program for trade and indirect tax policy reform. Here the focus is on those measures that need to be undertaken immediately and over the medium-term. All the recommendations are summarized in Table 12 at the end of this Chapter. 5.2 The following recommendations are made for the minimum Platform of common measures to be undertaken at the soonest possible (January 1, 1993) by all countries simultaneously: (a) The turnover tax on imports should be removed from the CET. This would return the TCAI to the jurisdiction of each country and enable each to set its rate independently and in harmony with its own domestic indirect taxes; (b) The CET, its various components, and the CT should be replaced with a single import duty with three rates for the following three product categories: essential products (category I); raw materials and capital goods (category II); and general consumption goods (category III). The allocation of tariff lines into each category should be regionally agreed upon and uniformly applied across countries. Category I products should be subject to a 5% tariff and category II to a 15% tariff in all countries. All member countries should adopt a rate of 70% for Category III products in the immediate term, and agree to progressively and simultaneously reduce this to 35% over a maximum transition period of five years (this period being revisable depending upon the evolution of the macro-economic situation of the member countries) from the date of the start of the reform program. The application of a temporary surtax should be permitted within a ceiling of 15% over the duty rate on Category III products. Eligibility for the surtax should be restricted to a list of regionally selected products. This list should comprise only those products that are currently subject to QRs. The ourtax should be applied only to replace an existing QR, and for a maximum period of three years from the date of removal of the QRs which it replaces. No product should be eligible for the introduction of a surtax after the end of the third year from the date of the start of the reforms; (c) The TU regime should be abolished. No new agreements for the TU should be approved. The UDEAC Management Committee should no longer have jurisdiction over the TU on the sale of local goods, which in each country should be replaced by the local sales tax. TU firms should pay the new import duties applicable to their country of location on all their imports. The TU on imports should also be abolished; (d) Each ce-untry should introduce a generalized preferential tariff for all intra-Union trade in manufactures per an agreement defining "rules of origin" or soma other appropriate eligibility criteria. Each member country should apply this tariff at a rate equivalent to 75% of the TuGmyt - 75 - normal import duty it would apply to similar products of non-Union origin; (0) Treaty provisions on fiscal harmonization ,hould be modified to enable each country to introduce: a generalized sales tax (Taxe sur Chiffre d'Affaires - TCA) to replace the existing TCAI, ICAI, TU on the sale of local goods, TIP, TIC, TCI, and at their own rhythm, also other domestic indirect taxes, such as the TT; and excise levies on a regionally agreed list of products which is, at a minimum, to include, tobacco and drinks. Each country should be allowed the freedom to fix the rates of these taxes per its own fiscal requirements, and those countries that wish to proceed with the introduction of a VAT, be allowed to do so; and (f) The existing Act 13/65 of the UDEAC Customs Code should be revised to make it more restrictive with regard to award of import duty-exemptions as recommended in Annex X to this report. 5.3 The following recommendations are made for measures to be adopted on a country-specific basis: (a) The current ICAI on services should be replaced with the above mentioned generalized sales tax (TCA) at rates to be detei.mined by each country independently, and applied on the same basis as at present; (b) All import duty exemptions relating to TIP/TIC/TCI regimes (which are the responsibility of individual member countries) should be discontinued at the same time as the elimination of the TU regime; other duty exemptions under existing Investment Codes should be allowed to lapse without renewal, and these Codes should be revised so that in the future no firms are accorded import duty exemptions; other exemptions (special conventions, ad hoc exemptions, etc.) should be reduced progressively so that the goal of a minimum 5% imposition on all imports, without exceptions, is achieved at the soonest possible 72/; and (c) QRs on remaining sectors should be removed over a maximum period of three years from the start of the reform program - - in this cortext each country may use temporary surcharges per the regional agreement stipulated in para. 5.2 (b) above 73/. 72/ This will require tax-inclusive accounting for donor financed imports (grants or loans), and the setting up of an appropriate administrative mechanism to make this operational. 73/ To facilitate the transition, member countries should also pursue, in parallel, programs of public enterprise reform that seek to liquidate those firms that cannot be salvaged and to restructure those that are potentially competitive. TU.GWYW - 76 - B. Next Steps 5.4 A number of the critical preparatory technical and legal steps outlined in para. 3.31 needed for implementing the reforms have already been completed, based on the Green Cover version of this report. In particular, the signing of the Protocol of Understanding between the six UDEAC-member countries on a minimum platform of regional trade and tax reform measures in November 1991, and the subsequent modification of the Treaty of Brazzaville by the UDEAC Council of Heads of State in December 1991 is a major step forward (see para. 1.50 and Annexes XI, XII A and XII B). However, a number of an additional steps need to be taken before the reforms can be launched. 5.5 The legal texts that will govern the implementation of each of the measures comprising the minimum platform need to be finalized and adopted by the UDEAC Management Committee. These comprise: (a) A text specifying the modalities for applying: (i) the new CET, including its basis, its rate structure, and the precise classification of each of the Harmonized System's tariff lines into categories I, II and III; (ii) the proposed temporary surtax; and (iii) the preferential tariff; (b) A text laying down the modalities for applying: (i) the new sales tax (TCA), including its basis and the list of products exempt, the dispositions providing the option to each country for introducing a system of deductibility (and thereby, of moving to a system of a value added type consumption tax); and (ii) the proposed excise levy, including its basis and the list of products to be subject to it; and (c) A text revising Act 13/65 of the UDEAC Customs Code, and specifying more restrictive criteria for the award of import duty exemptions. 5.6 It is recommended that an extraordinary session of the UDEAC Management Committee be convened at the soonest possible to adopt the finalized version of these various texts. Following that, each country will need to incorporate the specific measures of the regional reform pr3gram into its next Finance Law. In parallel, efforts will have to be made to disseminate the content of the reform program to the private sector through a well coordinated publicity campaign. Some training will need to be provided for the personnel of the tax and customs administrations of each country, especially in order to familiarize them with the modalities for the application of the TCA and the preferential tariff. Finally, provision will have to be made for the timely printing of the new Customs Tariff and of the documentation needed for operationalizing the TCA and the preferential tariff. It is suggested that UDEAC-member countries identify requirements for technical assistance so that appropriate donor assistance can be sought to facilitate the execution of this work program, 5.7 Responsibility for monitoring the progress of the reforms should lie with the Management Committee, which brings together the Ministers of Finance and of Development of all member countries on a bi- annual basis. The implementation of the RRP does not, therefore, warrant the creation of any new institutional structures. The UDEAC Secretariat should, however, be reorganized in order to better provide support to the Management Committee. In this regard, it is recommended ?ax.Gt.y - 77 - that account be taken of the administrative and financial audits of the Secretariat recently commissioned by the UDEAC Council of Heads oi State and by the French Ministry of Cooperation. Jwm 30. i992 Tax.GOyM - 78 - Table 12 Regional Reform Program A. Short and Nediun-Term Action Plan Imoediate Actions Actions over the mediun-term 1/ . ............. ..................................... .................................. * 1. Separation of TCAI trom CET 1. Phase out of TT/TIT where relevant * 2. Regional agreement on classification of 2. Phase out of remaining QRs over tariff lines into three categories a three year period * 3. Replacement of customs duty, entry duty & 3. Progressive reduction new eiport duty on complementary tax with new import duty at category II from 70 to 35X over a five rates indicated for the three product year period 4/ categories in each country (5X, 15X, 70%) 1/ * 4. Regional agreement on time table for 4. Progressive reduction of exemptions phased reduction of import duty for category III from 70 to 35X 2/ * 5. Regional agreement on list of products to be subject to excise levies * 6 Discontinuation of TU regime -- no more TU regimes to be accorded, and existing TU firms to revert to normal regime * 7. introduction of generalized preferential tariff * 8. Revision of Act 13/65 of the UDEAC Customs Code * 9. Replacement of TCAI, ICAI and Tu on local sales of goods, TIP, TCI, and TIC with a TCA on goods 3/ * 10. Replacement of ICAI on services with TCA on services * 11. Elimination of import duty exemptions to existing TU/TIP/TCI/TIC firms * 12. Introduction of excise levies * All measures marked with an asterisk will form part of the regionally negotiated minimum platform. All other actions are to be carried out on a country specific basis. 1/ A temporary surtax of 15% could be applied on certain products that currently benefit from quantitative restrictions for a maximum period of three years. 2/ There are two possibilities: either the reduction of the tariff could take place in a and simultaneous manner, or at a pace appropriate to each country. 3/ Each country would have the option to replace the TCA with a VAT. 4/ Subject to modification depending upon the evolution of the macro-econoric situation of member countries. - 79 - Table 12 (contd.) B. Recommended Rate Structure of Tariffs and Indirect Taxes for Immediate Apptication (K) 1/ Name of Tax Cameroon CAR Chad Congo Eq. Guinea Gabon ........................ ............. ... .... ..... ... ..... ..... . . ........ .......... .. 1. Ilport Duty 2/ on category 1 5X 5K SX 5X 5X 5X 11 15K 15X 15X 15X 15X 15X III 3/ 70X 70X 70X 70X 70X 70X 2. Preferential Tariff 75 X of import duty on each category of goods In each country 4/ 3. TCA on goods 5/ 13X 4X 11K 6K 10K 9° 4. TCA on services 6/ Same rate as existing ICAI on services 5. Excise Taxes 7/ on alcoholic drinks 15K 22X 45K 25X 25K 18% on tobacco 15K 8K 15X 15X 25X 48X on other products 8/ 15X 22X 15X 15X 25K 45X 1/ i.e. Scenario A in each country. 2/ Applied on c.i.f. value of Imports in all countries. 3/ A temporary surcharge on a regionally agreed sub-list of "Category III" coutd be applied at a repionally agreed rate not to exceed 15X. 4/ Applied on a c.I.f. value of all Intra-UDEAC trade satisfying a rule of orIgin criteria. 5/ Applied at same flat rate on imports (on their c.i.f. value + inport duty) and local products (value of sales net of taxes). Imports used in local production to be exempt upon production of satisfactory proof. Petroleum and category I inports also to be exeapt from TCA. 6/ To be applied on same basis as existing ICAI on services. 7/ Applied at same rate on local and imported products. 8/ Non-alcoholic drinks, objets d'arts, musical instruments, cosmetics, precious metals, watches. - 80 - Table 12 (contd.) C. Recommended Rate Structure of Tariffs and Indirect Taxes over Nedium-Term (X) 1/ Name of Tax Cameroon CAR Chad Congo Eq. Guinea Gabon 1. Import Duty on category I 5X 5X 5X 5X 5X 5X 11 15X 15X 15X 15X 15X 1S% III 2/ 35X 35X 35K 35K 35X 35S 2. Preferential Tariff 75 K of import duty on each category of goods in each country 3. TCA on goods 28K 3/ 8X 12K 10K 16K 14X 4. TCA on services Same rate as existing ICAI on services 5. Excise Taxes on alcoholic drinks 30X 30X 45X 32X 65K 18X on tobacco 30K 12K 15X 22K 65K 46X on other products 30K 30K 15K 22X 65X 45a 1/ i.e, scenario to be imlpemented over a five to seven year period, depending upon the country. 2/ A temporary surcharge, if introduced, to be phased out by this time. 3/ This represents the rate of a VAT that could applied instead of the TCA on goods. This VAT would be limited only to manufacturing activity. 11.I I ANN EX I KEY INDICATORS I 18-Jur-92 TABLE 1.1 S1.ECTED SOCIAL INDICATORS (Wost Rec nt Estil_tes) Equatorial Sub-Saharan AREA CANEROOM C A R CHAD CONGO Guinea GABO Africa Total land area (thousand sq. Km) 475.4 623.0 1,284.0 342.0 28.1 267.7 22,242.0 AgricuLtural land (% of totat) 32.1 8.0 37.5 31.2 11.9 19.2 32.7 GNP Per Capita (Current USS) 960.0 330.0 170.0 870.0 140.0 2760.0 320.0 GOP at 1988 market prices (billions of CFAF) 4022.0 356.1 313.2 803.9 45.5 983.3 ... POPULATION AND VITAL STATISTICS 0' Totat Population (thousand) 10,927 2,727 5,273.0 2,020.0 390.0 1,047.0 466,172.0 Life expectancy at birth (years) 56.0 50.0 45.0 58.0 45.0 52.0 50.6 Crude birth rate (per thousand) 48.0 43.0 44.0 46.0 42.0 40.0 47.2 Crude death rate (per thousand) 13.0 16.0 21.0 12.0 20.0 16.0 15.8 Infant mortality rate (per thousand) 85.0 115.0 139.0 73.0 149.0 100.0 113.6 LABOR FORCE Total Labor Force 4.039 1,302 1,826.0 724.0 172.0 522.0 188,681.0 Female (M) 34.0 47.0 22.0 39.0 41.0 38.0 38.0 Agriculture 70.0 72.0 83.0 62.0 66.0 75.0 ... Industry (X) 8.0 6.0 5.0 12.0 11.0 11.0 ... - 87 - 22-Jun-92 Table 1. 2 Cameroon - MAIN ECONOMIC INDICATORS (X) Actual Prelim Projections . . . . . . . . . . . . . .. .. . . . . . . .. . . . . . . . . . . ...... , ...... ............. Key Indicators 1985 1986 1987 1988 1989 1990 1991 1992 ... .. .. ... .. .-... .. .. ... .. .. ... .. .. ... .... .... .... .... .... .... I. Growth Rates ............ GDP 7.6 8.0 -6.5 -7.7 -3.3 -2.4 -1.0 1.7 GDP/Capita 4.3 4.6 -0.9 -10.6 -6.4 -5.6 -3.9 -1.4 Private Consumption/Capita 6.2 5.5 5.2 -2.5 -22.7 -5.3 -2.7 1.3 Exports GNFS Volume 11.4 -25.6 -33.6 -9.0 15.0 5.1 1.5 -0.4 Inportu GNFS Vclume 18.3 6.2 -13.4 -16.2 -10.5 4.5 -2.6 3.1 II. Debt Service Debt Service/XGNFS 34.5 34.6 43.4 47.4 31.5 31.2 40.6 45.7 Debt Service/GDP 11.8 9.1 7.8 7.6 6.2 6.6 9.2 9.6 III. Miscellaneous Gross Investment/GDP 20.8 30.8 24.1 15.7 11.9 10.6 9.5 11.0 Domestic Savings/GDP 31.8 31.5 19.6 12.9 14.2 13.0 12.1 12.2 Public Investment/GDP 11.1 11.3 14.4 7.6 4.5 4.7 4.1 3.1 IV. Budget Government Revenues/GDP 20.9 21.5 18.1 16.0 16.0 13.7 16.7 17.8 Goverrnment Expenditures/GDP 22.5 22.0 31.0 22.0 20.0 21.0 21.0 21.0 Budget Deficit C-) or Surplus (+)/GDP -1.5 -1.2 -12.8 -0.1 -4.0 -7.0 -4.6 -2.9 V. SOP Exports/GDP 34.3 23.6 16.8 16.5 19.7 21.2 36.1 34.1 Imports/GDP 23.3 22.9 21.2 19.2 17.8 19.1 22.0 22.2 Current Account/GDP -4.0 -5.6 -9.8 -7.2 -18.3 -2.5 -2.7 4.9 Real Effective Exch. Rate (1980=100) 99.19 109.78 122.38 118.45 109.9 113.6 Terms of Trade (1980-100) 74.3 59.5 65.1 66.1 63.1 66.1 65 70.6 Source: Officiat Goverrment statistics, and Staff estimates and projections. - 88 - 23-Jun-92 Table 1. 3 Central African RepubLic ,........................ -- AIN ECONOMIC INDICATORS Actual Prelim Projections Key Indicators 1985 1986 1987 1988 1989 1990 1991 1992 !. Growth Rates ............ GOP 3.8% 5.2% -2.5X 2.9% 2.6% 0.7% 2.6% 2.7% GDY 4.4% 3.7% -2.6% 3.9% 2.3% *2.5% 3.8% 2.8% GOY/Capita 1.7% 1.0% -5.0% 1.3% -0.3% -4.9% 1.2% 0.2% Private Consumption/Capita -4.0% -0.4% -1.9% 2.4% -1.5S -5.0% 2.7% 0.9% Imports GNFS 21.8% 5.7% *8.7% -7.3% -1.9% 3.6% 10.0% 8.2% Exports GNFS 14.9% -11.4% -7.7% -6.8% 8.3% 9.6% -2.6% 3.0% 11. Debt Service Debt Service/XGS 13.2% 17.6% 19.5% 27.6% 22.4% 21.2% 18.1% 14.7X Debt Service/GDP 3.4% 3.4% 3.7% 5.0% 4.5% 3.7% 2.7% 2.3% III. Niscellaneous Gross Investment/GDP 12.9% 12.2% 12.5% 10.6% 10.3% 10.2% 10.4% 12.0% Domestic Savings/GDP -1.8% -1.7% -2.3% -1.5% -0.6% -2.7% -2.5% -2.4% Public Savings/GDP 4.3% 2.5% 3.8% 8.1% 5.5% 4.0% 0.7% 4.4% Public Investment/GDP 10.9% 9.7% 10.5% 8.6% 7.9% 8.4% 8.3% 10.0% IV. Budget Goverrnment Revenues/GDP 18/ 13.2% 11.7% 12.1% 12.4% 11.9% 12.2% 13.2% 14.0% Goverrment Revenues/GDP lb/ 18.3% 16.4% 19.2% 22.3% 20.1% 18.3% 18.2% 19.5% Government Expenditures/GDP 26.3% 25.5% 27.1% 26.1% 23.3K 24.3% 24.1% 24.2% Budget Deficit (-) or Surplus (+)/GDP la/ -13.1% -13.8% -15.0% -13.7% -11.5% -12.1% -10.9% -10.2% V. BOP Exports GNFS/GDP 25.2% 18.7% 18.8% 17.8% 19.8% 17.2% 15.0% 15.3% Imports GNFS/GDP 33.7% 32.6% 33.7% 29.9% 30.8% 30.1% 27.9% 29.7% Current Account/GDP -7.6% -6.6% -4.5% 2.5K -1.0% -4.8X -8.9% -8.1% Current Account/GDP 2/ -17.8% -16.5% -19.0% -16.6% -15.2% -17.0% -17.0% -16.9% REER 3/ (1987.100) (USS/CFAF) .. 102 100 84 73 87 98 102 Terms of Trade Index .. .. 100 107 95 98 106 101 Source: Official Goverr,ent statistics, and Staff estimates and projections. la/ Before grants lb/ Including grants 2/ Excluding public transfers 3/ Real Effective Exchange Rate - 89 - 22-Jun-92 Tabte 1. 4 Chad MAIN ECONOMIC INDICATORS CXt -- Actual Prelim Projections .... ... ... ...; . ... ... ... ... .... ... ... ... ... ... ... ... ... ............ . . . . . . . . . Key Indicators 1985 1986 1987 1988 1989 1990 1991 1992 . . ......................... .... ........................... .... . ..... ..... ..... ..... .. ---- .... . .. .... .... . . .... ---- .. ...... ..... 1. Growth Rates GDP 25.9 -4.1 -3.4 17.6 0.9 -0.5 3.0 3.0 GDP/Capita 23.4 -6.5 -5.9 15.1 -1.6 -3.0 0.5 0.5 ConsL.41ptfon/Capita 33.7 -20.4 -11.5 20.9 0.9 1.5 1.4 3.2 Exports GNFS Volume -19.3 8.3 12.3 12.5 5.3 0.0 0.0 0.0 Imports GNFS Votume 37'3 8.7 0.2 -4.4 5.9 0.0 0.0 0.0 II. Debt Service Debt Service/XGNFS 8.9 9.6 11.2 5.6 6.1 7.4 6.8 7.0 Debt Service/GDP 1.2 1.2 1.3 1.2 1.5 1.6 1.5 1.5 III. Miscellaneous Gross Investment/GDP 5.4 9.1 12.3 7.8 9.0 10.0 10.9 10.9 Domestic Savings/GDP -22.4 -23.2 -19.0 -14.7 -14.7 -12.5 -10.2 -9.8 Public Investment/GDP 5.0 8.7 11.8 7.5 8.5 9.5 10.4 10.4 IV. Budget Government Revenues/GDP 6.9 6.8 8.0 7.9 8.9 9.6 10.0 10.1 Goverinment Expenditures/GDP 16.4 27.4 34.0 26.8 32.8 30.9 31.1 31.0 Budget Deficit (-) or SurpLus (+)/GOP -9.5 -20.6 -26.0 -18.9 -23.5 -21.3 -21.1 -20.9 V. BOP Exports/GDP 17.9 17.4 21.5 21.2 22.1 22.2 22.1 21.6 Imports/GDP 47.1 45.9 50.6 42.4 44.5 43.0 41.7 40.7 Current Account/GOP -29.0 -30.2 -31.5 -24.1 -25.8 -24.6 -23.4 -23.1 Real Effective Exch. Rate (1980100) 96.4 86.9 86.2 93 84.2 88.6 Terms of Trade (1980=100) 103.9 89.8 85.5 93.3 84.1 88.7 83.2 84.9 Source: Officisl Government statistics, and Staff estimates and projections. - 90 - 27-Feb-92 Table 1. 5 Congo -- MAIN ECONOMIC INDICATORS X) -- Actual Pretim Projections ~~~~~ . .... . ... .... .. . ... . .... .... . . .................. .... .... ..... ...... ...... Key Indicators 1985 1986 1987 1988 1989 1990 1991 1992 .. .. . .. . .. .. . .. . .. .. . .. . .. .. . .. ... - - . .. .... . . . .. .... 1. Growth Rates GDP -5.2 -6.0 -1.0 0.5 0.2 0.5 2.3 5.7 GDY/capita -7.3 -5.0 -9.2 -4.0 -0.1 -5.9 -1.7 2.1 Private Consumption/Capita . .. .. .. *3.0 -8.0 -5.0 -3.7 Exports GNFS Volume -6.0 -3.0 -0.1 7.0 14.2 1.4 4.1 17.6 Imports GNFS Volume 0.3 -22.0 -8.5 -23.3 6.7 12.2 2.0 -12.7 11. Debt Service Debt Service/XGNFS .. .. .. 89.0 56.0 49.0 47.0 52.0 Debt Service/GDP .. .. .. 38.0 30.0 32.0 32.0 33.0 111. Misceltaneov' Gross Investment/GDP 30.0 29.0 20.0 17.0 14.0 24.0 27.0 19.0 Domestic Savings/GDP 21.0 21.0 19.0 11.0 20.0 31.0 32.0 28.0 Public Investment/GDP .. .. .. 5.0 3.0 5.0 5.0 5.0 IV. Budget Government Revenues/GCP 33.7 34.8 19.6 19.0 23.0 31.0 33.0 26.0 Goverrunent Expenditures/GDP 21.5 32.6 28.1 37.0 34.0 40.0 39.0 37.0 Budget Deficit (-) or Surplus (+)/GDP -12.2 -2.0 -8.0 -18.0 -11.0 -9.0 -5.0 -9.0 V. SOP Exports/GDP 57.0 43.0 44.0 42.0 52.0 64.0 67.0 63.0 Imports/GDP 56.0 64.0 44.0 63.0 58.0 72.0 77.0 71.0 Current Account/GDP -7.0 -32.0 -10.0 -20.0 -3.0 -10.0 -13.0 -10.0 Real Effective Exch. Rate (1980=100) 100.16 101.81 101.84 101.89 101.63 Terms of Trade (1988=100) 116.2 65.1 106.9 100 124.8 138.9 130.5 102.2 Source: Official Goverment statistics, and Staff estimates and projections. - 91 27- Feb-92 Table 1. 6 Equatorial Guinea ............................. -- MAIN ECONOMIC INDICATORS (X) - Actual PreLim Projections Key Indicators 1985 1986 1987 1988 1989 1990 1991 1992 I. Growth Rates ............ GDP .. -3.4 1.3 5.3 -1.6 3.1 2.7 11.8 GDY/Capita .. -4.1 -9.1 1.8 -6.6 1.8 -5.3 15.3 Priv Consuiption/Capita .. -10.0 13.3 -3.5 -4.9 5.5 1.8 -7.0 Exports GNFS Volume .. 37.1 16.8 10.8 -7.5 5.7 0.8 44.6 Inports GNFS Volume .. 54.6 43.0 8.9 -14.5 21.7 1.5 -4.3 II. Debt Service Debt Service/XGNFS 60.6 47.9 36.4 22.7 31.1 32.8 48.4 32.5 Debt Service/GDP 17.1 13.9 11.7 7.4 9.1 9.2 12.9 10.7 III. Miscellaneous Gross Investment/GDP 13.5 16.4 22.8 24.0 18.5 22.7 21.3 18.6 Domestic Savings/GDP 0.6 2.0 -3.9 -6.9 -8.1 -12.1 -17.9 0.1 Public Investment/GDP 10.5 7.9 14.5 13.6 14.0 15.3 14.4 12.6 IV. Budget Goverinment Revenues/GDP 19.9 14.6 20.0 14.6 13.0 16.5 15.7 15.1 Goverrnment Expenditures/GOP 22.2 20.2 19.5 20.1 18.6 18.4 17.2 14.9 Budget Deficit (-) or Surplus (+)/GDP -19.9 -14.6 -20.0 -14.6 -13.0 -16.5 -15.7 -15.1 V. BOP Exports/GDP 28.3 29.1 32.1 32.7 29.2 27.9 26.6 32.9 Imports/GDP 36.5 46.0 64.4 66.5 63.9 83.0 50.1 22.2 Current Account/GDP -13.1 -19.1 -37.1 -39.6 -39.3 -44.7 -60.5 -19.5 Real Effective Exchange Rate (1980.100) .. 87 78.39 78.86 81.46 87.24 . Terms of Trade (1986=100) .. 100.00 97.30 94.30 78.70 65.70 . . Source: Official Government statistics, and Staff estimates and projections. - 92 - 18-Jun-92 Table 1. 7 Gabon .......................... -- NAIN ECONOMIC INDICATORS (M) Actual Prellm Projections Key Indicators 1985 1986 1987 1988 1989 1990 1991 1992 1. Growth Rates .......... ............ GOP 5.8 -2.1 -16.1 2.7 3.8 5.5 1.4 1.5 GDP/Capita .. .. -20.5 -2.4 13 2.7 -1.4 -1.2 Consuaption/Capita .. -2.5 -21.7 2.5 .. .. -3.0 -2.6 Private Consumption/Capita .. .. -24.9 -1.9 .. .. -3.6 -3.1 Exports GNFS Volume -1.6 -2.0 -5.8 2.2 22.5 22.6 1.8 1.6 lImports GNFS Volume 16.7 -0.1 -33.3 1.8 -1.7 1.1 ).9 1.2 11. Debt Service Debt Service/XGNFS _2/ 11.5 11.9 7.0 9.8 11.9 11.0 22.1 26.9 Debt Service/GOP 6.1 5.0 2.9 4.3 6.3 6.3 11.2 13.1 111. Miscellenous Gross Investment/GDP 36.3 44.7 28.2 31.9 25.3 22.4 23.0 23.7 National Savings/GDP 44. 