Over taxation and charges in Africa: Case Study, aviation industry in Africa

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Nowel Ngala, Group Commercial and Ground Operations Director — ASKY Airlines

Economists define taxation as a means by which governments finance their expenditure by imposing charges on citizens and corporate entities.

Governments use taxation to encourage or discourage certain economic decisions. For example, reduction in taxable personal (or household) income by the amount paid as interest on home mortgage loans results in greater construction activity, and generates more jobs.

Some African tax rates are the highest in the world. In Tanzania for example with one of the highest tax rates, a 30% rate is applied at $475 of income earned plus a 20% VAT added on everything bought in the country.

Such high tax rate makes it impossible to build capital in Africa. As a result, nothing gets built, nothing, no factories, no roads, poor infrastructure and very low development of the primary industry.

At the same time poor African countries have the lowest wage income in the world, and yet a company like Boeing can’t implant a factory in Africa because of the repressive tax rates, despite the high presence of raw materials for manufacturing in Africa.

Taxes have killed any possibility of economic development and have also killed any hope of African countries helping themselves, which leaves Africa completely at the mercy of charity and loans.

Africa continuous to suffer from these high taxes because of loan donors, foreign institutions and financial organizations that continue to lend money to African governments, because these governments need to show them that they can raise enough money to pay back their loans.

But unfortunately taxes can’t raise any money if it kills the economy. So it therefore turns out that the tragic consequence of the ‘good intention’ of lenders to Africa, their ‘kindness’, simply encourages Africans to lock themselves into a gruesome economic depression.

If the lenders don’t encourage Africans to cut their tax rates, Africans will never grow their economies. People will continue to live a lifetime of unemployment, diseases will be rampant, poverty will be permanent and children will be hungry and the loans will never be enough.

However, in Africa nowadays, the taxation of firms, entrepreneurs and businesses is often a vote winner for politicians to raise capital. It seems fairer and less painful to impose heavy taxes on large, impersonal corporations than on individual wage earners struggling to support families. But this apparently persuasive idea depends on an assumption that might not always hold.

Formally, a corporation pays its taxes, but who really pays for them? Let us consider a tax on an airline. This hits the airline’s profits and it may respond by raising airfares, so consumers end up footing the bill. The tax reduces potential returns from investment, so the airline doesn’t expand its fleet as much as it had planned. It offers fewer flights, leading to still higher airfares and the lay-off of some of its workers. This is just one demonstration of the way that taxes ripple around the economy and have all sorts of unlimited consequences.

Source: Economics in minutes – Niall Kishtainy

Africa has the highest tax cost in aviation globally, and West and Central Africa is the most expensive region to operate an airline.

Based on a brief analysis looking at ticket fares during reservations, see below data on taxes per region in Africa that passengers have to pay, which is collected by airlines and transferred to governments when tickets are bought in specific regions and countries in Africa.

East Africa

  • KRT has a 10% stamp tax based on the net fare, meaning the higher the net fare, the higher the amount of the stamp tax to be paid
  • ADD has a stamp tax of $0.2 which is below 0 amount
  • ADD has the lowest amount of taxes followed by NBO which has only passenger service charge of $50 for international service
  • DAR has the highest tax charges

North Africa

  • ALG has a VAT tax of 19% charge on net fare + airport tax
  • CAI has a development tax of 25% charge on net fare + fuel surcharge
  • There is also some taxes regarding class of service (Economy or Business) in CAI (solidarity tax and CMN (Tourism tax)

Central Africa

  • LBV seems to have the lowest amount of tax but when the trip is within CEMAC countries, there is 8% of the value of the ticket collected as tax
  • From BZV the sales tax varies between 1.9 to 6.5% to CEMAC countries
  • From DLA there is VAT of 19.25% to CEMAC countries and the recent finance law 2018 which levies a tax of 25,000Fcfa for all passengers leaving Cameroon

West Africa

  • COO has the lowest amount of tax in West Africa followed by LFW
  • OXB and DKR are the highest. DKR mainly due to infrastructure development charge of about $65
  • ABV has VAT and sales tax of 5% each on the base fare of each ticket
  • DKR is the most expensive city within West and Central Africa, the following taxes are paid when flying to/from DKR:
  1. DF Security charge – 6,000 Fcfa/xof
  2. ZE Passenger service charge – 10,000 Fcfa/xof
  3. KQ Civil aviation charge – 2,000 Fcfa/xof
  4. VQ Immigration user fee – $12 USD
  5. HP Infrastructure development charge – 54 EURO

