Negotiating Tax In Africa
12 November 2012
Posted by: Author: Cor Kraamwinkel
Negotiating Tax In Africa
"Africa offers great potential in terms of investment,but multinationals need to strategise business deals carefully in order to reduce their tax burden,” says Cor Kraamwinkel, an associate director in PwC’s corporate international tax division. He points out that African jurisdictions are known for their inconsistent tax rates."There is no harmony in tax rates across the continent. The corporate tax rates are high. There are also high withholding tax rates.This places significant challenges on multinationals wanting to do business and cross border transactions.”
Furthermore, the double taxation treaty network in Africa is scattered, with no single jurisdiction having treaties with all of Africa. The value-added taxation(VAT) systems are also inconsistent in that in some jurisdictions taxpayers are unable to claim an input VAT."The tax authorities are renowned for being suspicious of foreign multinationals wanting to enter into cross-border activities in the African continent.”
Kraamwinkel says multinational companies should consider the most effective solution and whether it’s possible to negotiate with the African tax authorities about possible tax treatments, the interpretation of various laws and the resolution of various disputes.
The African Tax Administration Forum (ATAF)recently stated in media reports that it is aware of complaints by multinationals that have had dealings with African tax officials who lack an understanding of complex and technical legislation.As a result,ATAF has trained more than 400 tax officials on the continent in various aspects of tax, including technical training programmes.
Kraamwinkel adds multinational companies usually find themselves in a difficult position when making business decisions as the tax laws regarding complex cross border business transactions may not be clear. In certain jurisdictions, taxpayers have the opportunity to see the tax authority’s interpretation of the law by way of advance tax rulings."There are wide differences in Africa regarding advance rulings.Furthermore,companies should not assume that they can get a tax ruling in any country, as some countries in Africa do not have advance tax ruling systems in place.”
Where disputes do arise, certain countries do allow tax disputes to be resolved by way of an alternative dispute resolution (ADR) process,thereby avoiding the need to approach the courts. South Africa has offered this to taxpayers for several years. ADR can either be initiated by the taxpayer or the South African Revenue Service (SARS).
Kraamwinkel says that some authorities in Africa may be lenient towards taxpayers who acknowledge they have made a mistake and approach revenue to correct past errors.In such cases, they are prepared to waive penalties for late payments of taxes.However,many countries, such as Uganda, are often not willing to entertain the waiver of tax penalties.
A number of African jurisdictions offer tax incentives to attract and retain greater levels of foreign direct investment. However, there is a move towards codifying tax incentives and doing away with unregulated tax holidays or other incentives, particularly in the wake of the recent economic uncertainty. Kraamwinkel says that this is in line with international norms and efforts to regulate the tax laws.
"Multinationals need to be careful when entering into tax incentive negotiations with African jurisdictions. If they reach an agreement with government officials that is not supported by law, they may find that such arrangements are later challenged based on the fact that officials did not have the necessary authority.The organisation could be held liable for hefty fines and penalties for failing to comply with the applicable tax laws."Businesses must be aware of the relative laws when negotiating deals and the legal basis of tax incentives and tax holidays.”
Lobbying to influence the tax laws on the African continent does take place in varying degrees."It should not be viewed as inherently bad, but rather as a bridge between policy makers and the practical business world.It may be an invaluable tool to taxpayers and government to ensure the continued development of tax laws in Africa. Some countries allow for formal input from taxpayers on tax policy matters, while others encourage lobbying on an informal basis.”
Lobbying involves extensive research, planning,organising and, most importantly, relationships."It’s about whom you know and are connected to.” Kraamwinkel warns that some African tax authorities tend to remain cautious and suspicious of taxpayers, particularly foreign multinationals carrying out large business transactions."Multinational companies need to know who to speak to in government departments.Having a good track record is vital and can make a difference between the success and failure of a deal.”
Source: By Cor Kraamwinkel (TaxTalk)