21.0 17.0 11.1 20.0 26.2 21.8 20.2 Pubtic Investment/GDP 10.6 12.6 3.2 2.5 2.6 6.6 7.0 7.2 IV. Budget Goverernet Revenues/GDP 38.3 41.8 25.3 25.6 23.0 30.1 32.2 29.5 Goverrment Expenditures/GOP 43.4 56.4 25.8 27.8 24.0 31.0 31.1 30.6 Budget Deficit (-) or Surplus (+)/GDP -5.1 -14.6 -0.6 -2.2 -1.1 -0.9 1.1 -1.1 V. SOP Exports/GDP 57.8 35.0 39.8 37.6 53.4 57.1 57.3 57.3 Imports/3DP 62.3 65.5 39.5 45.0 46.0 39.9 39.7 39.6 Current Account/GDP -4.4 -60.5 -13.9 -19.4 -6.4 3.8 -1.9 -4.3 Real Effective Exchange Rate (1990.100) 98.00 108.00 106.56 91.24 92.95 100.00 Terms of Trade Index (1990.100) 143.00 76.50 89.65 75.04 86.91 100.00 89.55 85.13 Source: official Governrent statistics, anC Staff estimates nd projections. A N N E X STRUCTURE OF NOMINAL AND EFFE'.TrVE TARIFFS -~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 96 - 28-Feb-92 Table II. 1 CANEROON Existing Tariff Structure 1/ (1987/88) ...................................... Product Now Nominal Rate (X) Effective Rata (U) .......... . .................. FOWD MANUFACTURING 46.1 29.9 BEVERAGES 142.0 44.6 TOBACCO 241.7 214.7 SUBTOTAL AVERAGE 67.1 33.2 TEXTILES 135.2 36.5 WEARING APPAREL 87.1 78.9 LEATHER PRODUCTS 75.8 69.0 FOOT WEAR 79.1 52.7 SUBTOTAL AVERAGE 124.7 42.9 WOO., CORK, & PRODUCTS 50.3 17.9 WODEN FURNITURE & FIXTURES 81.6 30.8 PAPER PRODUCTS 52.3 5.4 PRINTING & PUBLISHING 7.9 4.9 SUBTOTAL AVERAGE 40.3 9.5 INDUSTRIAL CHEMICALS 48.7 4.2 OTHER CHEMICAL PRODUCTS 28.4 11.2 PETROLEUM REFINERIES 90.7 7.8 PETROLEUM & COAL PRODUCTS 62.7 19.0 RUBBER PRODUCTS 61.1 45.7 PLASTIC PRODUCTS NECESSITY 80.7 33.2 SUBTOTAL AVERAGE 49.4 11.1 CERAMIC PRODUCTS 73.0 47.9 CLASS & GLASS PRODUCTS 68.5 18.6 OTHER NONMETAL MINERAL PRODUCTS 69.1 19.0 SUBTOTAL AVERAGE 69.1 20.4 - 97 - Tabte II. I (Contd.) CAMEROON Existing Tariff Stru:ture 1/ (19"7/88) ...................................... Product Name Nomfnal Rate (X) Effective Rate (X} ....................... ................ ..................................... METAL PRODUCTS NECESSITY 58.6 17.9 NONELECTRIC MACHINERY 45.0 16.0 ELECTRICAL MACHINERY 50.4 16.9 TRANSPORT EQUIPXENT 62.5 52.6 SCIENTIFIC EQUIPMENT 29.1 9.7 OTHER MANUFACTURING 68.1 59.8 SUBTOTAL AVERAGE 52.5 22.8 CONSUMER GOODS 65.3 34.7 INTERMEDIATE GOODS 60.9 8.7 CAPITAL GOODS 42.8 16.6 CATEGORY I PRODUCTS 2/ 33.3 6.0 CATEGORY 11 PRODUCTS 2/ 57.8 14.0 CATEGORY III PRODUCTS 2/ 57.6 41.0 PRODUCTS SUBJECT TO EXCISE TAXES 2/ 159.2 45.0 OVERALL AVERAGE 58.9 23.0 1/ Weighted by iqport shares. 2/ Product categories defined per table 6 of text. Source: Customs Directorate, Cieroon. - 98 - 01-Jul-92 Table II. 2 CENTRAL AFRICAN REPUBLIC Existing Tariff Structure (1990) Product Name 1/ Nominal Tariff 2/ (X) Effective Tariff 3/ CX) ........ .................................. .................................. ....................... LiATEGORY I PRODUCTS 42.6 33.2 CATEGORY II PRODUCTS 49.6 6.3 CATEGORY III PRODUCTS 53.9 24.4 PRODUCTS SUBJECT TO EXCISE TAXES 150.0 126.8 OVERALL AVERAGL 51.4 12.2 I/ Froduct categories defined per table 6 of text. 2/ Unweighted 3/ Rough estimates derived as follows: (effective tariff) (average nor.Snal tariff) * (non-exempt and partially exempt inports) / (total imports) Source: UDEAC Customs Code; Staff estimates Table II. 3 CHAD Existing Tariff Structure (1990) ......................... ................................. .. Product Name 1/ Nominal Tariff 2/ CX) Effective Tariff 3/ (X) ............... ..................... ....................... CATEGORY I PRODUCTS 43.8 0.0 CATEGORY 11 PRODUCTS 50.8 3.7 CATEGORY III PRODUCTS 54.5 13.2 PRODUCTS SUBJECT TO EXCISE TAXES 73.3 10.0 OVERALL AVERAGE 47.5 7.1 1/ Product categories defined per table 6 of text. 2/ Unweighted 3/ Rough estimates derived as follows: (effective tariff) * (average nominal tariff) * (non-exempt and partially exempt imports) / (total imports) Source: UDEAC Customs Code; Staff estimates - 99 - O1-Jul-92 Table 11. 4 CONGO Existing Tariff Structure (1990) .... ............................ Product Name 1/ Nominal Tariff 2/ (X) Effective Tariff 3/ (X) ....... ...................... ..................... ............................................. ....................... CATEGORY I PRODUCTS 43.4 25.0 CATEGORY 11 PRODUCTS 49.2 7.0 CATEGORY III PRODUCTS 54.4 25.0 PRODUCTS SUBJECT TO EXCISE TAXES 152.5 54.0 OVERALL AVERAGE 51.3 16.3 ....... ............ _.. .... 1/ Product categories defined per sable 6 of text. 2/ Unweighted 3/ Rough estimates derived as follows: (effective tariff) = (average nominal tariff) (non-exempt and partially exempt inports) / (total imports) Source: UDEAC Customs Code; Staff estimates. l. - 100 - 01 -Jut -92 Table 11. 5 EQUATORIAL GUINEA Existing Trifff Structure 1/ (1989) Product Name Nominal Tariff CX) Effectlve Tariff tX) .................................. ............................ .................... FOOD MANUFACTURING 37.3 22.1 BEVERAGES 94.3 58.7 TOBACCO S5.0 32.3 SUBTOTAL AVERAGE 53.6 32.5 TEXTILES 53.9 31.4 WEARING APPAREL 56.7 47.4 LEATHER PRODUCTS 57.5 62.1 FOOT WEAR 55.0 52.0 SUBTOTAL AVERAGE 55.0 39.8 WOOD, CORK, & PRODUCTS 64.5 18.7 WOODEN FURNITURE & FIXTURES 60.0 84.4 PAPER PRODUCTS 42.0 6.3 PRINTING & PUBLISHING 19.1 2.3 StBTOTAL AVERAGE 29.3 5.8 INDUSTRIAL CHEMICALS 39.8 4.8 OTHER CHEMICAL PRODUCTS 40.9 9.7 PETROLEUM REFINERIES 22.0 9.8 PETROLEUM & COAL PRODUCTS 41.1 16.1 RUBBER PRODUCTS 43.3 25.5 PLASTIC PRODUCTS NECESSITY 58.2 21.1 SUBTOTAL AVERAGE 37.7 10.6 CERAMIC PRODUCTS 53.9 24.2 GLASS & GLASS PRODUCTS 52.9 22.9 OTHER NONMETAL MINERAL PRODUCTS 46.9 18.2 SUBTOTAL AVERAGE 47.3 18.6 IRON & STEEL B-METAL IND 40.0 14.3 NONFERROUS S-NETAL IND 44.8 16.4 METAL PRODUCTS NECESSITY 47.9 17.5 NONELECTRIC MACHINERY 38.6 13.3 ELECTRICAL MACHINERY 43.7 11.2 TRANSPORT EQUIPMENT 40.8 18.5 SCIENTIFIC EQUIPMENT 34.5 20.5 OTHER MANUFACTURING 4U.3 20.5 SUBTOTAL AVERAGE 41.8 15.8 CONSUMER GOODS 49.4 21.7 INTERMEDIATE GOODS 41.8 14.7 CAPITAL GOODS 38.0 15.6 CATEGORY I PRODUCTS 2/ 32.1 7.0 CATEGORY II PRODUCTS 2/ 44.3 11.0 CATEGORY III PRODUCTS 2/ 48.7 24.0 PRODUCTS SUBJECT TO EXCISE TAXES 2/ 89.7 24.0 OVERALL AVERAGE 43.6 17.0 1/ Weighted by Import shares. 2/ Product categories defined per table 6 of text. Source: Custoom Di. torcte, EqAatoralt Guinea. - 101 - 01-Jul-92 Table 11. 6 GABON Existing Tariff Structure 1/ (1989) Product Name Nominal Tariff (X) Effective Tariff . .................... .................. ................. FOOD MANUFACTURING 43.3 38.3 BEVERAGES 174.4 98.2 TOBACCO 219.4 33.3 SUBTOTAL AVERAGE 73.6 49.1 TEXTILES 88.6 43.0 WEARING APPAREL 134.9 55.5 LEATHER PRODUCTS 68.3 61.8 FOOT WEAR 78.8 69.2 SUBTOTAL AVERAGE 93.8 49.1 WOOD, CORK, & PRODUCTS 76.1 28.7 WOODEN FURNITURE & FIXTURES 74.1 47.8 PAPER PRODUCTS 50.0 16.9 PRINTING & PUBLISHING 14.5 11.5 SUBTOTAL AVERAGE 42.3 20.3 INDUSTRIAL CHEMICALS 44.6 12.9 OTHER CHEMICAL PRODUCTS 48.6 17.2 PETROLEUM REFINERIES 44.3 36.5 PETROLEUM & COAL PRODUCTS 52.3 24.2 RUBBER PRODUCTS 57.4 32.6 PLASTIC PRODUCTS NECESSITY 98.5 38.1 SUBTOTAL AVERAGE 50.9 24.5 CERAMIC PRODUCTS 65.8 40.5 GLASS & GLASS PRODUCTS 62.7 49.1 OTHER NONMETAL MINERAL PRODUCTS 50.4 27.8 SUBTOTAL AVERAGE 56.4 36.3 IRON & STEEL B-METAL IND 62.8 8.3 NONFERROUS B-METAL IND 54.3 18.9 METAL PRODUCTS NECESSITY 56.1 17.5 NONELECTRIC MACHINERY 43.1 13.7 ELECTRICAL MACHINERY 50.4 17.9 TRANSPORT EQUIPMENT 49.4 33.5 SCIENTIFIC EQUIPMENT 50.5 7.9 OTHER MANUFACTURING 53.3 46.0 SUBTOTAL AVERAGE 50.5 17.4 CONSUMER GOODS 63.1 39.2 INTERMEDIATE GOODS 57.3 19.0 CAPITAL GOODS 43.2 13.2 CATEGORY I PRODUCTS 2/ 34.2 10.0 CATEGORY 11 PRODUCTS 2/ 49.5 20.0 CATEGORY III PRODUCTS 2/ 54.6 40.0 PRODUCTS SUBJECT TO EXCISE TAXES 2/ 210.1 100.0 OVERALL AVERAGE 54.4 25.0 1/ Weighted by import shares. 2/ Product categories defined per table 6 of text. Source: Customs Directorate, Gabon. A N N E X HI COMPANY INTERVIEWS I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ I~' I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -105 - ANNE 1X1I A. hiackgrund 1. A total of 86 manufacturing firms were interviewed across five countries: 34 in Cameroon, 11 in CAR, 7 in Chad, 12 in Congo and 22 in Gabon. No firms in Equatorial Guinea were interviewed because of negligible manufacturing activity in that country. The analysis is based on data for 76 firms. 2. The sample of firms was chosen so as to cover the principal sectors of formal manufacturing activity in these countries. The product coverage in each country is representative of the breadth of the mantufacturing sector in each. Thus, the sample of 34 firms for the Cameroon covers the widest range of activities. The sample in others is restricted essentially to four activities: drinks (alcoholic and non- alcoholic), cigarettes, textiles and food processing (mainly sugar and/or edible oil). The share of these four major sectors in manufacturing activity ranges from 58.8% in Congo to about 90% in Chad. 3. The results of the ERP analysis that are presented in Tables IlI.1 - III.6 are only indicative. The quality of the data was not uniform across firms in different countries with the result thac cross- country comparisons have to be treated with caution. Be Methodolocical Note 4. The data on firms was obtained from interviews. The nominal tariffs were available from the UDEAC Customs Code and world prices of competing products were estimated using (i) data on effective tariffs, calculated by taking the ratio of tariff collections to the actual value of imports for each category of products (the difference between the nominal tariff and this ratio provides an approximation of the average exemption rate on each item); or (ii) data on the local market price of similar products imported by competitors. 5. The Effective Rates of Protection (ERPs) have been calculated using the Corden approach t ERP - 1(Va/Vm) - 1 x 100 where V, = Q - A and V, = Q/(1 +t) - A/(1+t) Q* - A* 6. V, denotes the value added of the firm in local currency, Vm the value added in world prices, Q the value of the sales in local currency, A the value of imported inputs, t the tariff on the commodity produced abroad and ti the tariff on imported inputs. The value added in world price, is derived indirectly by deflating the value of the output by t and by deflating imported inputs by ti. 7. The post reform ERPs have been calculated assuming that the changes in tariffs do not affect the value added in world prices: ERP - (Vn'/Vm) - 11 x 100 where Vn, Q* (1 + t') - A* (l+t'1) 8. Va' is the post reform value added in local currency, t' the post reform tariff on the product and t'i the post reform tariff on imported material. CONcl - 106 - 09-Mar-92 Table III. 1 CAMEROON Estimates of Sectoral Effective Rates of Prote4tfon (1989) Current Current Post-Reform ERPs PRODUCTS VA/T 3/ nominal tariff Effective Tariff Current Scenario Scenario rates rates ERPs A C ..........................,................................................................ conc. milk 6.0X 56.9X 29.9X 161.4X 456.2% 102.9X milk prod. 37.0X 28.2X 29.9K 23.4X 93.6X 46.4X sugar 1/ 27.0K 137.9K 29.9X * - - chocolate 27.0X 69.5X 29.9X 38.6X 108.7K 51.1X ciment 1/ 36.0X 90.3X 59.9X 3693.5X 9.0X 9.0X r'aint 28.0K 36.1X 11.25X 164.8X 9.0K 9.0X glue 42.0K 23.7K 4.2X 11.4K 9.0X 9.0K cosmetics 46.0K 183.7K 69.0% * - soap 1/ 2/ 8.0K 39.1K 34.7% 0.7X 87.6K 43.2K detergent 2/ 29.0K 64.0K 12.2X 3.5X 239.2X 86.9X aluminum 47.0K 186.1K 17.9X 190.5X 126.0K 52.2K plastic products 13.0K 21.6K 45.7X * - - plastic pipes 10.0K 13.1K 33.2X * - packing materials 35.0K 42.1K 19.2K 426.4K 9.0% 10.0K paper products 20.0K 50.8K 5.4 *- - packing materials 47.0K 41.7X 5.4K 152.1K 9.0K 10.0K paper note books 22.0K 67.2K 5.4K 4065.8X 554.8X 109.4K textile fiber 1/ 14.0K 94.6K 36.5K 40.8K 100.5K 46.6K textiles 1/ 2/ 24.0K 135.2K 36.5K 4.0K 124.0K 51.7K paper bags 62.0K 125.0K 30.8K 405.7K 99.8K 46.3K shoes 45.0K 142.9X 52.7X 134.8X 81.7X 41.7K iron products 55.0K 90.0K 8.1X 309.4K 9.0K 10.0K corr.met.sheets 2/ 16.0K 35.3K 17.9K 0.7X 9.0K 10.0K home appliances 42.0K 80.7X 16.0X 63.5K 69.8K 38.4K metal tools 60.0K 41.6K 17.9X 50.0K 9.0K 10.0K drinks 35.0K 180.0K 180.0K 228.0K 81.2K 40.0K cigarettes 35.0K 225.0K 225.0K 256.9X 51.8K 10.9X ref. soya oil 1/ 12.5K 84.5K 7.6K * - - ref. peanut oil 1/ 56.6K 73.5K 30.8X * - Average 30.0K 1/ Currently subject to quantitative restrictions. 2/ Currently subject to widespread customs fraud. 3/ Value added/Turnover. * Indicates negative value added at world prices. For firms with negative value added at world prices, it is not possible to calculate meaningful post-reform ERPs. NOTE: (i) 34 firms were interviewed of which sufficient data were evailable for 29 (ii) Post-reform ERPs calculated using post-reform effective rate structure (i.e nominal rates adjusted for exemptions). (iii) It is assumed that products currently subject to widespread custom fraud (i.e soap, detergent textiles, corrugated metal sheets and cigarettes) will no longer be subject to fraud post-reform. (iv) Post-reform estimates assume that remaining QR#s will be dismantled. (v) Estimates of current ERPs for cigarettes are overestimates because they do not take into account existing custom fraud. Source: UDEAC Custom Code and company interviews 09-Mar-92 Table 111.2 CENTRAL AFRICAN REPUBLIC Estimates of Sectoral Effective Rates of Protection (1990) Post-Reform Post-Reform Current Current Current ERPs (w/ fraud) 4/ ERPs (w/o fraud) 5/ PRODUCTS VA/T 3/ nominal tariff effective tariff ERPs Scenario Scenario Scenario Scenario rates rates A C A C drinks (firm 1) 20.3X 200.0X 173.0X * drinks (firm 2) 48.0% 200.0X 180.0% *- - cigarettes 26.1X 100.0X 71.4X 672.5X 395.01 80.31 511.01 171.81 textile 2/ 14.81 80.0X 46.61 73.61 -13.8X -46.9X 93.4X 38.21 sugar I/ 43.8X 90.0X 62.51 * - paints 28.01 35.01 35.0X 865.9X 15.0X 15.0X 15.01 15.01 edible oil + soap 42.7X 90.01 62.91 114.91 68.81 14.51 115.41 51.51 bicycles 31.81 44.01 44.01 76.81 129.7X 51.91 129.71 51.91 Average 38.21 ....... ............ .. . ......... ... . . . . . ._. . . . . . .. _ . . . .. . _ . . . .. . . ... .. . . . . . . .. . . . . . .I. . . .. . 1/ Currently subject to quantitative restrictions. ° 2/ Currently subject to widespread fraud. 3/ Value added/Turnover. 4/ Assumes that custos fraud mill continue as at present. 5/ Assumes that the effective tariff rate on competing irports is equal to the post-reform nominal rate. * Indicates negative value added at world prices. For firms with negative value added at world prices it is not possible to calculate meaningful post-reform ERPs. Note: Ci) 11 firms were interviewed of which sufficient data were available for 9. (ii) Post-reform ERP's calculated using post-reform effective rate structure. Ciii) Post-reform estimates assume that remaining QR's will be dismantled. Source: UWEAC Custom Code and company interviews. 28-Feb-92 Table 1I1. 3 CHAD Estimates of Sectoral Effective Rates of Protection (1990) Post-Reform 4/ Post-Reform 5/ Current Current Current ERPs (w/fraud) ERPs (w/o fraud) PRODUCTS VAIT 3/ norinal tariff effective tariff ERPs Scenario Scenario Scenario Scenario rates rates A C A C ................................... ............................................................................... .............. .............. ..... .. .. drinks (firm 1: 63.7X 90.02 90.0X 150.5X 101.8X 44.1X 107.5 48.62 drinks (firm 2) 1/ 33.62 55.02 47.42 82.7X 67.92 14.62 113.62 50.82 cigarettes 2/ 35.22 75.02 38.82 54.92 -14.7X -58.92 128.62 54.82 sugar 1/ 2/ 23.02 90.02 38.22 81.42 -77.62 -84.71 184.82 76.7X textile 1/ 2/ 66.02 80.02 7.42 5.72 -68.22 -68.22 8.51 8.52 cotton oil & soap 17.02 35.02 31.02 6.32 11.52 2.52 16.32 6.42 paints 39.6X 60.02 22.02 78.42 5.02 4.02 15.02 15.02 average 25.7X ................ .................................. .... ...... ......... ................... ............ . . . ... ......... 1/ CurrentLy subject to quantitative restrictions. The post-reform ERP's are based on assuwption that these ORs will have been removed. 2/ Currently subject to widespread customs fraud. 3/ VaLue added/Turnover. 4/ AssLues that customs fraud will contimue as at present. 5/ Assunes that the effective tariff rate on competing imports is equal to the post-reform nominal rate. NOTE: (i A total of seven firms were interviewed. (ii) Post-reform ERPfs assume that the effective tariff rate on competing imports is the post-reform nominal rate deflated by the proportion of the total estimated local market for the product currentli suppLied by Legal or illegal imports that pay zero import duty. (iil) Fraud is a serious problem in Chad and post-reform results with regard to ERP's are sensitive to the evolution of custom fraud in the future. Source: UDEAC Customs Code and company interviews O-Nar-92 Teble M11. 4 CONIGO Estifates of Sectoral Effective Rates of Protection (1990) Post-reform Post-Reform ERPs Cu/fraud) 3/ ERPs (u/o fraud) 4/ PRODUCTS VA/T 2/ Current nominal Current effective Current Scenarfo Scenario Scenario Scenario tariff rates Tariff rates ERPs A C A C drinks (firm 1) 33.0X 180.0X 169.2X 614.3X 212.0X 81.1X 225.0 91.4X drinks (firm 2) 52.4K 180.0X 169.2X * - drinks (firms 3) 30.0X 30.0X 20.0X 24.4X 50.8K 14.7X 82.1X 39.4X cigarettes 34.0X 125.0K 99.2X 242.1% 52.5K -16.3K 136.1X 50.1X textites 14.4K 85.0K 39.0X 168.7X 115.6X -13.1X 225.0K 74.5X sugar 1/ 50.0K 90.0X 90.0X * - - 30.9K 15.2X flour 1/ 21.0K 43.0X 38.0X * - - - c.uent 1/ 39.6K 65.0X 42.6X * - 15.0K 15.0X oft 17.1K 34.0X 12.OX 14.2X 15.0X 15.0X 15.0X 15.0X paints 6.3K 86.0X 86.0X 683.0X 15.0X 15.0Z 15.0X 15.0K filters 37.4K 35.0K 35.0X 23.4X 34.3K 9.6K 34.3X 9.6K aluminium sheets 17.2X 65.0X 53.3K * - - - - 0 Average 35.0Z .. . ... . ... ... . ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1/ Currently subject to quantitative restrictions. Post-reform ERP based on assumption that these QRs will have been removed. 2/ Value added/Turnover. 3/ Assumes that customs fraud will continue as at present. 4/ Assumes that the effective tariff rate on competing imports is equal to the post-reform nominal rate. * Indicates negative value added at world prices. For firms with negative value added at world price, it is not possible to calculate meaningful post-reform ERPs. Note: (i) A total of 12 firms were interviewed of which sufficient data were available for 11. (ii) Post-reform ERP's calculated using post-reform effective rate structure (i.e. nominal rates adjusted for exemptions). Source: WEAC Customs Code and company interviews. 0- m-9e Table 111. 5 6UON Estimates of Sectoral Effective Rates of Protec.tkn (1990) Post-Reform ERPs Current nominal Current effective Current Scenario Scenario roducts VAJT 31 tariff rates Tariff rates ERPs A C drinks (firm 1) 38.6% 209.0% 209.0% 675.3% 221.3% 90.0% drinks (firm 2) 36.8% 214.0% 214.0% 472.5% 153.6% 65.4% drinks (firm 3) 46.6% 155.0% 155.0% 270.8% 127.3 55.8% cigarettes 2/ 32.5% 219.0% 200.7% - meat products 38.0% 43.0% 38.0% 55.2% 100.8% 46.2X flour 1/ 46.4% 55.0% 25.0% * - 60.5% textile (firm 1) 2/ 46.9% 86.0% 13.4% 22.3% 103.6% 45.2% textiles (firm 2) 51.8% 86.0% 61.3% 99.2% 105.6% 48.0% alntinm sheets 8.0% 56.0% 18.0% - - sugar 1/ 53.3% 60.0% 57.1% * - 17.1% edible oil I/ 37.6% 84.5% 44.0% * - 38.7X tires 16.3% 57.4% 32.6% * - - paints (fir. 1) 49.0% 65.0% 65.0% 194.5% 15.0% 15.0% paints (firm 2) 54.8% 65.0% 65.0% 198.1% 15.0% 15.0% chemicals (firm 1) 46.0% 65.0% 65.0% 213.4% 15.0% 15.0% ° chemicals (firm 2) 48.2% 65.0% 65.0% - electric appliances 45.9% 30.7% 30.7% 27.8% 15.0% 15.0% radio and stereo 5.4% 90.0% 67.0% * - - metal industry 66.0% 60.0X 60.0% 77.3% 15.0% 15.0% cement 1/ 43.4% 53.0% 53.0% * - Average 40.7% 1/ Currently subject to quantitative restrictions 21 Currently subject to widespread customs fraud 3/ Value added/Turnover * Indicates negative value added at world prices For firms with negative value added at world prices, it is not possible to calculate meaningful post-reform ERPs. Note: (i) 22 firms were interviewed of which sufficient data were available for 20. (ii) Post-reform ERP's calculated assuming effective rate on competing imports is post-reform nominal rate deftated by porportion of local market currently supplied by tegal or illegal imports paying zero duty. (iii) Fraud is a serious problem only for the textile firm. The ERP's in the table assume no-fraud post-reform. If fraud persists at current Level, post-reform ERP's for the textile firm would be as follows: Scenario A C Firm 1 -66.5 -89.2 Firm 2 77.6 25.7 Source: UDEAC Customs Code and comqany interviews A N N EX IV CAMEROON Detailed Results of Simulation Analysis I.= X i !; - 114 - TABLE IV.1 TAXABLE BASE A. IMPORTS (c.i.f) 87/88-90/91 (billions of CFAF) Regime 1987/88 1988/89 1990/91 (a) Misc. oxemptions 1/ 88.11 112.05 108.64 of which: grants, govt. projects, public admin. (20.62) (19.17) (18.59) Customs Tariff and other misc. 2/ (67.49) (92.88) (90.05) (b) Intra-UDEAC 3/ 1.08 0.98 0.95 (C) Investment Code 4/ 59.79 54.32 52.67 of which: regimes A,B & SHE 27.58 16.72 16.21 regime 0 1.29 1.47 1.43 regime C 30.92 36.13 35.03 (d) TU 5/ 78.99 62.42 60.52 (e) TIP 5/ 18.87 27.64 26.80 (f) Non-exempt 185.78 144.82 140.41 Total 432.63 402.24 390.00 ............................. Source: Cameroon Customs; see Table 111.6 for details. 1/ These imports are totally exempt 2/ The following exemptions are included: diplomatic, military, Act 13/65 of the UDEAC Cutoms Code and "ad hoc" exemptions accorded by the authorities. 3/ Intra-UDEAC imports are partially exempt becasue they pay a lower tariff than similar imports from outside UDEAC. 4/ Partially exempt inports per provisions of the Investment Code or special conventions. 5/ These imports are per the provisions of the TU and TIP regimes. B. SALES OF LOCAL MANUFACTURES (billions of CFAF) 1987/88 1988/89 1990/91 Local sales of TU enterprises 214.89 186.95 181.26 Local sales of TIP enterprises 54.31 47.75 46.29 Local sales of other manu. firms 59.45 42.30 33.00 Total 1/ 328.66 277.00 260.55 of which drinks and beer (est.) 200.00 200.00 110.00 2/ ....................... Source: Customs declaration type 21 and 23 for TU and TIP enterprises per classification of the PAGODE system of Cameroonian Customs. The total value of these declarations represents the taxable base of TU and TIP firms, and thus, the value of their local sales. The local sales of other enterprises were estimated assuning that these firms generated CFAF 3.3 billion in sales tax receipts in 1990/91 at a rate of 10X. Finally, the turnover of firms in the drinks and tobacco sectors is per IMF estimates of August 29. 1991. 1/ This represents a conservative estimate of the sales tax base. A Finance Ministry study covering 125 enterprises of the non-petroleum industrial sector estimated the turnover of this sector to be FCFA 412 billion in 1988/89. 