Splitting Africa projects into offshore, onshore parts may reduce taxes
19 September 2012
Posted by: SAIT Technical
By Evan Pickworth (Business Day)
HERMANUS — Investors in African infrastructure need to accept they will attract the enthusiastic interest of the revenue authorities in the countries concerned.
However, there are ways to keep the tax costs of these projects to a minimum, said Justin Liebenberg, who heads up Ernst & Young's international tax department.
Speaking at the firm's annual Africa Tax Conference on Tuesday, Mr Liebenberg said because tax rates in African countries tended to be high, it was sensible to consider splitting projects into offshore and onshore elements, keeping only the necessary on-the-ground activities in the high-tax African country.
Other project-related functions, such as strategic planning and management, could be performed in a lower-tax jurisdiction.
However, Mark Preiss, associate director of international tax at Ernst & Young, warned that all of the profit related to the project could be brought into the African country's tax net, even profit from activities performed offshore.
The tax implications of using subcontractors are also important factors to bear in mind.
"To the extent subcontractors carry out the activities in the African country, the risk arises that the main contractor will be seen as having a taxable presence in the country. This would trigger potential exposure to both income tax and value-added tax,” said Mr Preiss.
Albena Todorova, associate director in the tax department of Ernst & Young's Mozambique office, advised investors not to rely too heavily on tax incentives and benefits.
"While some still apply in Mozambique to certain basic infrastructure projects, there are none for other types, such as natural resources projects.
"Current policy is against the (granting) of new incentives, and there is pressure from civil society for existing benefits to be disclosed and renegotiated.”
Ms Todorova said construction projects tended to be highly regulated in Mozambique.
"Often they must be executed in terms of a public- private partnership and there is a web of regulations that govern work permits and environmental licences,” she said.