South Africa

  • JNB is the city with the lowest amount of tax but has a VAT of 14% applied on the base fare making the total tax to become expensive than the other cities based on the net fare of the ticket
  • LAD has a stamp tax of 5% of the base of the ticket
  • LLW has the lowest amount of tax

The region with the highest aviation taxes to be paid by passengers is Central Africa followed by West Africa; the lowest amount of taxes supported by passengers is in North Africa. Countries in the Eastern and Southern regions of Africa have taxes in % of the fare basis, which makes it cheaper for the passengers. Reasons why LCC airlines attempt to thrive in these regions.

The ECOWAS Commission recently commissioned IATA to carry out a feasibility study for a common policy on aviation charges, taxes and fees for ECOWAS member states.

The primary objective of the study is to develop a common policy on aviation charges, taxes and fees benefiting the air transport sector, attractive for airlines operation and favorable to passengers of the community to be adopted by ECOWAS member states.

Following a draft final report submitted on the 5th of February 2018 by IATA Consulting, the findings are amazing as summarized briefly below.

The work was carried out in various stages indicating the following results: Results of the onsite visits to the 15 ECOWAS member states

Results of the analysis of charges and taxes, Results of the benchmarking of charges and taxes, Impacts of current charges and taxes on ticket prices, Estimated potential benefits and reducing charges and taxes, Final recommendations.

Following the survey carried out during onsite visits of the 15 member states, only 09 states considered that their national regulation on charges is compliant with ICAO’s (International Civil Aviation Organization) policies. 12 states indicated that they have implemented ICAO policies on charges and 11 states claimed to have incorporated into national regulations the ICAO’s principles of non-discrimination, cost-relatedness, transparency and consultation with users. Only one state Burkina Faso has effectively incorporated such principles in a comprehensive manner into its national regulation.

As a result of the analysis of charges and taxes, on average, each state collects close to 12 different charges and taxes to recover the costs of providing airports and air navigations service aeronautical facilities and services and to generate revenue for governments from aviation activities. Amazingly, the results of the analysis reveal the following:

·    Airport infrastructure and ATC combined charges represent on average 21.8% of the total charges and government taxes levied for the movement of a Boeing 737-800 operating a national flight, 8.2% for a regional flight and 7.1% for an international flight.

·    For the same B737-800 with 114 passengers on board the security and passenger charges taken together account for 66.6% of the total costs of national flights, 74.2% for a regional flight and 72.6% for an international flight

·    The government taxes levied on 114 passengers represents 11.6%, 17.6% and 20.6% of the total costs for the different categories of flight

·    The average total charges and taxes for regional passengers are $87.59 or 380% more expensive than for a national passenger who pays on average $18.25 and international passengers are being charged on average $103.58 or 467.5% more than a national passenger and 18.3% more than a regional passenger

·    The average total charges and taxes levied on regional passengers account for 84.5% of the average charges collected from international passengers

·    From 2010 till date, the average total charges and government taxes for national flights have increased by 47% and during this same period, the increase for regional flights was 81% and 74% for international flights

·   Today to operate a B737-800 with 114 passengers in the region costs $2,662 on average in charges and government taxes for a national flight, $10,877 for a regional flight, which is $8,215 or 309% more expensive and for an international flight the cost is $12,700 which is $10,038 or 377% more expensive than national flight but only $1,823 or 17% more expensive than a regional flight.

Majority of states subsidize their national aviation services by charging much less to airlines and passengers on national flights than on regional and international flights which is contrary to the ICAO principle of non-discrimination.

This also means that airlines and passengers on regional and international flights pay for facilities and services that they don’t use and for which costs cannot be allocated to them. This situation violates a key ICAO principle under which users should pay only for facilities and services they effectively use.

It is therefore our cry that African governments should seriously reconsider their position on aviation taxation. From all indication this sector is seriously being over taxed making travel by air very expensive and still a myth in most parts of Africa, when it is the fastest and safest means of transport in other parts of the globe.

We all (aviation practitioners, travellers, partners and stakeholders of the industry) have to join hands to call on our governments for revision and harmonization of the various tax policies in the aviation.

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