2/ Per Ministry of Finance and IMF. - 115 - TABLE IV.2 CUSTOMS AND INDIRECT TAX RECEIPTS (billions of CFAF) 1987/88 1/ 1988/89 1/ 1990/91 2/ 1991/92 3/ Import taxes *Customs duties 21.70 11.60 10.00 *Entry duties 39.80 25.80 23.00 *TCAI 22.12 14.80 13.00 *Complementary tax 18.63 11.70 9.00 *Intra-UDEAC 0.36 0.36 0.36 0.36 *Computer service fee 1.80 3.40 3.6 5.00 Sub-total 104.10 67.36 58.96 101.00 Other 4/ - 11.00 * TIP 6.49 6.10 8.00 8.00 *TU on local sales 31.00 43.90 32.00 32.00 Domestic indirect taxes ICAI 43.40 25.40 20.00 15.00 *on local sates of goods 5.95 5.00 3.33 2.50 *on services 37.50 25.00 12.00 12.50 Specific Taxes *on drinks 0.00 0.00 3.80 14.00 'on vehicles 0.00 0.00 0.68 2.50 'on electrical appLiances 0.00 0.00 0.27 1.00 an petroleum products 5.00 41.80 35.40 35.40 other non-petroleun taxes 206.27 204.11 138.95 171.00 Total non-petroleum tax receipts 353.80 325.70 246.00 332.00 Sub-total of taxes to be replaced under the reforms 5/ 147.53 121.59 107.05 161.00 (marked by asterisk) Total indirect taxes 241.1 227.5 183.71 neant ............... Source: Ministry of Finance and IMF 1/ Fiscal Receipts in Cameroon: Analysis and Possibilities for Reform, IMF, March 15, 199 . 2/ Ministry of Finance and IMF, Central Gove;nment Receipts, August 26, 1991. 3/ Ministry of Finance and IMF, Projections for 1991/92, August 29, 1991. Includes following new measures: raising of complementary tax on milk, salt, soap etc. (14 billion CFAF); reduction of Investment Code exemptions (17 billion CFAF); imposition of 15X on TU/TIP imports (13 billion CFAF); conputer service fee (5 billion CFAF); minimum irposition of 5X on all imports and on customs warehouses (11 billion CFAF). 4/ Minimum tax of 5S and imposition on customs warehouses. 5/ Represents minimun target revenue to be generated from these taxes post-reform. This total does NOT include receipts from ICAI on services, because it is assumed that only the name of this tax will change -- the new TCA on services will applu at the same rate as the existing ICAI on services. Also exluded from this total are receipts from the minimum levy of 5X on all imports ind the imposition on customs warehouses. - 116 - TABLE IV.3 EXISTING RATES AND EXEMPTIONS STRUCTURE Effective Import Tariff Rate 1987/88 1988/89 1990/91 Average effective import tariff rate 1/ 23X 16X 14X of which: Customs duties 5X 3X 3X Entry duties 9X 6X 6X TCAI 5X 4X 3X Complementary tax 4X 3X 2X Average legal inport tariff rate 2/ 59X 51X 51K Percentage of imports totally or part exempt 3/ 57X 64X 64K Percentage of imports totally exempt 4/ 43X 50X 50K Average rate of the TIP 5/ 12X 13K 17K Average rate of the TU on local sales 6/ 14X 23X 18X on intra-UDEAC trade 7/ 33X 37X 38K Domestic taxes ICAI: on sates of local goods 10X 10X 10K on services 10 10X 10K 1/ (Receipts from all import taxes)/Cc.i.f value of imports) 2/ weighted by import shares 3/ (1 - non-exemrpt inports)/(c.i.f. value of imports) 4/ (exempt inports + TU inrports + TIF .ports)/(c.I.f value of inports) 5/ (TIP receipts)/(local sales of TIP firms) 6/ (local TU recefpts)/(local sates of TU firms) 7/ (receipts from TU on imports)/(c.i.f. value of inports from other UDEAC countries) Table IV.4 REVENUE IMPACT SINUULATIONS 1990191 Basis A. Post-Reform Tax ard ExeMptions Structure (X) Scenario A Scenrio B Scenario C Scenario D Scenario A I it II[ I 11 III I it III I It III I it III Iwort dkty 5.00 15.00 70.00 5.00 15.00 50.00 5.00 15.00 35.00 30.00 30.00 30.00 5.00 15.00 70.00 Preferentibl Tariff 3.75 11.25 52.50 3.75 11.25 37.50 3.75 11.25 26.25 22.50 22.50 22.50 3.75 11.25 52.50 TCA (an gsods) 2/ 0.00 13.00 13.00 0.00 15.00 15.00 - Excise Tax 0.00 0.00 15.00 0.00 0.00 22.00 0.00 0.00 30.00 0.00 0.00 22.00 0.00 0.00 15.00 VAT 3/ - - - - 28.00 28.00 Q.00 22.00 22.00 0.00 24.00 24.00 TCA on services 41 Existing rate (s) of ItA1 on services Proportion of Imports totally or partially exemt S/ 37X 6/ 31X 7/ 25X B/ 25X 6/ 37X 6/ ..............................I AssuLqptions 1/ The TCA is applied at the sae rate on all goods, whether ifported or locally produced. It is also applied to intra-UDEAC isports. It does NOT, on the other hand. -J aply to inputs liported by Investment Code or TU firms. The TCE. does NOT appty to imports of petroleun products, which are assumed wbject to existing taxes on tocalt crns&uption of such products. Finally, the TCA is applied on the duty inclusive price of imports and on the value of of local sales net of taxes. 2/ Applied on drinks and tobacco. 3/ The VAT is applied only on the sale of gowds; S are excluded. 4/ The rate(s) of the TCA on services may differ from the proposed new TCA on goods. This tax is to apply on the sam basis as the present ICAI on services. 5/ Exemptions are projected to decline over time as indicated by this ratio. The specific assumptions pertaining to exemptions reduction under each scenario are explained in the footnotes below. 6/ This scenario assumes that TU ard TIP related exemptions (c.i.f. import value of CFAF 87.3 billion) are eliminated; that exemptions accorded under the PIE (small and medium scale enterprises) regimes and regimes A & B of the Investment Code are reduced by 80X (from CFAF 16.2 to 3.2 billion) in line with measures already amnncued by the authorities as part of their agreement with IMF; that mother miscellaneous" exemptions are reduced by 6X (CFAF 5.4 billion) following modification of Act 13165 of the IWEAC Customs Code. the value of imports subject to pertial or total exemptions is thus assumed to decline from CFAF 249.6 to 143.4 billion. 7/ In addition to the elimination of the TU and TIP, regimes, this scenario assumes that "other miscellaneous" exemptions are reduced by 24X (CFAF 21.7 billion); exemptions to small L medium scale enterprises and those under regime A L 8 of the Investment Code are cantletely eliminated. while those under regime C of the Code are reduced 51 (by CFAF 1.75 billion). 81 In addition to the elimination of the TU, TIP regimes and of the exemptions to small & medium scale enterprises and under regimes A & B of the Imestment Code, this scenario assumes that exeptions under regime C of the Code are reduced by 501 (CFAF 17.5 billion) and that "other miscellaneaous" exemptions are reduced by a third (CFAF 30 billion). This target should be entirely feasible if Act 13/65 of the Customs Code is revised and Investment code privileges are not renewed. Table IV.4 (contd.) B. Receipts Scenario A Scenario B Scenario C Scenario D Scenario A* Total iqmrt taxes 118.90 108.26 64.97 89.46 92.44 Customs duty 90.28 74.33 62.62 87.56 90.28 Preferential tariff 0.50 0.36 0.25 0.21 0.50 TCA on imports 26.46 31.86 - - Excise duty on imports 0.83 1.02 1.42 1.00 0.83 Receipts from reduced rate taxes on irports 0.82 0.68 0.68 0.68 0.82 TCA on locale sales 1/ 33.67 39.08 - - of ubich: on local sales of TU firms 23.56 27.19 on local sales of TIP firms 6.02 6.94 on local sales of other firms 4.29 4.95 Value Added Tax 2/ - - 72.68 57.10 62.29 Excise duty on local sales 16.50 22.00 33.00 24.20 16.50 Total 169.27 169.34 170.64 170.77 171.23 11 Ooes not include receipts from TCA On services .hich remain unchanged post-reform. 2/ Taxable value added Is estimted as follows: CFAF billions Taxable value added equals: 259.56 taxable domestic Industrial sales 260.56 (see Table IVM1) plus: imports of finat products 168.37 minus: Intermediate consumption 169.36 with: Intermediate consLuption * 65X of dc estic industrial sales (Source: National Accounts. 1985/86). Irports of final products * (non-exempt iwports) - (total estimated intermediate imports -TU/TIP Imports - imports of other Investment Code firms). Estimated Intermediate imports = 43X of domestic industrial sales (Source: National Accounts 1985/86). Table IV. 5 IMPACT OF REFORMS (1990/91 BASIS) On all TU/TIP firms Scenario A Scenario B Scenario C Scenario D Scenario A* Indirect taxes paid in CFAF biltions pre-reforme 67.00 67.00 67.00 67.00 67.00 as X of turnover 1/ 29X 292 29X 29X 29Z post-reform 73.26 78.12 73.40 67.55 62.79 32X 34X 32% 30% 28X Enterprises of the drinks & tobacco sector Indirect taxes paid in CFAF bitlions pre-reform 40.47 40.47 40.47 40.47 40.47 as X of turnover 37% 372 37% 37% 37% post-reform 43.94 49.13 47.91 41.53 34.92 402 45X 44X 38% 32% On other TU/TIP firms Indirect taxes paid in CFAF billions pre-reform 26.53 26.53 26.53 26.53 26.53 as 2 of turnover 23% 23% 23X 23% 23% post-reform 29.32 29.0 25.49 26.03 27.87 25% 25X 22% 22X 24% Effective cmutative tariff on ron-exempt imports 2/ pre-reform 52% 522 52% 52% 52% post-reform 48% 40% 38% 43X 52% Effective cumulative tariff on atl imports 3/ pre-reform 19% 19% 19% 19% 19% post-reform 30X 28% 29X 32% 34% Effective lmport duty on: 4/ pre-reform post -reform post-reform post-reform post-reform post-reform category 1 16% 42 4X 4% 23% 4% category 11 14% 82 92 102 21% 8% category II 41% 59% 432 31% 27% 59% drinks & tobacco 45% 65% 47X 332 28% 65% 2 of taxes subject to reforms collected by Customs 5/ pre-reform 882 88% 88% 882 88% post-reform 70X 64% 66% 742 78% 2 of taxes subject to reforms collected by Tax Department pre-reform 12% 12X 122 12X 12% post-reform 302 36% 34% 26X 22% TABLE IV.5 (contd.) NOTE Mi) The calculation of the indirect tax burden includes only indirect taxes paid by firms on the sate and purchase of goods. (ii) Turnover is net of taxes and includes sate of local goods, and corresponds to the tax base of Table IV.1B. 1/ The calculation of the indirect tax burden pre-reform is based on 1991 data, after introduction of the new measures of the 1991/92 Finance Law, including irposition of a 15X duty on att TU/T!P imports and a 15X specific tax on local sates of drinks. 2/ (import duties + TCA + excise tax + special levies)/(non-exempt inports c.i.f), of which import duties include receipts from the higher Taxe Cowplementaire and the statistical levy introduced in 1991. 3/ (as above)/(total imports c.i.f). 4/ Assumes that Customs will not have responsibility for applying the new TCA or excise levies on sales 0 of TU and TIP firms as they do currently. The transfer of responsibility from Customs to the Tax Department is not critical to the reform. If such a move is likely to cause too much adninistrative disruption in the short-term, it could be deferred to later. In the long run, however, it would be desirable for Customs not to be responsible for domestic taxes. 5/ (Import duties onty)/(imports of relevant category c.i.f). - 121 - TABLEAU IV. 6 STRUCTURE OF IMPORTS (c.i.f) 1990/91 (billions of CFAF) Product Category Regime I II III Total (a) Miscellaneous exempt 1/ 8.15 83.76 16.73 108.64 (11.56) (1.09) (b) Intra-UDEAC 2/ 0.00 0.00 0.95 0.95 (c) Investment Code 3/ 2.49 45.61 4.57 52.67 (0.02) of which regime A, B & SME 0.26 12.54 3.41 16.21 regime D 0.03 1.38 0.02 1.43 regime C 2.20 31.70 1.14 35.03 (d) TU 4/ 0.93 40.94 18.65 60.52 (9.58) (e) TIP 5/ 0.29 19.23 7.28 26.80 (0.31) (f) Non-Exempt 6/ 18.38 50.83 71.20 140.41 (1.11) (3.19) Total 30.25 240.36 105.20 390.00 of which petroleum products (12.67) products to be subject to excise tax (14.19) Source: PAGODE System. Customs Directorate, Cameroon. Note: Ci) The detaited structure of imports being available only for the year 1987/88 (see Annex II), this table was constructed assuming the same structure of imports as in 1987/88. (ii) The table assumes that the structure of exemptions is the same as in 1988/89, a detailed breakdown by type of regime, not being available for more recent years. 1/ Includes imports under regimes 20 to 23 of the PAGODE system in 1988/89. 2/ Includes imports under regime 16. 3/ Includes imports under regimes 3 to 9 and 12. 4/ Includes imports under regime 1. 5/ Includes imports under regime 2. 6/ This total is obtcined as a residual. .4.. f ANNEX V CENTRAL AFRICAN REPUBLIC Detailed Results of Simulation Analysis .~~~~~~~~~~~~~~ -124 - TABLE V. 1 TAXE BASE 1989-90 A. Imports (c.i.f) (Billions of CFAf) Regime 1989 1990 (ast) (est) (a) Miscellaneous exemptions 1/ 17.99 15.40 of which public administration (3.23) (1.62) petroleum products 2/ (4.47) (4.47) UDEAC Customs Code & other miscellaneousous (10.3) (9.31) (b) Intra-UDEAC 4/ 8.00 4.27 (c) Investment Code 5/ 11.08 12.59 (d) TU/TCI 6/ 8.75 13.03 (e) Non-exempt 26.69 20.29 of which petroleum products (0.36) (0.36) Total 72.51 65.55 of which petroleum products (4.83) (4.83) .. .. .. . ..... 1/ These imports are totally exempted. 2/ Exempt from inport duties but subject to a petroleum consumption tax. 3/ Includes exemptions under Act 13/65 of the UDEAC Customs and those granted on an "ad hoc" basis. 4/ Intra-UDEAC imports are subject to lower duties than the same products from ouside UDEAC. 5/ Part exempt due to application of a reduced rate. 6/ These are totally exempt under the TU and TIC regimes. Exemptions under just the TU regime are CFAF 3.23 billion. Source: BEAC, Directorate of Statistics, Customs Directorate (SYDONIA) and UorLd Bank. See table V.6 for details. B. LOCAL SALES OF GOODS 1990 (Billions of CFAF) Local sates of TU/TCI firms 1/ 12.14 of which sales of drinks & tobacco sector firms (9.31) Local sates of other manufacturing firms 2/ 0.98 Total 13.12 1/ Source: Company Interviews. This total excludes the sates of UCATEX and of SOGESCA, ------ which are subject to special conventions preventing the immediate application of the proposed new sales taxes to them. Exports and resale of imported goods are also excluded from this total. 2/ Essentially the local sales of forestry firms. - 125 - TABLE V. 2 CUSTOMS AND INDIRECT RECEIPCEIPTS (1987-1990) CBlitfons of CFAF) 1987 1988 1989 1990 Cest) Total inport taxes 7.59 8.97 8.83 8.54 of which * Customs duties 1.22 1.27 1.08 1.06 * Entry duties 2.96 2.62 2.92 3.22 * TCAI 1.37 1.23 1.1 1.32 * Complemantary Tax 0.76 1.06 1.45 1.14 * Others 0.78 1.29 0.73 0.30 * Taxe Unique on Intra UDEAC leports 1.50 1.50 1.50 1.50 * TUWTCI (including CAA on beer) 3.11 3.16 3.25 3.53 Domestic Indirect Taxes ICAI * ICAI on sates of local goods 0.16 0.16 0.16 0.16 * ICAI on servicas 1.59 1.50 1.44 1.55 * Transactions Tax 1.19 1.11 1.18 1.18 TRtA n.e 0.21 0.19 0.19 Other indirect taxes 7.57 7.88 8.37 8.74 of which taxes on exports 2.11 2.06 2.49 2.24 Other 1.66 1.60 1.57 1.57 Taxes on petrolem products 3.80 4.22 4.31 4.93 Total indirectes taxes 22.11 22.89 23.4223.89 Sub-total of taxes to be replaced under reforms (marked by asterisk) 1/ 12.95 13.30 13.4213.41 Total fiscal receipts (direct & indirect) 33.50 35.60 33.94 n.a Source : Ministry of Finance, CAR. 1/ This total represents the minimum target revenue to be generated by theses taxes. It does not include receipts from the ICAI on services because only the name of this tax Is assuned to change post-reform (to TCA services). - 126 - TABLE V. 3 EXISTING RATES AND EXEMPTIONS STRUCTURE t1990) Average effective Iqmort tariff rate 1/ 13% of which Custom duties 1.6% Entry duties 4.9% TCAI 2.0% Complementary Tax 1.9% Average legal inport tariff rate 2/ 51.4% Percentage of Inports partially or totalty exempt 3/ 69.0% Average TU rate on locat sales 4/ 29.1% on Intra-UDEAC inports S 35.1% ......................... ................................ 1/ (Receipts from all iwports taxes)/Cc.i.f value of 1mports). 2/ Urweighted. 3/ (1 - non-exempt lfrports)/Cc.i.f value of inports). 4/ tTU receipts)/(local sates of TU firms). S/ (Receipts from this tax)/Cc.i.f value of intra-UDEAC Imports). TABLE V. 4 EVEE DIPACT SNIULAT IOU 1990 Basis A. Post-Reform Rates and Exeptions Structure (X) Scenario A Scenario 8 Scenario C Sceario D Taxes Product Category Product Category Product Category Product tategory I EI Ill I It III I 11 [it I 11 III Import duties 5.00 15.00 70.00 5.00 15.00 S0.00 5.00 15.00 35.00 30.00 30.00 30.00 Preferential Tariff 3.75 11.25 52.50 3.75 11.25 37.50 3.75 11.25 26.25 22.50 22.50 22.S0 TCA (on goods) 1/ 0.00 4.00 4.00 0.00 6.00 6.00 0.00 8.00 8.00 0.00 5.00 5.00 Excise tax on tobacco 8.00 12.00 12.00 10.00 on drinks 22.00 28.00 30.00 30.00 TCA on aervices 2/ existing rate(s) of ICAI on services Proportion of iaports totalty 64X 4/ 61X S/ 57X 61 57X 61 or partially exeupt 3/ Assumptions 11 The TCA is appplied at the saee rate on all goods. uhether imported or locally pr produced. It applies also to Intra-UDEAC iWports. It does NOT apply to the iqorted inputs of Investment Code firms, iieluding TU firms. Nor does It apply to petroleun products which continue to be taxed as at present. Finally, the TCA is applied on the duty-inctusive prke of imports and on the value of local sales, net of taxes. 2/ The TCA rate on service couLd be dI*ferent from that of the new TCA on goods. It is apolied on the saw basis as the existing ICAI on services. 3/ Exeaptions are projected to decline over time as indicated by this ratio. The specific assurptions pertaining to exemptions reduction under each scenario are explained in the footnotes below. 4/ This scenario assumes that exemptions granted under the TU regime (CFAF 3.2 billion) are eliminated. 51 In addition to the measures in 4I above, assumes that exemptions to TCI firm are reduced 2OX (froma CFAF 9.8 to 7.8 biLtion). 6/ In addition to the measures in 4/ above, assuies that exemptions to TCI firms are reduced sox (from CFAF 9.8 to 4.9 billion). - 128 - TABLE V. 4 (contd.) B. Receipts 1/ (Billions of CFAF) Scenario A Scenario B Scenario C Scenario D Total taxes on imports 12.73 12.08 11.72 12.30 Customs duties 8.80 7.66 6.73 8.57 Preferential Tariff 1.86 1.47 1.11 1.02 TCA on imports 1.15 1.86 2.72 1.50 Excise tax on imports 0.67 0.84 0.91 0.96 Receipts from reduced rate duties on imports 2/ 0.25 0.25 0.25 0.25 TCA on local sales 3/ 0.52 0.79 1.05 0.66 Excise tax on local sles 1.57 2.06 2.18 2.11 Total 14.83 14.92 14.95 15.06 1/ Assumes that import demand elasticities are as follows: Category I products 1.00 Category It products 0.25 Category III products 1.25 Products subject to excise duty 1.50 Post-reform inport values are not very sensitive to these elasticities. Compared to their existing level 1CFAF 65.55 billion), the following inport values result from each of the above elasticities: Scenario Total inports (CFAF billions) A 62.74 B 64.71 C 66.56 D 67.18 2/ Receipts reduced rate levies on equipment imports under the Investment Code. 3/ This does not include receipts from TCA on services which are not affected by the reforms. - 129 - TABLE V. 5 IMPACT OF REFORMS 1O9 BASIS) Scenario A Seeario Seonario C scenario D On atl TU/TCI firms 1/ Indirect taxes paid In CFAF billions pro-reform 2.91 2.91 2.91 2.91 As percentage of turnover 24.8X 24.8X 24.8X 24.8X post-reform 2.74 3.31 3.58 3.90 23.41 28.2 25.6X 33.2X On drinks & tobacco sector firms pro-reform 2.59 2.59 2.59 2.59 Indirect taxes paid in CFAF billions 31.7X 31.7X 31.7X 31.7X As percentage of turnover post-reform 2.30 2.82 3.04 3.25 28.1X 34.5X 37.21 39.6X On other TU/TCI firm 2/ pre-reform 0.34 0.34 0.34 0.34 Indirect taxes paid in CFAf billions 9.5X 9.51 9.51 9.5X As percentage of turnover post-reform 0.47 0.52 0.57 0.69 13.1X 14.5X 16.0X 17.4X Effective cumuLative rate pro-reform 421 421 42% 42X on non-exempt imports 3/ post-reform 421 391 321 341 Effective cumulative rate pre-reform 13X 13X 13X 13X on all Imports 4/ post-reform 20X 191 181 181 Effective import duty rate on 5/: pro-reform post post post post category 1 33X 41 4X 4X 241 category 11 6X 31 41 5 101 category III 241 381 291 211 181 Drinks & tobacco 127X 641 461 321 281 X of taxes subject to reforms pre- reform 901 901 901 901 collected by Customs 6/ post-reform 861 81X 781 821 X of taxes subject to reforms pre-reform 101 101 101 101 collected by Tax Department 6/ post-reform 141 191 221 181 ...................... Source Company Interviews, Custom Oirectorate, and World Bank. NOTE: (i) The calculation of the indirect tax burdfti includes only indIrect taxes paid by firm on the sale nd purchase of goods; (if) turnover Is net of taxes nd includes sale of goods, resale of imported goods and exports; it do not correspond. therefore, to the tax base o; Table V.1 S. 1/ Assumes that 25 X of total intra-UDEAC imports are finished products. 2/ Excludes UCATEX and SOGESCA that are protected by special conventions. 3/ (Import duties + TCA U excise taxes + special levIes on imports receipts from reduced rate imports)/ (non- exeapt imports c.i.f). 4/ (ICport duties + TCA + excise taxes + special levies on imports)/(imports c.i.f). 5/ Clrport duties only)/Cimports of relevant categories c.i.f). 6/ Assumes that Custom will noet have responsibIlity for applying the new tCA and excise taxes on sales of TU firms as they do currently. The transfer of responsibility from Customs to the Tax Department is not critieal to the reforms. If such a move is likely to causoe too much administrative disruption in the short run, it could be deferred to later. In the long run, however, It would be desirable for Customs not to be responsible for domestic taxes. - 130 - TABLE V. 6 STRUCTURE OF IMPORTS (C.I.f) 19"0 (Billions of CFAF) Product Categories Regime I 11 III Total Miscellaneous exemptions 1/ 0.71 8.87 5.78 15.40 (4.47) (0.13) Intra-Udeac 2/ 0.00 0.00 4.27 4.27 Investment Code 3/ 0.00 8.86 3.72 12.58 TU/TCI 4/ 0.00 13.03 0.00 13.03 Non-exempt 2.46 4.44 13.4 20.30 (0.36) (2.37) Total of which 3.51 35.20 27.17 65.55 petroleum products (4.83) products to be subject to excise taxes (2.8) Source : Customs Directorate (SYDONIA); Directorate of Statistic; BEAC. I/ See Table V. 1 for coqmosition. 2/ Corresponds to TU3 imports. 3/ Reduced rate imports. 4/ Duty free inports of raw material and packing materials. Methodological Note: ............. ................. .. ti) The total value of imnports for 19O was extrapolated from 1989 BEAC data on the current account balance tc.i.f value of merchandise imports net of transfer of bank notes). (ii) The decomposition of total imports by type of regime (TU3, Taxe Unique, reduced rate ect..) was obtained based on SYDONIA data for the composition of imports for the first four months of 1991. (iii) The decomposition of imports by product category is assumed to be the same as in 1989 data for which, based on customs declarations, was available from the Directorate of Statistics. i ! A N N E X VI CHAD Detailed Results of Simulation Analysis I I - 133 - TABLE VI. I TAX BASE A. IMRTS (c.f.f) 1989-90 (Bfllfons of CFAF) 1989 1990 ("t.) (a) Miscellaneous exemts 1/ 64.60 63.92 of which petroteum products 2/ - 6.40 pubilc admlnfstration and lnvesturt progrum 19.02 project/food aid and diplomatic 28.69 petroleu company iymorts 3/ 4.67 Customs tariff and other miscellaneous 4/ 5.15 (b) Intra-UEDEAC 5/ 2.42 0.61 Cc) Inwestment Code 6/ 3.67 3.65 td) TU 7/ 6.43 13.50 Ce) Non-exempt 9.21 7.94 Total Imports 8/ 86.65 89.63 Source: BEAC. Classification into categories based on World Bank estimtes. ------ See Table VI.6 for details. 