Taxes put companies at risk in Africa

Doing business in Africa comes with a number of challenges, many of which are predictable and manageable. Hauliers know what the state of the roads is, and their drivers know how to navigate around the potholes. Natural disasters create challenges of their own, but the logistics industry has proven that it can deliver goods and move freight under the most difficult physical conditions. What is, however, out of the control of the country managers and business owners is the actions of the revenue authorities. Border delays by inefficient and/or corrupt customs systems have been well documented. What is not as well understood is the corporate tax regime, which varies from country to country and is subject to constant revision. From a government perspective there is an urgent and ongoing need to collect revenue. About half of the countries of sub-Saharan Africa can be categorised as fragile states. With some exceptions (mainly oil producers), tax revenues in fragile states are typically less than 20% of GDP, ref lecting the low levels of formalisation of the economy and weaknesses in tax administration. Key objectives of tax reform in fragile states are to boost budget revenues to fund a rebuilding of public services, to support sustainable economic growth and to contribute to better governance, according to a study by African Economic Outlook. Politically and practically the first place to look for more revenue is the business sector. “What our clients experience while doing business in Africa led to some very interesting results in our Tax in Africa survey,” says PricewaterhouseCoopers (PwC) in its 2014 Africa Tax Survey. “The most significant findings confirm that doing business on the African continent is still a fairly large challenge. “In particular, areas such as obtaining certainty around the application of legislation and discussing/ negotiating with the tax authorities remain challenging. “Another interesting conclusion is that tax is still considered to be one of the primary constraints to doing business in Africa. “This is a unique challenge since business considerations should ideally be leading decision making, with tax matters following as a mere formality,” says PwC. Taxes are also seen as a risk by the UK Foreign and Commonwealth Office. In its country briefing on Namibia, for example, it warns that “withholding tax in Namibia places an increasing tax burden on multinationals that provide business consulting services to Namibian entities”. Mining companies, with UK dominance, are taxed at a rate of 37.5% for hard-rock mining and 55% for diamond mining. Petroleum exploration and production companies are taxed at a basic rate of 35% plus additional profit calculated tax. Namibia was not, however, seen as being particularly challenging from a tax perspective by the respondents to the PwC survey. They ranked Nigeria first, followed by Tanzania, Angola and South Africa overall in a combined ranking of “most difficult, second most-difficult and third most-difficult.” Many of the problems are due to tax authorities simply not understanding the business environment. In Nigeria, for example, respondents cited a lack of knowledge by officials about the realities of how businesses actually operate. For instance, authorities usually refund tax receivables only after having audited the company’s figures, while the cash inf low is very important for the company. Zambian authorities are at loggerheads with the mining companies over the withholding of VAT refunds estimated at around US$600 million. The government is insisting that companies produce a certificate of shipment and tax invoices from the country of origin/destination. Forwarders and clearing houses interviewed by FTW say this is virtually impossible because of the nature of the commodities industry, where copper is purchased at source by traders and then sold on to multiple customers and destinations.