Navigating the complexities of reverse VAT in Zambia
28 August 2012
Posted by: SAIT Technical
Multinational companies who fail to appoint a local tax agent to carry out Value-Added Tax (VAT) activities on their behalf for any transactions and business activities in Zambia will have to fork out hefty fees, warns Professional Services Firm PwC. Foreign investors, including South African companies, who register entities in Zambia need to consider the VAT implications of entities when importing goods and services, says Elandre Brandt an International Tax Director and Leader of the Africa Desk at PwC in Johannesburg. "Not only is the appointment of a tax agent an expensive exercise, but the legal implications must also be considered,” says Brandt.
Most African countries have the reverse VAT mechanism in place. The reverse VAT mechanism requires the importer rather than the supplier of services to account for and pay the VAT over to the local tax authorities. Usually reverse VAT is a timing issue as the VAT paid on the importation of services can be claimed as a credit, provided it is incurred on services acquired solely for the purpose for the purpose of making taxable supplies, says Brandt.
"However, in Zambia the tax treatment is different. Where the non-resident supplier does not make use of a local tax agent, the importer of the service will have to bear the reverse VAT charge out of pocket since it will not qualify as an input VAT deduction.” For example, a Zambian entity which imports $100 worth of services will be required to account for and pay VAT at 16% of the value of the imported service. The result is that for every $100 worth of services imported, $116 is paid in total with the VAT charge of $16 being an additional expense for the importer.
In order to overcome the problem around the deductibility of reverse VAT, the foreign supplier of services must appoint independent tax agents which are resident in Zambia. The tax agent should be a VAT registered supplier approved by the Commissioner-General of the Zambian Revenue Authority.
In this instance the ‘local tax agent' will take on the liabilities and obligations of the foreign supplier for any transactions and business undertaken in Zambia. Under this arrangement, the tax agent will raise invoices for local supplies on behalf of the foreign supplier and account for output VAT on the value of services provided. As the tax agent would be locally registered and operate under a local VAT registration, the recipient of services should be entitled to reclaim the corresponding input VAT, assuming they are VAT registered and make taxable supplies.
"Appointing tax agents can be expensive and the basis of fees charged can vary from a percentage of the value of the invoice to a minimum fixed fee,” says Mary Drought, PwC Tax Manager in Zambia. The VAT charged by the tax agent on agency fees is not deductible as input VAT. Furthermore, the Zambian recipient of the services is liable, in a similar manner as the agent, for any liability arising from the functions performed by the tax agent. These functions include the maintenance of records or accounts, the filing of the relevant VAT return and the payment of taxes and interest. Considering the risk of potential liability, it is paramount that a reputable tax agent is appointed and monitored for compliance with the requirements of the Zambian Revenue Authority, says Drought.
"Zambia provides an increasingly investor-friendly environment with a number of reforms being implemented in the process of business establishment. Furthermore, multi-facility economic zones, tax and regulatory incentives make the country a good destination for foreign direct investment. As a member of the Southern African Development Community free trade area and the Common Market for Eastern and Southern Africa (COMESA), Zambia also provides easy access to both Eastern and Southern African markets.” says Drought.
These, together with investment opportunities in the mining, tourism and horticultural industry, amongst others, have led to much foreign direct investment in Zambia in recent years.
"Beyond these favourable considerations however, foreign investors who are considering registering companies in Zambia need to also consider the VAT implications on these entities, particularly if services are to be imported into the country.
"A decision will have to be made between incurring the monthly agency fees and monitoring costs on the one hand, and having their Zambian subsidiaries or branches bear the 16% VAT as an additional expense on the other hand,” says Brandt.
Brandt will present a workshop at PwC's 15th African Tax and Business Symposium in Mozambique during September 2012, regarding global emerging international tax issues.