1/ These imports are totally xexpt. 2/ Petroleum projects are exempt from normal Import taxes; they, howver pay the petrolet conwption tax. 3/ For oft exploration and development. 4/ Per act 13/165 of the UDEAC Custom Code ad per administrative discretion. 5/ These Imports pay lower duty than the samw products imported from outside UDEAC. 6/ Equipmet imported at reduced rates under the linestnt Code. 7/ Raw mterials and packing materials. U/ Estimted offiefal imports these are seller than total Imports a estimted by BEAC. (see Table VI.6 for details). B. SALES OF LOCAL MANUFACTURES (Billions of CFAF) 1989 1990 Local sales of TU firms I/ 25.21 34.25 of which tobacco & drinks sector firms 5.14 5.54 Local sales of non-TU mwrufacturing firms 0.00 0.00 Source: Company interviews. 1/ Does not include sales of STT uhich is presued not to be wJett to now sales ta"e. - 134 - TABLE VI. 2 CUSTOMS AND INDIRECT TAX RECEIPTS (Billions of CFAF) 1989 1990 Total import taxes 7.06 6.38 of which * Customs duties 1.29 1.18 * Entry duties 3.39 3.00 * TCAI 1.41 1.23 * Corplementary Tax 0.37 0.43 * Taxe Unique on imports 1/ 0.36 0.00 * CAA on imports 0.24 0.29 other 2/ - 0.25 ICAI on services 1.55 1.73 * on sales of local products 0.00 0.00 * TU on sales of local products 2.53 2.04 * CAM on sales of local products 1/ 1.74 1.58 * Transaction tax 0.00 0.27 Other non-petroleum receipts 9.11 11.71 3/ of which other non-petroleum indirect taxes n.a 5.29 Total non-petroleum receipts 21.99 23.70 Specific taxes on petroleum products 4/ 4.22 4.43 Total fiscal receipts 26.22 28.13 Sub-total of taxes to be replaced under reforms (marked by asterisk) 5/ 11.34 10.27 Total indirect taxes 21.72 Source: Ministry of Finance. 1/ Taxes levied by the Caisse Autonom dtAmortissement. 2/ Includes statistical tax, etc.. 3/ Include CFAF 2.05 billion in other non-petroleum CAA taxes, CFAF 0.44 billion in export taxes, and CFAF 6.42 billion in direct taxes levied by the Tax Departmnt. 4/ Including petroleum tax levied by CAA. 5/ This total represents the minimm target revenue to be generated by these taxes post-reform. It does NOT include receipts from ICAI on services because it is assumed that this tax will only change its name post-reform (to TCA on services), its rates and the basis for its application remaining unchanged and therefore too its receipts. - 135 - TABLE VI. 3 EXISTING RATES ANP EXEMPTIONS STRUCTURE (1990) Average effective Inport tariff rate 1/ 7.11 of wihch Customs duties 1.3X Entry duties 3.31 TCAI 1.4X Complementary Tax 0.51 Average legal import tariff rate 2/ 481 Proportion of imports totally or 911 partially exept 3/ Average effective rate of TU 4/ on sales of locat products 5/ 11l on Intra-UDEAC Imports 6/ 19X Source: Custom Directorate, Company interviews 1/ (Receitps from all imports)/(c.I.f value of iwports). 2/ Unm ighted by import shares. 3/ 1 - (non-exempt imports)/(c.i.f value of Imports). 4/ Includes additionnal taxes Levied by the CAA. 5/ (TU recelpts)/(local sales of TU firms). 6/ (Recelpts from this tax)/Cc.i.f value of Intra-UDEkC Imports). TABLE VI. 4 REVENUE IMPACT SIMULATIONS 1990 Basfs A. Pott-Reform Tax and Exeaptions Structure (X) Scenario A Scenario B Scenario C Scenario 0 Product category Product Category Product Catgopry Product Category I 1t 1ii I ii III I II III I 11 111 Icport duty 5.00 15.00 70.00 5.00 15.00 50.00 5.00 15.00 35.00 30.00 30.00 30.00 Preferential tariff 3.75 11.25 52.50 3.75 11.25 37.50 3.75 11.25 26.25 0.00 22.50 22.50 ICA (an goods) I/ 0.00 11.00 11.00 0.00 12.00 12.00 0.00 11.00 11.00 0.00 7.00 7.00 Excise tax on cigarettes 15.00 15.00 15.00 15.00 en alcoholic drinks 45.00 45.00 45.0 45.00 en non-ulcobolic drinks 15.00 15.00 15.00 15.00 TCA an services 2n existing rate(s) of ICAI on services Proportion of imports totally or partially exept 3/ 76X S 76X 5/ 71X 6/ 712 6f a% ....................I Assumptions 1/ The TCA is apwifed at the se rate on all goods. whether iaported or locally produced. It is also applied to Intra-UDEAC imports. It does NOT, on the other hand, apply to inputs imported by Investment Code or TU firms. The TCA does NOT apply to inports of petroleun products, which are assumed subject to existing taxes on local consumption of such prodc ts. Finally. the TCA is applied on the duty inclusive price of imports and on the value of tocal sales net of taxes. 2/ The rate(s) of the ICA en services fy differ from the proposed new TCA on goods. This tax is to apply on the same basis as the present ICAI on services. 31 Exeaptions are projected to decline over time as Indicated by this ratio. The specific assurptions pertaining to exeaptions reduction urder each scenario are explained in the footnotes belo. 5/ This srenario assutes only that all exemptions granted for mports of ras materiats and equiphent under the TU regiee be eliminated (CFAF 13.5 billion). 61 in addition to the above, this scenario assumes that exemptions accorded uider Act 13/65 of the WEAC Customs Code and miscellaneous exemptions granted per administrative discretion (CFAF 5.15 billion) be reduced by 50X and that Investment Code related exemptions be also reduced by 50 (from CFAF 3.65 bilLion to 1.83 billion). - 137 - TABLE VI. 4 (contd.) B. Receipts 1/ (Billions of CFAF) Scenario A Scenario B Scenario C Scenario 0 Total inport taxes 5.96 5.57 6.71 7.92 Customs duties 4.66 4.16 4.63 6.30 Preferential tarif 0.15 0.13 0.11 0.10 TCA on inports 0.90 1.03 1.51 1.03 Excise duty on Imports 0.07 0.07 0.37 0.40 Receipts from reduced rate taxes on 0.18 0.18 0.09 0.09 inports 2/ TCA on local sates 3/ 3.63 3.93 3.63 2.40 Excise duty on local sales 1.63 1.63 1.63 1.63 Total 11.21 11.13 11.96 1194 .......... 1/ Assunes that import demand elaticities are as follows: Category I Products 1.00 Category It Products 0.25 Category III Products 1.25 Products to be subject to excise duties 1.50 These elasticities have a moderate impact on the value of total imports post-reform. Compared to the zero elasticity case In which official imports remain at their current level of CFAF 89.6 billion, these elasticities result in the following Ifport values post-reform: Scenario Total inports (CFAF billion) A 82.6 8 83.6 C 83.6 0 84.6 These reforms have, therefore, the net effect of depressing import demand between 3 and 8X below existing levels. This is explained by the fact that as exemptions are reduced, the cost of lnports will go up for many users, even as the average nominal rates decline. 2/ Receipts from duties on equipment imported utnder the Investment Code. 3/ Does not include receipts from TCA on services which remain unchanged post-reform. TABLE VI. 5 IMPACT OF REFORNS (1990 Basis) Scenario A Scenario B Scenario C Scenario D On all TU firms 1/ Indirect taxes paid in CFAF billions pre-reform 8.15 8.15 8.15 8.15 as percentage of turnover 13.2X 13.2X 13.2X 13.2X post-reform 8.70 9.12 8.39 9.25 14.1X 14.8X 13.6X 15.12 On tobacco sector firms Indirect taxes paid in CFAF billions pre-reform 1.11 1.11 1.11 1.11 as percentage of turnover 49.9X 49.92 49.9X 49.92 post-reform 1.07 0.95 0.86 0.86 47.82 42.52 38.62 38.6X On drinks sector firms Indirect taxes paid in CFAF billions pre-reform 1.80 1.80 -1.80 1.80 as percentage of turnover 52.52 52.52 52.52 52.52 post-reform 1.81 1.84 1.80 1.78 52.92 53.92 52.82 52.02 On other TU firms Indirect taxes paid in CFAF billions pre-reform 5.24 5.24 5.24 5.24 as percentage of turnover 9.32 9.32 9.32 9.32 post-reform 5.82 6.32 5.72 6.60 10.42 11.32 10.2X 11.8X Effective cumuLative 1/ pre-reform 732 732 732 732 tariff on non-exempt imports 2/ post-reform 38X 34X 302 352 Effective cumulative 1/ pre-reform 72 72 72 72 tariff on all imports 2/ post-reform 72 72 82 92 Effective inmport duty on 4/ pre-reform post-reform post-reform post-reform post-reform category I 02 ox 0X 0X 0X category I! 42 42 42 42 8a category III 132 112 92 82 8X drinks and tobacco 102 42 3X 162 152 2 of taxes subject to reforms, pre-reform 1002 1002 1002 1002 collected by Customs 5/ post-reform 532 512 562 662 2 of taxes subJect to reforms, pre-reform 0X 0X 0X 0X collected by Tax Department 5/ post-reform 47X 492 44X 342 TABLE VI. 5 (contd.) / AnaLysis based on data collected from company interviews. .j (Import duties + TCA + excise taxes + special levies on inports - receipts from part exempt imports)/(non-exempt imports c.i.f). , (ISports duties + TCA + excise taxes + special levies on imports)/(imports c.i.f). (/ Import duties only)/iimports of relevant category c.i.f). 5/ Assumes that Customs will not have responsibility for applying the new TCA or excise levies on sales of TU firms post-reform as they do currently. The transfer of responsibility from Custom to the Tax Department is not critical to the reform. If such a move is likely to cause too much administrative disruption in the short term, it could be deferred to later. In the long run, however, it would be desirable for Customs not to be responsible for domestic taxes. '0 'ote (i) The calculation of the indirect tax burden includes only indirect taxes paid by firms --- aon the sale and purchase of goods; (ii) Turnover is net of taxes and includes sale of Local goods, resale of inported goods and exports; It does not, therefore, correspond to the tax base of Table VI. tB. - 140 - TABLE VI. 6 STRUCTURE OF IMPORTS (c.I.f) 1990 (Billions of CFAF) Product Category Regime I II III Total Miscellaneous exeffpts 1/ 0.95 34.93 28.05 63.93 (6.4) (3.86) Intra-WDEAC 2/ 0.00 0.00 0.61 0.61 (0.61) Reduced rate 3/ 0.00 3.65 0.00 3.65 Taxe Unique 4/ 0.00 13.50 0.00 13.50 Non-exeampt 0.00 0.20 7.73 7.94 Total 0.95 52.28 36.40 89.63 of which petroleun products (6.4) products to be subject to excise tax (4.47) ............. ............. Source: BEAC, Balance of Payments 1989 and projections 1990; Customs Directorate, World Bank. I/ See Table VI. 1 for composition. 2/ This total represents the Imports of cigarettes from other UDEAC countries. 3/ Source: Company interviews - Imports of equipment. 4/ Source: Conpany interviews - Imports of raw and packing materials. Methodological Note tl) Total offical irmports were estimated by deducting the following from BEAC estimates of total Imports : 0i) transfer of CFAF bank notes and (fi) half the value of overseas transactions settled through Inter-bank or postal transfer of funds on the assumptfon that these account roughly for the value of non-declared imports into the country. (Memo Item: BEAC estimate of total imports (c.f.f) was CFAF 92.5 bfilion in 1989 and 89.63 billion in 1990). (iI) Exeaptions In Category I a 0.05 * ffports under pubtic Investment program (Source: Customs Directorate). (i1i) Total Imports in category II were estimated by applying the proportion that imports In this category constituted in 1979 to 1990 data (Source: UnIted Nations Trade Data Base). Exemptions in category II - petroleun product fiports + 0.5 * 4iports under publtic fnvestment program and foreign project/food-aid (Source: Customs Directorate). (iv) Exemptions in category III - 0.25 * lmports under exceptIonal exenptIons + 0.45 * inports under Investment program + 0.5 * Imports under foreIgn project/food aid + 0.75 * imports under exceptional exemptions. I I ! A N N E X VI I ~~~~~~C O N G O Detailed Simulation Results : ' i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 143 - TABLE Vll. 1 TAX BASE A. In*.;ts 1c.i.f) 1990 (Billions of CFAF) Regime (a) Miscellaneous exemptions 1/ 81.85 of which petroleum companies 2/ 57.42 Customs Code and other miscellaneous 3/ 6.38 Exceptional exemptions 4/ 5.37 Government departments, diplomatic corps exemptions for priority sectors 5/ 12.70 Cb) Intra-UDEAC 6/ 0.67 (c) Investment Code 7/ 9.96 Cd) Taxe Unique/TIC 8/ 16.38 Ce) Non-exempt 50.13 Total 158.99 Source: Customs Directorate, Congo; See Table VII.6 for details. 1/ These imports are completely exempt. 2/ Special conventions allowing these companies to import duty free. 3/ Includes exemptions under Act 13/65 of the UDEAC Customs Code; and regimes 1, 2, 5, 6 and 11 per the classification of the Comiputer Services and Projections. Division of the Customs Directorate, July 1991. 4/ Includes regimes 19, 20. 25. 26, 27, 28. 29. 31. 32, 34 and 35 per the classification of the Computer Services and Projections. Division of the Customs Directorate. These partain to a variety of para-legal exemptions. 5/ Includes diplomatic exemptions and exemptions to military/policy, Government contracts and COMILOG (CFAF 4.19 billion); and exemptions to the agriculture. forestry and shipping sectors. 6/ Corresponds to TU3 imports. 7/ Reduced rate imports. 8/ Imports of raw and packing materiels. - 144 - TABLE VII. 1 (contd.) TAX BASE B. LOCAL SALES OF GOODS 199O (Billions of CFAF) Local sales of TU and TIC firms 1/ 33.52 of which Local sales of drinks and tobacco firms 21.74 Local sales of other manufactur1ng enterprises 2/ 0.00 Source: Company lnterviews; Customs Directorate. I/ Taxable base of the TU per data of the Computer 'erv!ces and Projections Division of the Customs Directorate, exeluding the sales of SUCO, SOCICO and FLPRNT, which are asssumed not to be subject to the proposed new sales taxes. 2/ i.e. outsido of the TU/TIC regime. These are assumed to be zero because these firms are subject to specIal conventfons, and as such, would not be applied the proposed new sales taxes until expiration of these conventions. The total taxable base presented here is, therefore, an underestimate of the potential base. - 145 - TABLE VII. 2 CUSTOMS AND INDIRECT TAX RECEIPTS (1990) (9ittiom of CFAF) Total iport taxes 25.83 of which: * Customs duties 7.59 * Entry duties 9.07 * TCAI 4.79 * Complementary Tex 4.38 * Specific tax on drinks 0.00 * TU on Intra-UDEAC lmports TU on sales of local products 8.53 Domestic indirect taxes ICAI 4.05 * of which on sales of local goods 0.00 * Transaction Tax (TIT) 5.34 TCC 0.58 TIC (petroleua products) 4.26 Sub-total of taxes to be replaced under reforms (marked by asterisk) 39.70 Total taxes 48.59 Total fiscaL receipts (direct and indirect) 78.77 Source: Ministry of Finance, RepLulic of Congo. 1/ Thfs total represents the minimu target to be generated by these taxes post-reform. it does not include recefpts from the ICAI on services because only the name of this tax fs assumed to change post-reform (to TCA services). - 146 - TABLE Vll. 3 EXISTING RATES AND EXEMPTIONS STRUCTURE (1990) Average effective inport tariff rate 1/ 16.3X of which Cuatoms duties 4.8X Entry duties 5.7X TCAI 3.0% Comrplementary Tax 2.8X Average legal import tariff rate 2/ 51.3K Percentage of imports partially or totally exeffpt 3/ 68.5X Average effective TU rate 4/ 18.1X 1/ (Receipts from all import taxes)/(c.i.f value of imports). 2/ Weighted by import shares. 3/ 1 - (non-exempt imports)/(c.i.f value of imports). 4/ (TU receipts)/(local sales of TU firms). TABLE VII. 4 REVENLE INPACT SIWULATIONS (1990 BASIS) A. Post-reform Rates and exemptions Structure (X) Scenario A Scenario B Scenario C Scenario D Tax Product Category Product Category Pro. t CatePry Product Category I 11 III I it III I I III I it lit laport duties 5.00 15.00 70.00 5.00 15.00 50.00 5.00 15.00 35.00 30.00 30.00 30.00 Preferential tariff 3.75 11.25 52.50 3.75 11.25 37.50 3.75 11.25 26.25 22.50 22.50 22.50 TCA (on ooods) 1/ 0.00 6.00 6.00 0.00 7.00 7.00 0.00 10.00 10.00 0.00 5.00 5.00 Excise tax on cigarettes 15.00 20.00 22.00 15.00 on alcoholic drinks 25.00 30.00 32.00 25.50 on non-alcoholic drinks 15.00 20.00 22.00 15.00 TCA on services 2/ existing rate(s) of ICAI on services Proportion of Iwports totally or partialLy exempt 3/ 51X4/ 45X5/ 35X6/ 35X6 .............................._ ASSUhPTIONS 1/ The TCA applied at the same rate on all goods, whether imported or locally produced. It applies also to Intra-UDEAC imports. It does NOT apply to the imported inputs of Investment Code firms, including TU firms. Nor does it apply to petroleum products which continue to be taxed as at present. FinLly, the TCA is applied on the duty-inclusive price of imports, and on the value of locaL sales net of taxes. 2/ The TCA rate on services could be different from that of the new TCA on goods. It is applied on the same basis as the existing ICMI on services. 3/ Exemptions are projected to decline over time as indicated by this ratio. The specific assumptions pertaining to exemptions reduction under each scenario are explained in the footnotes below. 4/ Assunes that TU/TIC exemptions (10.3X of imports), and exeTptions under the WDEAC Custom Code (4X of imports) are eliminated as are atso exceptional exeoptions of a para-legal nature (3.4X of imports). 5/ in addition to the above measures assumes that Investment Code exemptions will be reduced 50X and those granted to Government departments and priority sectors (CFAF 12.7 billion) will be reduced by 33X. 6/ In addition to what is proposed in 4/ above, assumes that exemptions to priority sectors and Government departments be reduced by 50X (from 8 to 4X of imports); that 90X of Investment Code exemptions privileges reach the end of their validity and are not renewed; and finatly, that exemptions to petroteum companies are reduced by 16X (from 57 to 50 billion). - 148 - TABLE VII. 4 (contd.) B. Receipts 1/ Scenario A Scenario B Scenario C Scenario D Total taxes on imports ;5.11 33.17 32.09 35.91 Customs duties 30.30 25.84 22.80 30.96 Preferential Tariff 0.36 0.26 0.18 0.16 TCA on imports 4.07 6.64 8.67 4.46 Excise tax on inports 0.37 0.44 0.44 0.33 TCA on local sales 2/ 3/ 2.01 3.02 3.35 1.68 Excise tax on local sales 4.90 5.98 6.42 4.90 Total 42.01 42.17 41.86 42.48 1/ Assumes an import demand elasticity of 0. In any event, the results are not very sensitive to variations in elasticity. 2/ The base for the TCA does not include the following enterprises: SUCO, SOCICO and FILPRINT. 3/ This does not include receipts from the TCA on services which are not affected by the reforms. - 149 - TABLE VII. 5 IPACT Of REFORMS (1990 BASIS) Scenario A Seenario B Scenario C Scenario D On all TU firms 1/ Indirect taxes paid (CFAF billions) pre-reform 9.52 9.52 9.52 9.52 As percentage of turnover 24.6% 24.6% 24.6% 24.6% post-reform 11.26 13.41 13.41 12.46 29.1% 34.7% 34.8% 32.3% On drinks & tobacco sector firms Indirect taxes paid (CFAF bitlions) pre-reform 6.95 6.95 6.95 6.95 As percentage of turnover 30.3% 30.3% 30.3% 30.3% post-reform 7.84% 9.80 10.22 8.97 34.2% 428X8% 5% 39.1% Other TU/TIC firms Indirect taxes paid (CFAF billions) pro-reform 2.58% 2.58% 2.58% 2.58% As percentage of turnover 16.4% 16.4% 16.4% 16.4% post-reform 3.40% 3.61% 3.24% 3.49% 21.6% 23.0% 20.6% 22.3% Effective cumjlative tariff on non-exeumpt imports 2/ pre-reform 52% 52% 52% 52% post-reform 45% 38% 31% 35% Effective cumulative tariff on aLl imports 3/ pre-reform 16% 16% 16% 16% post- refona 22% 21% 20% 23% Effective import duty rate on 4/: pre post post post post reform reform reform reform reform category I 25% 4% 4% 5% 27% category 11 7% 5% 5% 8% 15% category III 25% 31% 25% 19% 17% Drinks and tobacco 54% 60C 45% 33% 28% X of taxes subject to reforms collected by Customs 5/ pro-reform 6/ 87% 87% 87% 87X post-reform 7/ 84% 7$X 77X 85% X of taxes subject to reforms cottected by Tax Deptertment pra-reform 8/ 13% 13% 13% 13% post-reform 9/ 16% 21% 23% 15% ............... .................. Source: Company Interviews and Customs Directorate. 1/ Based on Company Interviews (FILPRINT, SOCICO and SUCO are excluded). 2/ (import duties + TCA + excise taxes. special levies on imports - receipts from reduced rate imports)/ Cnon-exempt Imports c.i.f). 3/ (timport duties + TCA + excise tae x speciatl lvies on imports)/(imports c.i.f). 4/ (Import duties only)/(imports of relevant categories c.i.f). 5/ Assumes that Customs wilL not have responsibility for apptying the new TCA nd excise taxes on sales of TU firms as they do currently. The transfer of responsibility from Customs to the Tax Department is not critical to the reforms. If such a move is likely to cause too mach edeinistrative disruption in the short run, it could be deferred to later. In the long run, however, it would be desirable for Customs not to be responsible for domestic taxes. 6/ All taxes on Imports + TU + TIC. 7/ tmport duties + TCA and excise taxes on Imports only. 8/ ICAI on goods (ICAI on services Is exeluded from the analysis). 9/ TCA and excis, taxes on local sales. NOTE: (i) The caLculation of the indirect tax burden includes only indirect taxes paid by firms on the sale and purchase of goods; (ii) Turnover is net of taxes and includes sale of local goods, resele of imported goods, and exports; it does not correspond, therefore, to the tax base of Table VtI.1 B. - 15U - TABLE VIl. 6 STRUCTURE OF IMPORTS (C.I.F) 1990 (Sitlions of CFAF) Product Category Regime I II III Total (a) Miscellaneous exemptions 1/ 7.88 50.49 23.48 81.85 Cb) Intra-Udeac 2/ 0.00 0.00 70.67 0.67 (c) Reduced rate 3/ 0.58 7.06 2.32 9.96 *d) Taxe Unique 4/ 0.01 9.58 6.79 16.38 (1.07) Ce) Non-exempt 11.': 11.15 27.22 50.13 (0.8) Total imports 20.23 78.28 60.48 158.99 of which petroleun products (1.06) ducts to be subject 'cise taxes (2.26) Source: Customs Directorate and Company Interviews. 1/ See composition, Table VI1.1. 2/ Source: Interviews. These imports are subject to lower levies than the same products imported from outside UDEAC countries. 3/ Imports under the Investment Code. 4/ Cuty free imports of raw materials and packing material by TU/TIC firms. Note : This table is based on 1990 data from the Computer Services and Projections Division (excluding imports recorded at the Loubomo Office) by product type (classified at the 2-digit level) and by type of regime per classification of the Commission to Reformulate Customs Regimes). A N N E X VIII EQUATORIAL GUINEA Detailed Results of Simulation Analysis I~~~~~~~~~~~~~~~~~~~~~~ i~~~~~~~~~~~~~~~ I - 153 - TABLE VIII. I SAW# TAX A. INPORTS 1990 (Billions of CFAF) 1990 (est.) (a) Misceltneous exemptions 1/ S.66 of which: dipl matic corps 2.41 pubtlc edeinistration 0.44 pubtic 1nvestment program/projets 2.13 petroleus products 0.21 IDEAC Customs Code 2/ 0.49 (b) Intra-UDEAC 3/ 0.98 Cc) Non-exent Imports 2.85 Total Inports for local mrket 9.51 Re-exports 6.80 Other imports 4/ 0.07 Total Imports 16.38 ........................... Source: Directorate of Statistics. See Table VIII. 6 for details. it These ioorts are totally exempt. 