Tax is Regarded As a Significant Threat for Doing Business in Africa, According to PwC Survey
02 October 2013
Posted by: Author: PwC
Tax is the second-most significant threat for companies doing business in the African countries, after political instability, according to a survey issued by PwC today. Certainty around the tax position remains one of the main concerns for companies doing business in Africa. The DRC, Nigeria and Angola were considered among the most difficult countries in which to do business. South Africa was also considered to be the most difficult place from a business and regulatory perspective.Paul de Chalain, Head of Tax for PwC Africa, says: "While we see interest in doing business in Africa growing, and with that foreign investment into the various countries, we see the need for guidance and best practice in terms of tax and regulation growing too.
"The most significant findings of PwC’s second ‘Africa Tax Survey’ confirm that doing business in the African countries is still a big challenge. In particular, areas such as obtaining certainty around the application of legislation and discussing or negotiating with the tax authorities remain challenging. Another interesting conclusion of the survey is that tax is still considered to be one of the primary constraints to do doing business in Africa.
"This is somewhat disappointing, since business considerations should ideally be leading decision making, with tax matters following as a mere formality.”De Chalain was speaking at PwC’s 16th Africa Tax and Business Symposium, held in Mauritius from 29 September to 2 October. The Symposium brings together business leaders and tax experts from more than 25 countries. The theme this year is ‘Africa Connected’, highlighting Africa as a key environment in which businesses and investors operate.
PwC’s ‘Tax in Africa’ survey was initiated by the firm’s Africa Tax Desk. A total of 39 respondents completed the survey, which was made up of questions about tax, business and regulatory challenges facing companies operating in Africa. Most respondents’ companies have been operating on the African continent for more than five years; while more than two-fifths (44%) have been active for more than 10 years. The aim of the survey is to provide organisations and other stakeholders with a comprehensive overview of the main challenges faced by multinational companies doing business in Africa.
"South Africa’s position is somewhat surprising, as in our experience countries like Angola, Mozambique and DRC pose far greater practical difficulties for businesses,” says Elandre Brandt, PwC International Tax Partner and Head of the Africa Tax Desk, based in Johannesburg. "However, the feedback from respondents’ suggests South African exchange control regulations and other restrictions present significant obstacles. In addition, such rules are a hindrance to South Africa achieving its ambition of becoming a hub for regional investment.”
One of the ways that the South African Government has found to ease the burden of foreign exchange controls has been by way of the introduction of South African holding companies for African and offshore operations, beginning 2013. Entities listed on the JSE may now establish one subsidiary in South Africa to hold African and off shore operations, which will not be subject to South African foreign exchange restrictions. ‘So far, we have not yet seen many of these subsidiary companies been established and it will be some time before the success of this initiative will be able to be assessed,” adds Brandt.
Nearly two-thirds of respondents (64%) indicated that they would be less likely to consider South Africa as a location for the holding company for their African activities when withholding taxes on interest, dividends and royalties are in effect. This may change if the South African headquarter company starts gaining traction.The full implementation of withholding taxes has been delayed further and currently expectations are that this will be either 1 January 2015 or even 1 January 2016. However, withholding taxes on dividend and royalties are already in effect.
Together, Mozambique, Nigeria and the DRC were identified by almost half of organisations (48%) as being the countries that pose the most difficult tax challenges. Mozambique heads the list, with nearly one in five respondents identifying it as presenting the most difficulties. The most significant issues companies face relate to problems reclaiming Value Added Tax (VAT) and the language barrier between Portuguese and English.The majority of companies say they only have a low or medium degree of certainty about the practical application of tax and regulatory legislation to their business operations across Africa. Just 3% said they enjoyed a high degree of certainty, while the remaining 11% reported having an extremely low level of certainty. "Often legislation is not clear and the lack of interpretation and case law makes it difficult to consider the application of certain legislation in a specific situation.”
Withholding taxes are a high-level of concern for the majority of organisations (63%). In comparison to global standards, the rates of withholding taxes are high in Africa. Over 80% of respondents also identified transfer pricing as a medium or high-level risk. Brandt says: "Transfer pricing has become an areas of greater risk, with several countries having put transfer pricing regulations in place or in the process of doing so. These include Kenya, Egypt, Nigeria, South Africa and Uganda.”Compliance with the tax laws and practice is by far the biggest challenge the tax functions of companies doing business in Africa, with not less than 59% of organisations recognising it as their most difficult challenge and 95% including it among their top-three challenges.
Maintaining relationships with the tax authorities is considered the most important challenge for tax management. This is followed by finding tax staff with the required experience. "The struggle to find qualified people, preferably from the host country, and to then retain them, can be extremely difficult.”In its Action Plan on Base Erosion and Profit Shifting, issued in July 2013, the Organisation for Economic Cooperation and Development (OECD) put forward recommendations for tackling base erosion and profit shifting (BEPS), as well as reforming the international tax system. More than half of organisations (55%) said that the current international focus on BEPS had no influence on their investment decisions in Africa.
Almost three-quarters of respondents confirmed that their company had recently been the focus of a tax audit. "While tax audits can focus on any area, we find that transfer pricing, VAT and withholding tax come under the most frequent scrutiny. The increasing number and frequency of tax audits may be a nuisance for companies, but for some countries, they are also an essential part of growing their level of tax sophistication.”
Brandt concludes: "Africa is regarded as the continent of opportunity, but just as there are many opportunities, so are there many challenges to doing business. As GDP growth rates are growing significantly, the level of legislation, knowledge and capacity to enforce legislation is being outpaced.
"Tax advisors will need to develop an improved understanding of their businesses’, as well as risk profiles while also being commercially minded. Sound technical abilities, the capacity to provide practical, cost –effective advice and deliver it timeously, remain the top requirements from advisors.”
This article was first published on pwc.co.za