2/ No informetion bas aval able about the composition of this category which Is asumid to be comprised entirely of exemptions granted under Act 13/65 of the WDEAC Custom Code. 3/ TU3 declaration t other imports from WEAC Custom Code. 4/ Imports In trnsit. NOTE : There are no TU regime reloated lmports because thee are no firms with TU status in Equatorial Guinea. B. SALES OF LOCAL GOCODS 1990 (BilLions of CFAF) Tax base for ICAI 1/ 3.61 of diich on local les of goods 0.00 on servIces 3.61 sales of TU fIrms 0.00 ................................... Source : Ninistry of Finnce 1/ This total is estimted on the assumption that the recefpts for other txs on goods wid services3 in 1990 (Ninistry of Finance tobles) are gnerated by a 10X ICMI. Also, there are no TU frms in Equatorial Gunea. - 154 - TABLE VIII. 2 CUSTONS AND INDIRECT TAX RECEIPTS 1988/89-1989/90 (Billions of CFAF) 1988 1989 1990 * Total import taxes 1/ 1.53 1.41 1.47 of which * TU on Intra-UDEAC imports n.a 0.12 0.12 * TU on local production .00 0.00 n.e ICAI 0.31 0.31 0.36 * of which on local sales of goods 0.00 0.00 0.00 Specific tax on petroleu. products 1.99 1.94 1.88 Taxes on exports 1.04 0.74 0.88 Other fiscal receipts 0.49 0.46 0.30 Total fiscal receipts 5.36 4.86 4.59 Sub-total of taxes replaced 1.53 1.:¶ . 7 uiider reforms 2/ (marked by asterisk) Total indirect taxes 4.87 4.4 4.59 ....................... Source: Ministry of Finance, IMF and World Bank. 1/ Includes Customa duties, entry dutIes, TCAI and Complementery Tax. 2/ This represents the minimum target reveiwe to be generated by these taxes post-reform. Its does not include receipts from the ICAI on services because only the name of this tax Is asumed to change post-reform (to TCA services). TABLE VIII. 3 EXISTING RATES AND STRUCTURE OF EXEMPTIONS 1989/90 Average effective import tariff rate 1/ 15X Average legal import tariff rate 2/ 53X X of uports totally or portially 662 exempt 3/ Average effective TU rate on imports n.a ....................................... 1/ (Recelpts from all imports taxes)/Cc.i.f value of imports). 2/ Weighted by import shares. . 4 I -i 4 I . f 4I TABLE Vill. 4 REVENUE IMPACT SIMULATIONS (1989/90 BASIS) A. Post-Reform Rates and Exemptions Structure Scenario A Scenario B Scenario C Scenario D Product Category Product Category Product Category Product Category I ! I . . i t III Import duty 5.00 15.00 70.00 5.00 15.00 50.00 5.00 15.00 35.00 30.00 30.00 30.00 Preferential Tariff 3.75 11.25 52.50 3.75 11.25 37.50 3.75 11.25 26.25 22.58 22.50 22.50 ICA (on goods) 1/ 0.00 10.00 10.00 0.00 13.00 13.00 0.00 16.00 16.00 0.00 16.00 16.00 Excise Tax 2/ 25.00 35.00 65.00 0.00 0.00 65.00 TCA an services 3/ Proportion of iaports totally 66X 5/ 612 6/ 61X 6/ 61X 6 or partially exempt 4/ ............................ ASSUIPTIONS I/ The TCA is applied at the same rate on all goods. whether iported or locally produced. It applies also to Intra-LObEAC imports. It does NOT apply to the imported inputs of Investment Code firms, including TU firms. Nor does it apply to petroleum products which continue to be taxed as at present. Finally, the TCA is applied on the duty-inclusive price of liports, and on the value of local sales, net of taxes. 2/ Applied on drinks, cigarettes, objets d'art, cosmetics precious metals, matches and musical instruments. 3/ The TCA rate on services could be different from that of the new TCA on goods. It is applied an the sane basis as the existing ICAI on services. 4/ Exemptions are projected to decline over time as indicated by this ratio. The specific assumptions pertaining to exeptiorns reduction urder each scenario are explained in the footnotes below. 5/ Assunes that exemptions remain umchanged. The changed rate structures are sufficient to generate the targetted receipts. 6/ Assunes that miscellaneous exeffptions, other than those for petroleum products, are reduced by 10X (decline from CFAF 5.47 billion to 4.95 billion). This target should easily be achieved by eliminating existing exemptions granted under Act 13165 of the UDEAC Customs Code. Table VIII. 4 (contd.) B. RECEIPTS (Billions of CFAF) Scenario A Scenario 8 Scenario C Scenario D otaL taxes on inports 2.37 2.36 2.37 2.41 :ustonms duty 1.15 2.37 0.75 0.81 referential Tariff 0.44 0.32 0.23 0.22 CA an inports 0.47 0.65 0.74 0.75 xcise tax an iiports 0.30 0.39 0.66 0.64 Total d'mustic taxes 0.00 0.00 0.00 0.00 TCA en local sales 1/ 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 xcise tax on local sales Total receipts 2.37 2.36 2.37 2.41 . T d .n ........ . . . I/ This does not inctude receipts form TCA an services which are not affected by the reforms. TABLE VIII. 5 IMPACT OF REFORNS Scenario A Scenario B Scenario C Scenario D Effective cumulative tariff on non-exempt imports 1/ pre-reform 62X 62 62X 621 post-reform 59X 60X 47Z 49Z Effective cumulative tariff on a(l iworts 21 pre-reform 151 15X 15X 151 post-reform 251 251 251 251 Effective import duty rate on 3/: pre- reform post- reform post-reform post- reform post- reform category 1 71 11 1X 1X 21 category 11 11X 31 41 41 9X category III 241 28X 23X 161 141 products subject to excise taxes 241 501 36X 261 221 X of taxes subject to reforms cotlected by Customs pre-reform 1001 1001 100X 1001 post-reform 100X 1001 1001 1001 X of taxes subject to reforms cotlected by Tax Department pre-reform 01 01 01 0% post-reform 0X 0% 0X 0O Source: UDEAC Customs Tariff, World Bank. 1/ (Inport duties + TCA + excise taxes + special levies on inports)/(non-exempt imports c.i.f.). 2/ (Same as above)l(imports c.i.f). 3/ (Import duties only)/(inports of relevant categories c.i.f.). - 158 - TABLE VIII. 6 STRUCTURE OF IMPORTS (c.i.f) 1990 1/ Product Category Regimes I 11 III Total Intra-UDEAC 2/ 0.01 0.17 0.80 0.98 (0.57) Exemptions 3/ 0.34 3.04 2.29 5.68 (0.21) (0.11) Non-exempt 4/ 0.01 1.33 1.51 2.85 (0.68) (0.21) TotaL 0.36 4.55 3.71 9.51 of which petroleum products (0.89) (0.89) products to be subject to excise taxes (0.88) (0.88) Re-exports 6.80 Other imports 5/ 0.07 Total Inports 16.37 ... ... . .. ................................. . Source: Directorate of Statistics; Customs Directorate, Equatorial Guinea. 1/ The value of imports and their composition by product category are based on 1990 data from the the Directorate of Statistics. 2/ Imports correspond essentially to TU3 declarations. 3/ See TabLe VIII. 1 for composition by type of regime. 4/ The proportion of non-exempt imports in each product category is assumed to be the same as estimated for 1989 on basis of Customs Directorate data (see Annex It) using the following formula: imports exempt under category I are given by IE = (n-e)/n*M, where n nominal tariff rate for category I e * effective Import duty for category i a (receipts from all import taxes on category i)/(c.i.f value of category I Imports) H * c.i.f value of category i imports The implicit assumption in this formula is that imports of any particular product I pay either the full nominal tariff or a zero rate. Data on n are available from the UDEAC Tariff Schedule; e and N are based on Directorate of Statistics data. 5/ Imports in transit. I I~~~~~~~~~ A N N E X IX I GABON I Detailed Results of Simulation Analysis i i~~~~~~~~~~~~~~~~~~~\ - 161 - TABLEAU IX.1 TAXABLE BASE A. IMPORTS (c.i.f) 1989 (billions of CFAF) Regime (a) Miscellaneous exempt 1/ 72.48 of which diplomatic 1.46 Army/police etc. 6.95 parastatal 2.40 petroleum companies 2/ 55.12 Customs Tariff 3/ 6.55 (b) Intra-LUrEAC 0.04 (c) Investment Code of which petroleum companies (reduced rate) 4/ 31.86 mining companies (reduced rate) 4/ 3.07 other reduced rate 9.16 other totally exempt 20.74 stabilized fiscal regimes 5/ 0.55 (d) Taxe Unique 10.28 (e) Non-exempt 94.50 Total 242.68 ...................... Source: Gabonese Customs; see Table IX.6 for details 1/ These imports are totally exempt. 2/ Exempt imports of petroleum companies. 3/ Mainly imports exempt uider Act 13/65 of the UDEAC Customs Tariff and temporarily suspended duties. 4/ Per special conventions. 5/ Special fiscal regimes that guarantee stability of tax structure for specific firms. B. SALES OF LOCAL MANUFACTURES 1989 (Billions of CFAF) Local sales of TU and TCI firms 25.27 of which tobacco 2.90 Local sales of other manufacturing firms 27.33 of which non-alcoholic drinks and beer 27.33 Total 1/ 52.60 ............................ Source: Company interviews 1/ Does not include (i) sales to pretroleum companies (assumed to be 10X of total sales) and (if) sales of large pubtlc enterprises that do not pay any taxes either because of financial difficulties or because of special conventions (cement and agro-processing) - 162 - TABLE IX.2 CUSTOMS AND INDIRECT TAX RECEIPTS (1989) (billions of CFAF) Total Inport Taxes 60.68 * Customs duties 10.56 * Entry duties 25.05 * TCAI 11.88 * Complementary tax 12.28 * Other 1/ 0.91 * Tax unique on inports (est.) 0.01 * TCI 2/ * Tax unique on local production 2.27 Domestic indirect taxes 42.70 ICAI 19.84 * of which on locaL production 3.76 Transactions tax 6.09 Specific taxes 16.77 of which * on alcohol 4/ 0.00 * on tobacco 1.75 on petroleum products 15.02 Export taxes 4.79 Other taxes 80.22 Total non-petroleum receipts 190.65 Receipts from petroleun 68.00 Total receipts S/ .58.65 Sub-total of taxes to be replaced under the reforms 6/ 68.45 Total indirect taxes 122.95 Source: Minister of Finance Gabon. 1/ IncLudes other port levies. 2/ Tax on local consumption corresponding to the Gabonese TU. This tax only generates a minimum revenues. 3/ Applies essentially to tobacco and drinks sector firms. 4/ Remains unapplied on sales of local alcoholic beveragese for the time being 5/ This total is slightly higher that actual receipts (CFAF 258.6 billion) because data on inport taxes are on commitment basis, not actual receipts 6/ Marked by an asterisk. This total represents the minimum target revenue to be generated by these taxes post-reform. It is assumed that the transactions tax will, in the case of Gabon, be maintained until such time as the tax base for the proposed new turnover tax can be broadened to generate equivalent additional revenue. It is, therefore, not included as part of the target receipts to be attained post-reform. - 163 - TABLE IX.3 EXISTING RATES AND EXEMPTIONS STRUCTURE Average effective import tariff ratge 25X of which: Customs duties 4X Entry duties 10X TCAI 5X Complementary tax 5X Average legal import tariff rate 2/ 54X Proportion of ifports partially or totally exempt 3/ 61X Proportion of imports totally exempt 4/ 34X Average effective rate of TCI 5X Average effective rate of TU on sales of local goods 5/ 82 on imports from other UDEAC countries 6/ 22X Legal rate of ICAI high rate 14X normal rate 12Z reduced rate 52 Legal rate of Transactions Tax 46 Source: Minister of Finance, Tables IX.1 and IX.6, and company interviews. 1/ (Receipts from all import taxes)/(c.I.f. value of inports). 2/ Weighted by import shares. 3/ 1 - (non-exempt imports)/(c.i.f. value of Imports). 4/ (exenpt imports + TU importations)/(c.i.f. value of inports). 5/ (TU recefpts)/(local sales of TU firms excluding those of parastatals in the cement and agro-processing sectors). 6/ Based on inports of finished products from other WEAC countries by two Gabonese firms. TABLE IX.4 REVENUE IMPACT SINILUATIUNS 1989 Basis A. Post-Reform ard Exemption Structure Scemario A Scenario B scrio C ScenarIo D Tax Product Category Product Category Product Category Product Category I It III I if III I It III I it III Ilasrt duty 5.00 15.00 70.00 5.00 15.00 50.00 5.00 15.00 35.00 30.00 30.00 30.00 Pn. :rentiat tariff 3.75 11.25 52.50 3.75 11.25 37.50 3.75 11.25 26.25 , 22.50 22.50 22.50 7C,. 'on goods) 11 0.00 9.00 9.00 0.00 13.00 13.00 0.00 14.00 14.00 0.00 6.00 6.00 Excise tax on cigarettes 48.00 44.00 46.00 47.00 on drinks 18.00 17.00 18.00 22.00 on other products 45.00 45.00 45.00 45.00 TCA (services) 2/ existing rate (s) of ICAI on services Proportion of laports totally ON totally or partialty exempt 3/ 531 4I 48X SI 38X 6/ 3517/ .0 Assumptions: 1/ The TCA is applied at the sawe rate on all goods, whether imported or locally produced. It applies elso to intra-UDEAC imports. It does not apply to imported inputs of arnof the Investment Code firms including TU firms. Nor does It apply to petroleum products that continue to be taxed as they are presently. Finally, the TCA is applied on the duty-inclusive price of imports, and on the value of local sales net of taxes. 2/ The TCA rate on services could be different from that of the new TCA on goods. It is applied on the same basis as the existing ICAI on services. 3/ Exux tions are projected to decline over tim as indicated by this ratio. The specific assuptions pertaining to exemptions reduction urder each scenario are explained in the footnotes below. 4/ Assume that the TU, TCI regimes will be eliminated (ivports of CFAF 10.3 billion); that Customs Tariff related exemptions (see Table IX.1) mill be eliminated following revision of Act 13165 of the UDEAC Customs Code (CFAF 9.37 billion). 5/ Assums in addition to measures in 4/ above, that exemptions to petroleum companies mill be reduced by 11X (ie. by CFAF 5.2 billion from a total of CFAF 52.3 billion); that Investment Code exemptions (CFAF 20.7 billion) will be reduced by 25X, ie. CFAF 5.2 billion. 6/ Assums, in addition to measures in 4/ above, that exemptions to petroleum companies mill be reduced by 261 (ie. CFAF 13.7 billion); that Investmemt Code duty rebates and exemptions (excluding those utnder stable fiscal regimes or to petroleul/mining companies) by 75X (ie. CFAF 22.4 billion). 7/ Assumes, in addition to wasures In 4/ above, that exemptions to petroleum companies will be reduced by 26X (ie. CFAF 13.7 billion) and all duty rebates and exeaptions under the Investment Code will be eliminated. - 165 - TABLE IX.4 (continued) S. Receipts 1/ (billions of CFAF) Scenario A Scenario B Scenorio C Scenorfo D Total taxes on imports 61.34 59.23 58.73 61.82 Customs duty 44.38 36.66 32.59 48.10 Preferential tariff 0.00 0.00 0.00 0.01 TCA on imports 11.98 17.83 21.62 9.41 Excise in imports 2.77 2.65 2.65 2.56 Autres Recettes Reduced rate on imports 2/ 2.20 2.09 1.86 1.75 TCA on local sales 3/ 4.73 6.84 7.36 3.16 of which on TU firms 2.27 3.29 3.54 1.52 on other firms 2.46 3.55 3.83 1.64 Excise on local sales 6.31 5.92 6.25 7.38 Total Receipts 72.38 71.99 72.35 72.40 1/ Assumes zero elasticity of import demand. Results are not sensitive to different elasticity assumptions because new rates and exeeptions structure have little or no net effect on the cost of imports. While on the one hand, nominal duty rstes come down, reducing prices for non-exempt Importers, the cost of inports to previously exempt imports goes up. 2/ Receipts from reduced rate duties applicable to 1imports of equipment under the Investment Code. 3/ This does not include receipts from the TCA on services nor from the Transactions Tax which are to remain unchanged under the reforms. TABLE IX.5 IMPACT OF REFORMS (1989 BASIS) (billions of CFAF) Scenario A Scenario B Scenario C Scenario D On all firms Indirect Taxes paid (bill. CFAF) pre-reform 10.05 10.05 10.05 10.05 As percentage of turnover 1/ 19.6X 19.6X 19.6X 19.6X post-reform 13.65 15.33 15.92 15.96 21.6X 29.91 31.0X 31.1X On firms in drinks sector Indirect taxes paid (ttllions CFAF) pre-reform 5.80 5.80 5.80 5.80 As percentage of turnover 26.41 26.4X . 2644 26.41 post-reform 7.30 7.95 10.50 10.50 33.41 33.41 38.4X 38.6X On firms in the tobacco sector 3 IAilrect taxes paid (billions CFAF) pre-reform 2.34 2.34 2.34 2.34 As percentage of tunver 65.01 65.0X 65.0X 65.0X post-reform 2.28 2.29 2.19 2.46 63.5X 63.5X 60.7X 68.21 G% On other TU firms 2/ Indirect taxes paid (billions CFAf) pre-reform 1.91 1.91 1.91 1.91 As percentage of turnover 7.41 7.4X 7.41 7.41 post-reform 4.07 5.09 5.35 5.06 15.71 19.71 20.71 19.61 Effective cumulative tariff on pre-reform 621 62X 62X 62X non-exempt imports 31 post-reform 571 49X 401 36X Effective cumulative tariff on pre-reform 25X 251 251 251 all imports 4/ post-reform 251 251 251 251 Effective import duty rate pre- post- post- post- post- on: 5/ reform reform reform reform reform category I 101 21 2X 31 231 category 11 201 7X 81 101 19X category III 401 47X 341 251 221 luxury products 1001 361 281 22X 191 X of taxes subject to reforms pre-reform 92X 921 921 921 collected by Customs 6/ post-reform 851 821 P11 851 X of taxes stbject to reforms pre-reform 8% 81 8X 81 collected by Tax Department 6/ post-reform 15% 18% 19% 15X TABLE IX.5 (contd.) 1/ The anelysis is based on information company interviews. The sample excludes (i) pubLic enterprises of the agro-processing sector (sugar, edible oil); and vii) the cement firm bkcause these firms are subject to special coventions, a negligible tax burden and a fragile financial situation. 2/ The rise in the average tax burden hides substantial inter-firm variation. In fact, the indirect tax burden of 8 of 15 enterprises of the sample remains virtually unchanged, whereas that of the remaining 7 rises quite significantly because they are presently subject to negligible taxes. 31 (import duties + TCA + excise taxes + special levies on imports - receipts from reduced rate imports)/(non-exempt imports c.i.f.). 4/ (import duties + TCA + excise taxes + special levies on imports)/(imports c.i.f.). S/ (import duties only)/(import of relevant categories c.i.f). 6/ Assumes that CustrAm will not have responsibility for applying the new TCA and excise taxes on the sales of TU firms as they do currently. The transfer of responsibility from Customs to the Tax Department is not critical to the reforms. If such a move is likely to cause too much ackninistrative disruption in the short run, it could be deferred to later. In the long run, however, it would be desirable for Customs not to be responsible for domestic taxes. Note: (i) The calculation of the indirect tax burden includes only indirect taxes paid by firms on the sale or purchase of goods. (ii) Turnover is net of taxes and includes local sales of goods, and exports; it does not, therefore, correspond to the tax base of Table IX. 1B. - 168 - TABLEAU IX. 6 STRUCTURE OF IMPORTS (C.i.f) 1989 (billtons of CFAF) Product Category Regime I 11 III Total (a) Miscellaneous exemts 1/ 17.27 26.96 28.24 72.48 of which (3.52) diplomatic 0.00 0.00 1.46 1.46 Army/policy. etc. 0.00 0.00 6.95 parastatal firms 0.00 2.40 0.00 2.40 petroleum companies 11.23 21.29 18.82 52.33 UDEAC Custom Code 2/ 6.05 2.27 1.02 9.34 Cb) Intra-UDEAC 3/ 0.00 0.04 0.00 0.04 (c) Investment Code 0.00 65.38 0.00 65.38 of which petroleum companies 0.00 31.86 0.00 31.86 mining coapanies 0.00 .3.07 0.00 3.07 other reduced rates 0.00 9.16 0.00 9.16 other totally exempt 0.00 20.74 0.00 20.74 stabilized fiscal regimes 0.00 0.55 0.00 0.55 (d) Taxe Unique 4/ 0.00 10.28 0.00 10.28 (e) Won-exempt 2.84 41.47 50.19 94.50 (11.29) (3.47) Total 20.12 14.09 78.43 242.68 of which products to be subject to (7.00) excise taxes petroleum products (13.91) Source: Customs Directorate and company interviews. 1/ These Imports are totally exempt. 2/ These exemptions are granted under Act 13/65 of the UDEAC Customs Code. 3/ Based on company interviews. These imports are subject to lower duties then the same products inported from outside UDEAC. 41 Duty free imports of raw materials and packing materaels by TU firms. Nethodological Note: Ci) The elassification of imports Into different categories is based on Customs Directorste data at the 6-digit level. (if) The classification of Imports by type of ffsc-' regfma Is based on data revenue losses provided by the Custom Dfrectorate. The value of IfW .ts under each exeaption type was estimated in the following manner: for a particular product category, the value of totally *xexpt imports (IE) under an exewption rime a (revenue losses attributed to the regfme)/n, where n, the nomfnal tariff on the product catesory a (revenue losses + receipts from atl Import taxes on the product category)/Cvalue of imports of the product). The value of partially exeapt isports under a regime of partial xemptions is estimnted as IPE a (revenue losses attributed to that regime)/Cn-0.05). the implicit assumption being that products subject to partial exemptions are applied en average import duty of 5. ANNEX X Proposal for Reforms of Act No. 13/65-UDEAC-35 of the UDEAC Customs Code i~~~~~~~~~~~~~~~~~~~~ i~.. - 171 - TECHNICAL NOTE ON THE SPECIAL EXEMPTIONS FROM CUSTOMS DUTIES AND CHARGES PROVIDED FOR IN ACT NO. 13/65-UDEAC-35 QF DECEMBER 14. 1965 ESTABLISHING THE CONDITIONS FOR APPLICATION OF ARTICLE 241 OF THE UDEAC CUSTOMS CODE Provosals for Reform UDEAC Act 13/65 specifies in detail the conditions for application of Article 241 of the Customs Code which provides for special and contingent exemptions from customs duties and charges. Given that a key objective of the UDEAC tariff and tax reform program is the reduction of exemptions, it is essential to review and modify the provisions of the Act irn question, retaining only certain irreducible exemptions that may not be eliminated because of: - the very noture of the products; the existence of international agreements making provision for them; or - the status of the importer. I. IRREDUCIBLE EXEMPTIONS 1.1 Merchandise returnina to the Customs Union area (Title I) This refers to national merchandize initially exported and then reimported for various reasons. The text (Articles 2 through 7) is perfectly clear in providing for the taxation of any value added to the product while outside the UDEAC area, the taxation of complementary inputs of foreign origin, etc. There is therefore no need to review this provision. 1.2 Privileaes and immunities (Title II) This covers gifts to Heads of State and Government, gifts to States themselves and diplomatic privileges and immunities as provided for in the Vienna Convention. However, it seems anomalous that experts or representatives of UDEAC member countries or other organizations accredited to an international organization should benefit from the same facilities as those granted to members of diplomatic missions of comparable rank (Article 13, para. 3), since they are not really governed by the Vienna Convention. This provision should be reviewed. 1.3 Chanae of residence. inheritances, trousseaux (Title III) The provisions of Chapters I, III and IV should be retained (change of residence, inheritance, trousseaux. The same is not true of the provisions in Chapte- II relating to commercial enterprises, which ought to be subject to import duties for the motives for a "change of residence" for such an enterprise are quite different for that of an individual (cf. para. 2.5 below) 1.4 Shipments of an entirely noncommercial nature (Title IV) 1.5 Gifts to the Red Cross and similar orcanizations (Title V) - 172 - - 2- 1.6 certain tvoee of eauia ment and oroducts lntended for scecial technical use (part of Title VII) 1.6.1 Chapter I: radioelectric and cable transmission equipments - Exemptions could be retained as provided for in Article 47 ince they relate to networks belonging to the State. - Likewise for exemptions of Article 50 pertaining to products (navigation lights and beacons) for State use. 1.6.2 The provisions of Article 52 should be re-examined in light of the legal status of the Agency for the Safety of Aerial Navigation in Africa and Madagascar (ASECNA) and the international conventions governing this organization. 1.7 Military ecuioment (Title VIII) II. REDUCIBLE EXEMPTIONS These are exemptions that are subject to substantial abuse and could be eliminated without much difficulty if imports are reclassified into the three categories recommended under the reform program, viz. essential consumer goods, raw materials and equipment, and other consumer goods. It is also recommended that exemptions to donor financed imports be eliminated. This could be made operational through the implementation of a tax inclusive accounting system for monitoring expenses under donor financed projects. 2.1 Imports of a social or relictioue nature (Title V) With the exception of goods imported as grants for the Red Cross or similar programs of national assistance, and intended for free distribution (Chapter III), the exemptions provided for in Title V should all be eliminated, including exemptions currently accorded to products and equipment intended for State health services and certain hospital organizations (Chapters I and II), and goods intended for religious celebrations. 2.2 ImRorts of an educational, scientific or cultural nature (Title VI) These products and goods should be subject to import duties that would normally apply to them per the new classification of imports recommended under the reforms (see table 6 of the text). 2.3 Certain tvles of eouioment and oroducts intended for special technical use (Title VII) 2.3.1 Radioslectric and cable transmission equipment used by companies with petroleum or forestry concessions (Article 48). 2.3.2 Exemptions to foreign and multinational airline companies (Articles 54, 55, 56 and Annex IV to the Act). Since these are commercial companies, duties and taxes should be applied to them on all products. 2.3.3 Equipment and products imported as part of the locust eradication program (Chapter IV, Articles 57 through 59) and the products and equipment in Articles 36 and 38 (Chapters I and II of Title V). - 173 - -3- 2.3.4 Products intended for animal husbandry, agriculture, and cattle protection (Chapter V, Article 60). 2.3.5 Equipment and products intended for mining or petroleum prospecting (Chapter VI, Articles 61 and 62, Annex II to the Act). 2.4 Im2orts by third oarties on behalf of privileaed users exemot from imoort duties (Title IX, Chapter I, Article 66). This provision should be formally revoked in light of the opportunity it provides for abuses. 2.5 Tools. instruments and eauipment pertainina to the installation of industrial. aaricultural or commercial enterprises (Title II, Chapter II, Articles 21 through 24). In practice this pertains to a "change of residence" of an industrial, agricultural cr commercial enterprise. In such circumstances exemptions should not be allowed and the goods imported should be subject to duties assessed on a residual value to be determined by Customs. A N N EX XI a PROTOCOL OF UNDERSTANDING - 177 - UNOFFICIAL TRANSLATION PROTOCOL OF UNDERSTANDING Between their Excellencies the Ministers responsible for Finance of the member States of the Cuetome and Economic Union of Central Africa: The Minister of Finance of the Republic of Cameroon, The Minister of Finance, Trade, Industry and Small- and Medium-scale Enterprises of the Central African Republic, The Minister of Economy, Finance and Plan of the Republic of the Congo, The Minister of Finance, Budget and Participations of the Gabonese Republic, The State Minister of Economy, Trade and Planning of the Republic of Equatorial Guinea, The Minister of Economy and Finance of the Republic of Chad, hereinafter called the Parties to the present Protocol of Understanding At their meeting held at Libreville, Gabonese Republic, on November 21 and 22, 1991. - 178 - HAVING REGARD to the Treaty establishing a Customs and Economic Union of Central Africa (UDEAC), signed on December 8, 1964, at Brazzaville as well as the subsequent amending texts; HAVING REGARD to the Decision No. 14/88 - UDEAC-556 of December 8, 1988, giving a mandate to the Secretary-General of UDEAC to multiply the contacts and have thorough discussions with the World Bank with respect to the Regional Structural Adjustment Program; IN VIEW OF the studies which have been carried out and stipulated, relating to the new strategy of economic integration of UDEAC, further to various Acts and Decisions of the Council of Head. of State of UDEACI IN VIEW OF the summary Minutes of the meeting on the Regional Structural Adjustment Program held at Yaound6 on October 17, 1990, at the headquarters of the Bank of Central African States, in which Their Excellencies the Ministers responsible for Finance, Parties to the present Protocol of Understanding, participated, as well as the representatives of the co-donors; IN VIEW OF the urgent need to adopt reform measures in the field of trade and indirect tax policy aiming at improving tax receipt profits, at improving the efficiency and competitiveness of the local manufacturing activity while distributing the tax burden more evenly between sectors and enterprises, at making the instruments for tariff policy and indirect taxation more flexible and simpler, and at facilitating the administration thereof; IN VIEW OF the preparatory proceedings on reform measures, the Aide- N6moire signed between the World Bank and the Secretary-General of UDEAC on November 18, 1989, and the proceedings of the Workshop held at Bangui from March 18 to 23, 1991, and those of the Workshop held at Libreville from November 15 to 20, 1991, with the support of the World Bank, the International Monetary Fund, the French Republic, the Commission of the European Communities and the African Development Bank, and the recommendations retained at the end of these two Workshops; IN VIEW OF the extensive consultations which took place between the representatives of the six UDEAC member States, the General Secretiriat of UDEAC and the representatives of the World Bank and of the International Monetary Fund before the adoption of the said recommendations; - 179 - NOW THEREFORE THE PARTIES TO THE PRESENT PROTOCOL OF UNDERSTANDING HEREBY AGREE AS FOLLOWS: Article 1. The particular reform measures in the field of trade and indirect tax policy specified in Article 2 hereunder constitute the minimum platform of immediate measures to be taken simultaneously by all UDEAC member States, in accordance with the timetable set forth in Article 3 hereunder. Article 2. The minimum platform of measures includes: (a) The removal of the Turnover Tax on Imports (TCAI)i' from the Common External Tariff (TEC)Y and its replacement by a Turnover Tax (TCA)3' under the jurisdiction of each of the UDEAC member States, within a range to be reduced with a view to tax harmonization, the reduction of the range being determined in agreement between the UDEAC member States; the terms and conditions for the application of the TCA are set forth in paragraph (d) hereunder. (b) The elimination of the Complementary Tax (TC).Von imports and the merger of the remaining items of the TEC (customs duty and entry duty) into a single import duty applicable to the c.i.f (port of entry) value of imported goods classified identically per agreement between the UDEAC member States into three Categories, each corresponding to a uniform rate also determined in agreement between the UDEAC member States, in the following manner: Category I - Essential commodities: five percent (5%) Category II - Raw materials and equipment: fifteen percent (15%) * Category III - General consumption goods: seventy percent (70%) - With respect to the 70% rate under Category III, the objective will be to reduce it progressively, in a simultaneous manner, without backtracking, to 35%, over a five-year transition period beginning with the effectiveness of the minimum platform of measures; said period may be revised in agreement between the 1/ Taxe sur le Chiffre d'Affaires a l'Importation 2/ Tarif Ext6rieur Commun 3/ Taxe sur le Chiffre d'Affaires 4/ Taxe compl6mentgire - 180 - UDEAC member States depending on the evolution of the macro- economic situation of the UDEAC member States and following studies on the evolution of the most vulnerable sectors. The progressive reduction of the 70% rate will be put into effect according to a uniform timetable for all UDEAC member States. A temporary surtax applicable to the c.i.f. value of imported goods, within a 15% ceiling over the import duty rate, may be applied to Category III products, currently subject to quantitative restrictions which will be eliminated. Said surtax will be applicable only to a restricted list of products determined in agreement between all UDEAC member States, for a non-renewable period of three years beginning with the effective date of elimination of the quantitative restrictions. (c) The abolition of the Taxe Unicue (TU) regime, according to the following terms and conditions: - No new approval to said regime will be granted beginning with the effective date of approval of the present Protocol of Understanding by the UDEAC Management committee and the Council of Heads of State. - The enterprises at present admitted to the TU regime will be subject to the import duty provided for in paragraph (b) above in the case of imported products, notably, raw materials and equipment under Category II for which a 15% rate will be applicable. The TU on local sales will be replaced by the TCA provided for in paragraph (a) above. - The TU on imports will be replaced by a generalized preferential tariff, applicable to all intra-Union trade of locally manufactured products, defined according to a notion of product origin to be agreed upon by the UDEAC Management Committee. The rate of said preferential tariff, determined by the UDEAC Management Committee, will represent a percentage of the import duty applicable to a similar product originating from a non- member State and will be uniform in all UDEAC member States for a similar tariff position. (d) The TCA, provided for in paragraph (a) above, will be applicable according to the following terms and conditions: The TCA will be applicable to all products and services consumed on the local market, either on locally-manufactured goods and services or on imported goods, according to specific modalities of application determined in agreement between the UDEAC member States. - 181 - - The TCA will replace the TCAI, as provided for in paragraph (a) above, the TU on local sales, as provided in paragraph %c) above, the Domestic Turnover Tax (ICAI)5/ on local sales of goods and services, the Tax on Domestic Production (TIP)6/ in the case of the Republic cf Cameroon, the Internal Consumption Tax (TCI)7/ in the case of tne Central African Republic and the Gabonese Republic, the Domestic Tax on Consumption (TIC)O/ in the case of the Republic of the Congo, and the Complementary Tax in the case of the Republic of Chad. (e) The application of ad valorem (c.i.f. value plus import duty on imported products, ex-factory cost on local products) excise levies on a list of products including at least tobacco products and drinks. The rates of said excise levies will be determined by each UDEAC member State. With respect to tobacco products and drinks, with a view to tax harmonization and reducing fraud, the differences between the rates will be reduced in agreement between the UDEAC member States over a three-year period. 'f) The application of more restrictive provisions for import duty exemptions, including the revision of article 241 of the UDEAC Customs Code and Act No. 13/65 - UDEAC - 35. Article 3. (a) The Parties to the present Protocol of Understanding will submit the minimum platform of measures to the UDEAC Management Committee in December 1991, for adoption by the Council of Heads of State before December 31, 1991. (b) The Parties to the present Protocol of Understanding will recommend to the Management Committee in December 1991 to confer a mandate to the Secretary-General of UDEAC: - to convene az so-,% as possible an ad hoc commission at the inter- governmental level so that all UDEAC member States reach a consensus, in particular on the following items: specific modalities for the application of the TCA list of imported products under Categories I, II and III list of products which may be subject to a temporary surtax definition of the notion of product origin for locally- manufactured products and modalities for the application of the preferent al tariff 5/ Imv8t sur I Chiffre d'Affaires Int6rigur 6/ Taxe Int6rieure A la Production 7/ Taxe de Consommation Int6rieure 8/ Taxe Interieure a la Consommation - 182 - * list of products subject to excise levies * proposed amendment to Act No. 13/65-UDEAC-35 relating to exemptions - in furtherance of the above-mentioned consensus, to prepare before March 31, 1992 draft Acts and Decisions subsequent to the modifications to the Treaty establishing UDEAC. (c) The Parties to the present Protocol of Undei-standing propose that the UDEAC Management Committee hold an extraordinary meeting in April 1992 in order to adopt the above-mentioned Acts and Decisions, and to determine the date of effectiveness of the reform. Article 4. The particular measures to be taken on a country-specific basis by each UDEAC member State include: (a) The abolition of indirect taxes other than the ICAI, notably, the Transaction Tax (TT/TIT). (b) The elimination, simultaneously to the abolition of the Txe Unictu regime provided for in Article 2, paragraph (c), of all import tax exemptions under, or deriving from, the systems specific to each member State: Tax on Domestic Production (TIP) in the caee of the Republic of Cameroon, Internal Consumption Tax (TCI) i. the case of the Central African Republic and of the Gabonese Republic, Domestic Tax on Consumption (TIC) in the case of the Republic of the Congo, and Complementary Tax in the case of the Republic of Chad. (c) The non-renewal of tax advantages under the Investment Code which will have to be revised for each member State so as to abolieh the benefit of import tax exemption and the progressive reduction of other exemption categories under special agreements, ad hoc exemptions and others, the objective being to impose a taxation at a rate of at least 5% on all imports (and a compensation mechanism to be instituted by the UDEAC member States on imports made within the framework of projects financed by grants or loans at concessionary rates, allowing the customs administration to ensure that the imports effectively made correspond to those foreseen in the projects). (d) The elimination, within a three-year period after the effectiveness of the reform, of existing quantitative restrictions, and the determination, when a temporary surtax may be applied, of its rate and duration of application according to Article 2, paragraph (b). Article 5 With a view to make it possible for the minimw- platform of measures, provided for in Article 2, to be implemented in the best conditions, the Parties to the present Protocol of Understanding solicit the World Bank, the International Monetary Fund and the other co-donors for their technical and - 183 - financial support: (a) Concerning the implementation of the minimum platform of measures: support given to the ad hoc commission, support to the national tax administrations, recycling seminars, sensitization campaigns, publication of customs and tax documents... (b) Concerning the examination of possible difficulties deriving from the application of the minimum platform of measures, for the purpose of obtaining financial support to compensate for budgetary losses and of adopting appropriate accompanying measures, notably for the most vulnerable economic sectors. (c) To the UDEAC General Secretariat, responsible for monitoring the implementation of the minimum platform of measures, for which restructuring measures should preliminarily be taken on the basis of recommendations of audits performed at the request of the Council of Heads of State. Article 6. Regarding the Value Added Tax (TVA), it is recommended that each UDEAC member State introduces it in lieu of the TCA, as soon as the conditions for its implementation are met. - 184 - Signed at Libreville, Gabonese Republic November 22, 1991 For the Minister of Finance of the Republic of Cameroon, The Secretary of State No. 2 for Finance, /a/ Urbain Olanguena Awono The Minister of Finance, Trade, Industry and Small- and Medium-scale Enterprises of the Central African Republic, /a/ Auguste Tene-Koysoa For the Minister of Economy, Finance and Plan of the Republic of the Congo, The Secretary of State for Economy and Plan, /a/ Dieudonne Diabatantou-Boukambou The Minister of Finance, Budget and Participations of the Gabonese Republic, /s/ Paul Toungui For the State Minister of Economy, Trade and Planning of the Republic of Equatorial GuLnea, The Dlrector General of TaxatLon, /o/ Tomas Exono Ava For the Minister of Sconomy and FLnance of the Republlc of Chad, The Becretary of State for Economy and Finance in charge of the Budget, /s/ Mahayadine Saiah A N N E X XII A TREATY ESTABLISHING A CENTRAL AFRICAN CUSTOMS AND ECONOMIC UNION .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ __ ~ ~ ~ - _ fl - 187 - This annex presents the unofficial translation of the "Treaty Establishing a Central African Customs and Economic Union" along with the modifications made to this Treaty by the Council of UDEAC Heads of State in December 1991, following the formal adoption of the Protocol of Understanding on the Minimum Platform of Trade and Indirect Tax Policy Reforms (Annex XI). All additions made to the original Treaty are presented in bold type, and all deletions are in shaded italics. - 189 - TREATY ESTABLISHING A CENTRAL AFRICAN CUSTOMS AND ECONOMIC UNION The President of the Republic of Cameroon The President of the Central African Republic The President of the People's Republic of the Congo The President of the Gabonese Republic I.ie President of the Republic of Equatorial Guinea The President of the Republic of Chad Having regard to the Convention regulating the economic and customs relations between the States of the Equatorial Customs Union and the Republic of Cameroon, signed at Bangui on June 23, 1961; Having regard to the Protocol of Agreement signed on February 11, 1964 at Fort Lamy; Resolved to establish an ever-closer Union among their peoples in order to strengthen regional solidarity; Determined to promote the gradual and progressive establishment of a Central African Common Market; Convinced that the removal of barriers to trade among States will contribute to the expansion of existing national markets and to the improvement of the living standard of their peoples; Desirous of strengthening the unity of their economies and of ensuring their harmonious development through the adoption of measures which take into account the interests of each and all while adequately compensating, through appropriate measures, for the special situation of the economically less- developed countries, particularly through the harmonization of industrialization policies, the equitable allocation of community projects and the coordination of the development programs of the various productive sectors; Determined to participate, through the establishment of a subrogional group, in the creation of a true African Common Market and the consolidation of African Unity; Have decideds To establish a Central African Customs and Economic Union And have agreed as followst - 190 - PART ONE INSTITUTIONS Article 1. By the preuent Treaty, the High Contracting Parties establish among themselves a Central African Economic and Customs Union (Union Douani&re et Economique de l'Afrique Centrale - UDEAC) hereinafter referred to as the "Union." The Union shall be open to any independent and sovereign African State requesting admission. The admission of a new State shall require the unanimous consent of the members which make up the Union. Article 2. The achievement of the tasks incumbent on the Union shall be ensured by: the Council of Heads of State or of Government; the Management Committee; the General Secretariat. TITLE I COUNCIL OF HEADS OF STATE OR OF GOVERNMENT Chapter I - organization Article 3. The Council shall be constituted by the meetin,j of the Heads of State or of their representatives invested with the power of decision. The Heads of State may be accompanied by Ministers and Experts. Article 4. The Council shall meet as often as necessary and at least once a year. Article-S. The office of President shall be exercised each year by one of the Heads of State, in rotation, according to the alphabetical order of the States, unless otherwise unanLaously decided by the Heads of State. The Presidency shall change on the first day of each calendar year. Should any new States adhere to the Union, their Heads of State shall assume the Presidency of the Council after the State signatory to this Treaty that is last in alphabetical order. Ajjicle 6. In the event that a national vacancy in government deprives the Council of its President, the Presidency shall be assumed by the Head of State next in alphabetical order of the States. Chapter II - Powers Article 7. The Council shall be the suprme organ of the Union for the achievement of the objectives laid down in this Treaty and under the conditions herein set forth: - 191 - It shall guide and coordinate the customs, fiscal and economic policies, particularly those deriving from the different areas referred to in Part III of this Treaty. It shall have a power of decision and shall supervise the Management Committee. It shall decide upon the headquarters of the Union. It shall appoint the Secretary-General and Assistant Secretary-General of the Union. It shall draw up the budget and set the annual contribution of each Member State, on a proposal from the Management Committee. It shall decide upon tariff negotiations with third countries and the application of the general tariff. For problems of common interest, it shall guide and coordinate the external economic relations of Member States and shall define the principles of a common policy. it shall decide in the last resort on all questions concerning which the Management Committee has not been able to reach a unanimous decision. It shall arbitrate in disputes arising between Member States concerning the application of this Treaty. Decisions of the Council concerning economic, customs and fiLcal legislation and in the areas which are the subject of Part III of this Treaty shall be taken through a delegation of the powers of the National Legislative Assemblies or any other competent authorities, in accordance with the institutional rules of each State. Article S. The decisions of the Council shall be taken unanimously. They shall be legally enforceable in the Member States one full day after the arrival of the Official Gazette of the Union in the capital of each Member State. These decisions shall also be published in the Official Gazettes of the Member States. The Council may decide that it. decisions are to be published according to the emergency procedure. In this case, these decisions shall be enforceable three full days after the arrival in the capital of each Member State of the official telegram from the Secretary-General. Articlj 9. The President of the Council shall appoint the Department Heads, the Financial Controller and the Director of the Inter-State Accounting Agency. He shall set the timetable for the meetings of the Union and shall convene the Member States. He shall authorize the missions outside of the Union of the staff of the General Secretariat. Finally, he shall exercise the powers specified by the rules of procedure of the Council of Heads of State. - 192 - TITLE II MANAGEMENT COMMITTEE Chapter I - Organization Aricle 10. The Management Committee shall be composed of two members per Statet The Minister of Finance or his representative; The Minister responsible for problems of economic development or his representative. The Management Committee may associate other competent Ministers with its proceedings. The delegation of each State entitled to speak and vote must include at least one Minister. The members of the Management Committee may be accompanied by not more than four Experts per delegation. r-ticle 1U. The Committee may invite any qualified person to a meeting on a consultative basis but not for deliberative purposes. The Committee shall meet as often as necessary and at least twice a year. hricle 12. The office of Chairman shall be exercised by one of the Ministers of the Member State whose Head of State is performing the functions of President of the Council in accordance with Articles 5 and 6. Article 13. The Chairman shall exercise the powers specified by the rules of procedure of the Management Committee. Article 14. In case of emergency, he may consult the members of the committee in their own countries. Meetings of the Committee are valid only if all the Member States are represented by at least one Minister. Chapter II - Powers Article l. The Management Committee shall act under the authority conferred on it by the Council. In order to achieve the objectives sought by the Treaty and pursuant to the guidelines defined by the Council, the Management Committee shall adopt, upon proposal from the oeneral Secretariat, common policies and actions dealing specifically with the following matters: - tariff and statistical nomenclaturel - common external [ j tariff; - 193 - - preferential tariff WIN* -, ]I ; - Customs Code; - customs legislation and regulations; - consultation on export duties and posted values for exports on products of common interest; - harmonization of internal taxes; - Investment Code; - harmonization and coordination of development plars and industrialization projects; - coordination and rationalization of existing industries; - harmonization, development and implementation of a common transport policy; i - harmonization and development in the area of agriculture and of the rural economy; - study and development of energy production and distribution; - harmonization of legislation, policy coordination and rational utilization of the natural resources of the region; - harmonization of legislation, coordination and development of postal and telecommunications services; - harmonization, coordination and development of tourism; - harmonization and development of statistical information; - harmonization of social policies; - cooperation in the area of research and technology; - promotion and development of regional and community companies; - development of joint financing; - coordination of external economic relations on problems of common interest; [ - promotion and expansion of exports; - optimal utilization of external contributions and assistance; - business law; - social security; This list of areas in which the Management Committee may act is not exhaustive and may be supplemented by a decision of the Council. The conditions under which the Committee shall exercise its powers are specified in the following chapter. - 194 - Chapter III - Decisions of the Committee Notification - Enforceability Article 16. The Management Committee shall have a power of decision in the areas delegated to it. The decisions of the Committee shall be taken unanimously. They shall become legally enforceable in the Member States one full day after the arrival of the Official Gazette of the Union in the capital of each Member State. These decisions shall also be published in the Official Gazettes of the Member States. The Committee may decide that its decisions are to be published according to the emergency procedure. In such caoes, these decisions shall be enforceable three full days after the arrival in the capital of each Member State of the official telegram from the Secretary General. The Committee may also make recommendations and express wishes. TITLE III GENERAL SECRETARIAT Article 17. The General Secretariat of the Union shall be assured by the Secretary-General, assisted by an Assistant Secretary-General and administrative istaff. The Secretary-General shall be appointed by an Act of the Council of Heads of State for a period of three years, renewable. The Secretary-General shall be under the direct authority of the President of the Council. Articlg 18. The General Secretariat shall be organized into Divisions, Departments and Services. Where necessary, specialized community organizations may be created by an Act of the Council of Heads of State. The Council may also grant community status to existing services or organizations. Artigle 19. In the performance of their duties, the Secretary-General, the Assistant Secretary-General and the staff of the Secretaria': shall neither seek nor receive instructions from any Government or from any national or international entity. They shall refrain from any action that is incompatible with their position as international civil servants. The staff rules and regulations of the General Secretariat shall be determined by an Act of the Council. Articlg 2Q.. The Secretary-General shall have in particular the following responsibilities and powers: - 195 - He shall manage and direct the operations of the General Secretariat. In this capacity, he shall be responsible for the general efficiency of the administrative services and the organization of the executive apparatus. He shall organize the meetings of the Council, the Management Committee and the specialized Commissions, for which he shall provide the secretariat. He shall maintain contacts with national authorities and the public or private organizations of the Union. He shall be responsible for the application of the Treaty and the decisions taken by the Council and the Management Committee. In the budget area, his powers shall be determined by the financial regulations of the Union. Pursuant to Council and Management Committee decisions, he shall be responsible for preparing and promoting basic development programs and community projects, possibly in conjunction with the specialized Commissions. To this end, he shall be authorized to request studies or other expert research from qualified organizations and individuals, to organize meetings of experts and to use the services of consultants. Within the context of Council decisions and mandates, he shall help to coordinate external economic relations on problems of common interest. In the performance of his functions, he shall be authorized to request assistance from international, regional or bilateral assistance organizations and to coordinate their activities. He shall prepare an annual report on the activities and operation of the Union and on the progress made in achieving the basic objectives of the Treaty. This report shall be submitted to the Management Committee and forwarded to the Council of Heads of State. Hie other responsibilities shall be defined by an Act of the Council. Article 21. The Contracting States shall forward to the General Secretariat of the Union all legislative and regulatory texts, all decisions of a fiscal, customs or economic character including decisions concerning the granting of privileged treatment that lie within the internal competence of each State. The Secretary- General shall ensure the distribution of these texts to the Member States. TITLE IV LEGAL PERSONALITY Article 22. The Union shall have legal personality and in particular the necessary authority to: (a) contract; (b) acquire or transfer movable and immovable property as required for the achievement of its objectives; (c) take out loans; (d) engage in legal proceedings; - 196 - (a) accept donations, legacies and gifts of any kind. For this purpose it shall be represented by the President of the Council of Heads of State, who may delegate his powers. The capacity to enter into contracts, to acquire or transfer movable and immovable property and to take out loans shall be exercised by the President, with the prior consent of the Heads of the Member States. Article 23. The Council of the Union shall decide the immunities to be granted to the Union, to the representatives of the contracting parties and to the staff of the General Secretariat in the territory of the Member States. TITLE V FINANCIAL PROVISIONS Article 24. The budget of the institutions of the Union shall be drawn up annually by the Council upon proposal from the Management Committee. It shall be made applicable by an Act of the Council of Heact; of State. Its execution and the oversight of the same shall be ensured in accordance with the financial regulations of the Union. ArtLcle 25. The expenditures of the institutions of the Union shall be covered by equal contributions from each Member State. However, the Member States agree to seek a system which would gradually provide the institutions of the Union with their own resources. The Union may have recourse to external grants and assistance. Article 26. In a spirit of solidarity, and to take account of the advantages deriving from transit activities accruing to the coastal States, a solidarity fund shall be established, supported by lump-sum payments or any other resources, their amount and allocation being set annually by the Council of Heads of State. - 197 - PART TWO: CUSTOMS UNION AND FISCAL HARMONIZATION TITLE I CUSTOMS UNION Arti(ole 27. The Union shall constitute a single customs territory within which there shall be free movement of individuals, merchandise, goods, services and capital. Chapter I - Customs Legislation and Regulations Aicle 28. The Customs Union e'tablished between the Member Scates shall comprise, subject to the reservations and under the conditioas fixed in this Title: = a common i I external tariff in their relations wi Zfra counrries; a preferential tariff applicable in the State in which consumption takes place (other than the producer State) to industrial products 3riginating within the Union; - the free movement, exempt from all import duties and taxes, of unprocessed products originating in the Member States; t - a search for ways of gradually eliminating restrictive trade practices among the Member States. Artile 29. The Member States shall adopt, apply and maintain common customs legislation and regulations with respect to import duties and charges. Such common legislation and regulations shall essentially consist of the Customs Code aind its implementing texts, the Tariff, the customs and statistical nomenclature and the other tents and regulations regarding customs which are required for the proper application of import duties and charges. =tl 3.The common ezternal tariff shall consist of: A - The import duty, resulting from the merger of the customs duty and the fiscal entry duty, shall be applied to product. and merchandis imported into the customs territory of the Union and classified as follows: - 198 - - category lt essential co wodities; - category 2: raw materials and equipment; - category 3: general consumption goods. The list of products and mercbandise and the rate of the import duty applicable to the products and merchandise in each o} the thra- categories met out above shall be determined by Acts of the Management Committee. B - A temporary surtax applicable, as appropriate, for three years, to a limited number of products and merchandise in categowj 3 above currently subject to quantitative restrictions; the list of said products shall be determined by Acts of the Management Committee. rI., IBs 1 AM ;>$X'l9ER§Qfi gg %. R - : Article. 31. Unprocessed products and merchandise originating in Member States shall, when transferred from one Member State to another for final consumption therein, be exempt from all import and export duties and charges. A statistical check shall be sade as to the quantity and value of commercial transactions in imported products and merchandise acquired for consumption in one Member State and transferred to another Member State for final consumption, along with the products and merchandise referred to in the preceding paragraph. Article r~INI 32. Export duties and taxes shall remain within the competence of each Member State. However, the Member States undertake to hold bilateral or multi- lateral consultations to determine the tariffs and, if necessary, the reference prices applicable to similar products or to products of common interest. Aril 3 Customs declaration forms shall in principle be standardized in all the itn__er States. - 199 - Artigle 34. Transit regises in respect of shipment by sea, air, land and river shall be generalised in all the States of the Union. To facilitate the transit of imported goods to their final destination, the Member States undertake to apply the inter-State transit procedure known as the Central African Countries International Transit Systen (Transit International dos Pays de l'Afrique Central-, TIPAC). Chapter II - Accounting Regulations Pertaining to Export Duties Article f 'JO. The proceed. of export duties and taxes collected by the customs when merchandise leaves the Member States shall accrue to the budget of the State of origin of the goods. Certificates of origin shall be produced in support of export declarations; the Management Committee ehall draw up a model certificate of origin and determine the conditions for its use, except where other models of certificates of origin are required as a result of epecial arrangements A3ticle rf1 36. The Management Committee shall draw up a list of common customs offices inLthe Member States; these offices shall be authorized to collect duties and charges for the account of States other than that in which they are situated. in these offices, separate accounts shall be kept for each Member State. A duplicate of the accounts shall be forwarded at the end of each month to the customs administration of the States for whose account collections nave been made, as well as to the General Secretariat. The Management Committee shall establish procedures for transferring customs revenue from one State to a-other and for verifying these accounts. Chapter III - Safeguard Clauses Article r a 37. In the event that, in order to meet its development needs or industriarization requirements, a Member State envisages the introduction of measures departing from the provisions of this Title, it shall so immediately inform the Management Committee, which may authorize it to do so on a temporary basis. Should there be disturbances in an economic sector of one or more Member States or should difficulties arise which might cause substantial deterioration in a regional economic situation, the Member States concerned may immediately take the necessary measures to restore a sound situation. They shall so immediately inform the Management Committee and shall provide it with the pertinent informatiV,,. - 200 - TITLE II FISCAL HARMONIZATION Article 0I41 3 3. The Management Committee shall examine the conditions under which the' legislation of the Member States in respect of direct taxes and, if necessary, indirect taxes not levied by the customs administration, can be harmonized in the common interest. Upon proposal from the Management Committee, the Council shall draw up directives for the harmonization of laws and regulations and their interpretation. Article 1f41 39. As part of its work, the Management Committee shall aim at encouraging the installation and operation of enterprises under similar fiscal conditions, in the Member States. In particular, it shall seek to harmonize the rules governing the basis for computation of and, as far as possible, the rates of the principal taxes and duties, such as: _ [~t*~"J turnover taxes; - exciLse'duties; - corporate tax; - individual income tax; - registration and stamp duties. Article 40. The turnover taxes referred to in Article 39 above are specific to each Member State of the UDEAC and consist of single rates freely determined by ea_h State within a range that is to be gradually reduced in order to promote fiscal harmonization. These ranges are determined by an Act of the Management Committee. Article 41. The Member States shall inform the Management Committee of changes to the rates of turnover taxes and of the other taxes referred to in Article 39 above. t4~t V. A0!.4 AMON to ~~~~~t* -00.,, i" Iaw'.. ... .... . TITLE III INVESTMENT CODES Article 10 1 42. A besic code shall govern the maximum fiscal, economic and financial conditions applicable to priority or approved enterprises operating in the Union market. Article t " 1 43. The provisions of the National Codes that are in conformity with the Union basic code may not be modified unilaterally. - 201 - PART III - ECONOMIC UNION TITLE I PRINCIPLES Aticle r 1 44. The High Contracting Parties agree to harmonize their development plans in order to implement a common policy for economic cooperation and integration, particularly as regards industrialization, agriculture, trans- port, postal and telecommunication services, technology transfer, and the utilization of natural resources and energy. The objectives of harmonizing development plans and economic integration shall be incorporated in a medium and long-term regional program which the Council shall periodically prepare upon proposal from the Management Committee. In light of these objectives and regional development programs, the Council shall adopt, upon proposal from the Management Committee, sector programs and community projects. The regional development objectives and programs shall also constitute a framework for the coordination of external financial and technical assistance. They shall govern the promotion and financing activities of the regional development organization, as well as assistance from regional or international organizations and assistance agencies. To achieve these objectives, the Council may conclude technical assistance agreements with international or regional organizations and other States. The Council, upon proposal from the Management Committee, shall establish the modalities for implementing the regional development objectives. To this end, it shall establish an execution timetable not later than one year after the. revised Treaty comes into effect. TITLE II HARMONIZATION OF DEVELOPMENT PLANS Article r.4 45e The Member States agree to communicate to the General Secretariat their development plans or programs and the annual reports on the implementation of these plans or programs. Art-icle 0.L 4C. The General Secretariat shall make a comprehensive study of these documents with a view to presenting to the Management Committee and the Council a review of the economic situation of the Union during the period in question. This study shall in particular indicate: - any distortions which may have been observed, in particular as regards the harmonization objectives defined in Article 1451 44 and the relevant remedial measures; - the objectives and priorities of regional economic development. The Generul Secretariat may request assistance in its task from experts or r larch institutions approved by the Committee, and from consultative Commissions. - 202 - It shall address these documents and studies to the Member States. Article r4al 47. The study of these documents shall be included in the agenda for the ensuing meeting of the Management Committee, which shall give an opinion regarding them before submitting them to the Council for decision. TITLE III INDUSTRIAL COOPERATION Article rjf 9 48. Within the context and pursuant to various aspects of the regional o6jectives and programs, industrial cooperation and integration concerns - ~ ~ ~] all industrial enterprises iduig td tin h ttso ie conomy corporations or State corporations. Article 49. The industries referred to in Article 48 above may be established in each of the Member States, particularly in the context of the harmonization of development plans and priority objectives.. Their products may be sold on the sarkets of the other Member States according to rules and procedures established by an Act of the Management Committee. in addition to information concerning industrial projects, the State concerned shall regularly forward to the General Secretariat a comprehensive dossier on each industry thus created, for the information of the Management Committee. In addition, inter-State cooperation may be considered for thevs induastries. dovolopment pl4a and N The$r bo -o ________g to x a n Cosu$ttee.~~~~~~~~~~~~~~~~~~~~0 N In dd$ionto$nfras$o cocor$n indsra prjet h-8tt -263 - Article ri11 50. As regards the industrial projects ( e 1 referred to in Article 49, the State in which the planned Oro3Te .o shall send to the general secretariat a dossier prepared according to the conditions set by the Mana ement coitt - ra_ ~~~~~~~~~~~~~~~ s~~~~~~~~~~~~~~~~~~~~~~~~~'W S^_~~~~~~~~~~~~ _1~~~~~~~~~~ Article rSi 51. The General Secretariat shall ensure, in conjunction with the competent ommisions, the preparation in stages of the basic program for the medium and long-term development of the region which shall define the objectives and priorities referred to in Article 1 f) 44 In carrying out these tasks, the General Secretariat shall, in particular, inventory the resources and capacities of the region and shall periodically draw up a list of existing or planned production units. To this end, the Member States undertake to provide all the assistance needed by the General Secretariat and, in particular, to keep it regularly informed on the preparation and execution of their industrialization or development plans and projects. - 204 - As part of the regional development strategy, the General Secretariat shall prepare and propose joint sectoral programs in consultation with the competent Commissions. The Council shall decide on these sectoral programs, whose objectives are the following: (a) the promotion and development, along with the specialization, diversification and expansion, of industrial production in the region; (b) optimum exploitation of available resources; (c% onhanced productivity and efficient utilization of production factors; (d) exploitation of advantages of scale; (e) equitable distribution of benefits and, in general, the balanced development of the region. The Management Committee and the General Secretariat shall oversee the execution and application of joint sectoral programs. Article r5I 52. The Member States shall take all the necessary measures to promote thi implementation of the common industrialization strategy. The General Secretariat, in conjunction with the competent Commissions and with the assistance of qualified organizations and experts, shall prepare studies, plan muitinational projecte and help to promote effective community corporations. The Member States shall adopt incentive measures, particularly to facilitate the access of community or multinational corporations to resources provided by national, regional or international organizations. TITLE IV COOPERATION AND DEVELOPMENT OF THE RURAL ECONOMY Article r#2 53. To accelerate the agricultural development of the region, the Member States have decided to promote all the disciplines or activities capable of enhancing cooperation among Member States in the rural sector. In line with a timetable prepared by the Council, the General Secretariat, in conjunction with the competent Commissions, shall be in charge of studying and proposing to the Management Committee and the Council priority objectives for a general program to promote the production and marketing of agricultural products. In light of these studies and proposals from the General Secretariat and having consulted the Management Committee, the Council shall define the options for a common agricultural development policy and shall determine the forms of its application. The Member States agree to send periodically to the General Secretariat statistical information and any other documents relating to their agricultural development plans and projects. - 205 - Ar&stg . rLg 51i. Common measures shall apply in the following particular areas: - scientific and technical research; - coordination of production and marketing programs; - coordination of research, production and marketing activities in the livestock and meat production sector; - coordination in the area of agricultural training; - the study and execution of national and multinational agricultural projects; - the study and promotion of the processing of agricultural products. The General Secretariat shall approach organizations providing technical assistance and bilateral and multilateral financial aid in order to obtain their assistance for the agricultural development of the region. TITLE V COOPERATION AND COMMON POLICY FOR TRANSPORTATION aicle ral SS. In the area of transportation, the Member States propose to achieve the following objectives: - to harmonize their policies and regulations; - to standardize infrastructure and equipment; - to promote a policy to coordinate and develop transportation among the Member States, possibly in conjunction with other States; - to implement a common policy of external maritime transportation. Article r]l 56. To achieve these objectives, the following specific measures and actions are planned: - the Member States agree to send information to the General Secretariat on their projects to upgrade and develop comunications and their national regulations on transportation and traffic; - in conjunction with the competent Commissions, the General Secretariat shall conduct studies and prepare a periodic inventory of available resources; it shall prepare the transportation plan and specific projects to be submitted for approval to the Management Committee and the Council. TITLE VI COOPERATION IN THE AREA OF POSTAL AND TELECOMMUNICATION SERVICES Article fl 1 57. The Member States agree to harmonize their legislation and to coordinate their policies regarding postal and telecommunications services. - 206 - To this end, the General Secretariat shall carry out studies and prepare and propose programs and projects to the Management Committee and the Council of Heade of State that are designed to modernize and develop communications networks. Article rfi 58. In conjunction with the competent CommiLsions, the General Secretariat shall study and propose to the Management Committee and the Council any project to draw up or amend treaties, agreements and international arrangements regarding postal and telecommunicationo services. It shall also be responsible for coordinating these instruments and adapting them to regional and international systems. TITLE VII COOPERA,'ION IN THE AREA OF TOURISM Article rgli S9. To promote regional tourism, the Member States agree to send to the General Secretariat documents detailing their respective tourism infra- structures and their plans or programs for tourism development. Article rJi 60. In conjunction with the competent Commissions, the General secretariat shall undertake a comprehensive study with the aim of preparing a policy to coordinate and harmonize activities in the area of regional tourism. It shall prepare and propose programs or projects to the Management Committee and the Council that are conducive to promoting the development of tourism infrastructure and activities in the Member States. TITLE VIII HARMONIZATION AND DEVELOPMENT OF ECONOMIC AND SOCIAL STATISTICS Article r-l 61. The Member States agree to harmonize and develop their statistical, economic and uocial data. To this end, the General Secretariat shall prepare statistics on intra-community exchanges. It shall submit proposals to the Management Committee and the Council designed to: - standardize data; - harmonize and rationalize current statistics; - develop economic and social information, particularly through the preparation of regional statistical projects. It shall centralize and disseminate information pertaining to the Union. The Member States agree to send to the General Secretariat of the Union the documents and statistical information it requires to perform its tasks. - zo7 - TITLE IX FINANCING AGENCY Article !i 1 62. To promote effective regional development and the harmonious development of the States of the Union, and to help reduce existing development disparities, the Contracting Parties have decided to set up a community financing agency. This agency shall take the form of a Development Bank which shall mobilize internal and external financial resources and shall participate, in conjunction with the General Secretariat, in joint regional projects and goals which shall be defined by the Council of Heads of State. PART IV ] I~~~~~~~~I E ! ! E | CeM TI Q 0 E a. 11 !>:cg1. #*i.@Rff X O .S>;!SXl WX ~~~R! ';~~~~~~~~~~~~~~~~~~~~~~~~~~o. S10 - -111 _!~~~~~~~~~-- M_ _=M_ - 208 - ,~~~~~~~~~~~~~~~~~~~~Y r as origna;l wthin~y at ~Meme 8t4tw.~ ato,sal or pupoe of their consuptio in:t the ~ ote .e be Statos bAenofi t fo th prfreta tariff. The preeretia Q tarf may be*~)O ~eithe adt2t valore or)~?J sc F$xed by0 an A1cton of th ManaoIg-cj Cmittee, this t~ariff shal bo uWifor in llMe sthates fori~ tb hse mpttr duet h. oI.I Article 63. Theproducts of the industriespreferenti arrf tl ino Artclude 4, reoniz asf turinaver itahis an Member State,o shall fr purposes ofwheihr cosmptonte in Athe othe Meme retuateon benefi frominngo the preferential tariff.salb byodb an Act of the Management Committee . hstrf hl e nfr nalMme Sates foZte ae roucs Article n 64.ute Arsn uto hpplication of the preferential tariff salntpeld h eyn shall be settled according to the provisions of the Customs Code. PAdRT V FREE MOVEMENT OF PERSONS, SERVICES AND CAPITAL, RIGHT OF ESTABLISHMENT Article rtil 66. The circulation of persons and the right of establishment shall form the subject of a special Agreement by the Council of Heads of State. Article [72l 67. Movements of capital within the Union shall not be subject to any restrictions other than those provided for under the exchange regulations currently in force. - 209 - PART VI GENERAL AND FINAL PROVISIONS Artiole r9 1 68. When necessary, the Council way take the decisions required for the proper functioning of the Union and the achievement of its objactives even if the actions to be undertaken are not expressly provided for in this Treaty. Article f7l 69. The rights and obligations resulting from Conventions concluded prior to the entry into force of this Treaty between one or more Member States, on the one hand, and one or more third countries, on the other hand, shall not be affected by the provisions of this Treaty. Insofar as such Conventions may not be compatible with this Treaty, the Member State or States concerned shall take all appropriate steps to eliminate any incompatibility found to exist. Member States shall, if necessary, assist each other in order to achieve this purpose and shall, where appropriate, adopt a common attitude. In the application of the Conventions referred in the first paragraph, the Member States shall take due account of the fact that the advantages granted under this Treaty by each Member State form an integral part of the establishment of the Union and are therefore inseparably linked with the creation of common institutions, the conferring of powers on such institutions and the granting of the same advantages by all the other Member States. Article r il 70. This Treaty shall enter into force following its ratification in accordance with constitutional practice by each of the Contracting States. The instruments of ratification shall be deposited with the Government of the People's Republic of the Congo, hereby designated as the depository Government. Once the depository Government has received the instruments of ratification, it shall forthwith notify all the Contracting Parties and the General Secretariat of the Union. Article 12 1 71. Any amendments to this Treaty must be ratified by each State in the forms required by Lts internal legislation. Article r M 1 72. This Treaty may be amended in the same forms as those provided for its adoption. It may be denounced by any Member State. Such denunciation shall only take effect, in respect of the denouncing State, as from the January 1 following its notification to the President of the Council and not earlier than six months following such notification. Denunciation by one or more Contracting States shall not entail the dissolution of the Union. Only the Council of Heads of State may decide on the dissolution of the Union in the event that a Contracting State withdraws from it. - 210 - =L212 ravl-7. This Treaty, drawn up in a single copy in French, English and Spanish, the three texts being equally valid, shall be deposited in the archives of the Government of the People's Republic of the Congo which shall communicate a certified true copy to the Government of each of the signatory States. Done in Brazzaville, December 8, 1964. Amended at: Yaound6, December 7, 1974 Bangui, December 19, 1983 Brazzaville, December 19, 1984 Libreville, Decewm'er 6, 1991 THE PRESIDENT OF THE THE PRESIDENT OF THE REPUBLIC OF CANEROON CENTRAL AFRICAN REPUBLIC /L/ Paul Biva is/ General Andr6 Kolinaba Paul BIYA General Andr6 KOLINGBA THE PRESIDENT OF THE THE PRESIDENT TO THE GABONESE REPUBLIC PEOPLE'S REPUBLIC OF THE CONGO /a/ Omar Bonoo /1/ Colonel Denis Sassou Nouesso Omar BOki;O Colonel Denis Sassou NGUESSO THE PRESIDENT OF THE THE PRESIDENT OF THE REPUBLIC OF EQUATORIAL GUINEA REPUBLIC OF CHAD /a/ Obiana NWuem= Nbaooao /e/ Hissein Habze OBIANG NGUENA NBASOGO Hiseein HABRE A N N E X XIIB ACT ADOPTING THE TREATY MODIFICATIONS ,1~~~~~~~~~~~~~~~~~\ .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 213 - Central African Customs and Economic Union (UDEAC) COUNCIL OF HEADS OF STATE AMENDMENTS TO THE TREATY ESTABLISHING A CENTRAL AFRICAN CUSTOMS AND ECONOMIC UNION The President of the Republic of Cameroon The President of the Central African Republic The President of the Republic of the Congo The President of the Gabonese Republic The President of the Republic of Equatorial Guinea The President of the Republic of Chad Having regard to the Treaty establishing a Central African Customs and Economic Union signed on December 8, 1964 at Brazzaville and subsequent amendments; Having regard to Act No. 4/65-UDEAC-42 of December 14, 1965 of the Council of Heads of State establishing the conditions and execution periods for Acts and Decisions of the Council of Heads of State and the Management Committee, and subsequent amendments; Having regard to the Customs Code; Having regard to Act No. 12/65-UDEAC-34 of December 14, 1965 containing regulations on the Taxe Unique system in the Central African Customs and Economic Union, and subsequent amendments; Considering the obstacles posed and the challenges to be met by UDEAC in the process of bringing about its desired development and integration; Convinced of the need to consolidate subregional economic cooperation through a now strategy for economic and social integration; Considering the urgent need to adopt reform measures in the area of fiscal and customs policy that are designed to increase tax revenues, enhance the effec'3.eness and competitiveness of local manufacturing industry while allocating the tax burden in a more uniform manner among sectors and - 214 - enter-prises, ease and simplify the instruments of tariff policy and indirect taxation, and facilitate their administration; Considering that the customs procedures for goods in transit currently being used by the States of the Union are seen as not entirely satisfactory by the Customs Administrations, especially as regards the risks of fraud, and are responsible for complications that lengthen transit times and increase costs; Having consulted the Management Committee, At the meeting of the Council of Heads of State on December 1991, AGREED TO MODIFY AS SET OUT BELOW THE TREATY ESTABLISHING A CENTRAL AFRICAN CUSTOMS AND ECONOMIC UNION. PART ONE: INSTITUTIONS TITLE II THE MANAGEMENT COMMITTEE Chapter II -- Powers Article 15 (new). The Management Committee shall act under the authority conferred on it by the Council. In order to achieve the objectives sought by the Treaty and pursuant to the guidelines defined by the Council, the Management Committee shall adopt, on a proposal from the General Secretariat, common policies and actions dealing specifically with the following matters: - tariff and statistical nomenclature; - common external tariff; - preferential tariff; - Customs Code; - customs legislation and regulations; - consultation on export duties and posted values for exports on products of common interest; - 215 - harmonization of internal taxes; Investment Code; harmonization and coordination of development plan. and industrialization projectes coordination and rationalization of existing industries; harmonization, development and implementation of a common transportation policy; harmonization and development in the area of agriculture and the rural economy; study and development of energy production and distribution; harmonization of legislation, policy coordination and rational utilization of the natural resources of the region; harmonization of legislation, coordination and development of postal and telecommunications services; harmonization, coordination and development of tourism; harmonization and development of statistical information; harmonization of social policies; cooperation in the area of research and technology; promotion and development of regional and community corporations; -development of joint financing; coordination of external economic relations on problems of common interest; promotion and expansion of exports; optimal utilization of external contributions and assistance; policy regarding insurance; business law; social security. This list of areas in which the Management Committee may act is not exhaustive and may be supplemented by a decision of the Council. The conditions under which the Committee shall exercise its powers are specified in the following chapter. - 216 - PART TWO: CUSTOMS UNION AND FISCAL HARMONIZATION TITLE I CUSTOMS UNION Chapter I -- Customs Legislation and Regulations Article 28 (new). The Customs Union established between the Member States shall comprise, subject to the reservations and conditions fixed in this Title: the adoption of a common customs tariff in their relations with third countries; a preferential tariff applicable in the State in which consumption takes place (other than the producer State) to industrial production originating within the Union; the free circulation, exempt from all import duties and taxes, of local specialty products originating in the Member States; a search by the Member States for ways of gradually eliminating restrictive trade practices among them. Article 30 (new). The common external tariff shall consist of: A. The import duty resulting from the merging of the customs duty and the revenue duty, which shall be applied to products and goods imported into the territory of the Customs Union and classified as follows: category 1: essential goods; category 2: raw materials and capital goods; category 3: consumer goods. The list of products and goods and the rate of the import duty applicable to the products and goods in each of the three categories set out above shall be determined by decisions of the Management Committee. B. A temporary surcharge applicable, as ajppropriate, for three years to a limited number of products and goods in category 3 above currently subject to quantitative restrictions; the list of said products shall be determined by decisions of the Management Committee. - 217 - Article 31 (new). Unprocessed specialty products and merchandise originating in Member States shall, when transferred from one Member State to another for final consumption therein, be exempt from all import and export dutLes and charges. A statistical check shall be made as to the quantity and value of commercial transactions in imported products and merchandise acquired for consumption in one Member State and transferred to another Member State for final consumption, along with the products and merchandise referred to in the preceding paragraph. Article 33 (new). Customs declaration forms shall be standardized in dll the Member States. Article 34 (new). Transit regimes in respect of shipment by sea, air, land and river shall be generalized in all the States of the Union. To facilitate the transit of imported goods to their final destination, the Member States undertake to apply the inter-State transit procedure known as the Central African Countries International Transit System (Transit International des Pays de l'Afrique Central, TIPAC). TITLE II FISCAL HARMONIZATION Article 39 (new). As part of its work, the Management Committee shall aim at encouraging the installation and operation of enterprises on similar fiscal conditions in all the Member States. In particular it shall seek to harmonize the rules governing the basis for computation and, as far as possible, the rates of the principal taxes, such as: - the turnover tax; - excise duties; - tax on corporationos - tax on the income of individuals; - stamp duties and guardianship (curatelle) charges. - 218 - Article 40 (new). The turnover taxes referred to in Article 39 above are specific to each Member State of the UDEAC and consist of single rates freely fixed by each State within a range that is to be gradually reduced in order to promote fiscal harmonization. These ranges are determined by an Act of the Management Committee. Article 41 (new). The Member States shall inform the Management Committee of changes in the rates of turnover taxes and the other taxes referred to in Article 39 above. PART THREE TITLE III INDUSTRIAL COOPERATION Article 48 (new). Within the context pursuant to various aspects of the regional objectives and programs, industrial cooperation and integration concern all industrial enterprises, including those having the status of mixed economy corporations or State corporations. Article 49 (new). The industries referred to in Article 48 above may be established in each of the Member States, particularly in the context of the harmonization of development plans and priority objectives. Their products may be sold on the markets of the other Member States according to rules and procedures established by decision of the Management Committee. In addition to information concerning industrial projects, the State concerned shall regularly forward to the General Secretariat a comprehensive dossier on each industry thus created, for the information of the Management Committee. In addition, inter-State cooperation may be considered for these industries. Article 50 (new). As regards the industrial projects referred to in Article 49, the State in which the planned project is to be located shall send to the General Secretariat a dossier prepared according to the conditions set by the Manage.ment Committee. - 219 - PART FOUR PREFERENTIAL TARIFF Artilae 63 (new). The products of the industries referred to in Article 48, recognized am originating withln a Member State, shall for purposes of their marketing in the other Member States benefit from the preferential tariff. The preferential tariff may be either ad valorem or specific. Fixed by a decision from the Management Committee, this tariff shall be uniform in all Member States for the same products. Article 64 (new). Application of the preferential tariff shall not preclude the levying of turnover taxes and excise duties on similar products, whether imported or produced locally. article 65 (new). The regulations and functioning of the preferential tariff shall be fixed by decision of the Management Committee. Any disputes arising out of application of the preferential tariff shall be settled according to the stlpulations of the Customs Code. No change in the rest. in witness whereof, the undersigned Heads of State or their plenipotentiaries have appended their signatures to these amendments to the Treaty establishing a Central African Customs and Economic Union. - 220 - Libreville, December , 1991. The President of the Republic of For the President of the Central Cameroon African Republic, The Prime Minister and Head of Government /s/ Paul Biya /a/ Edouard Frank For the President of the Republic of The President of the Gabonese the Congo Republic The Prime Minister and Head of Government For the Prime Minister and Head of Government The Minister of the Economy, Finance and Planning /X/ Edouard Ebouka-Babackas /a/ Omar Bongo The President of the Republic of For the President of the Republic of Equatorial Guinea Chad The Prime Minister, Head of Government /a/ Obiang Nguema Mbasogo /s/ Jean Alingue Bawoyeu