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What companies hoping to influence tax policy in Africa need to know

Businesses have become quite effective at resolving customs and excise disputes across Africa – now they need to do the same from a tax perspective.

Understanding the complexities and challenges of doing business in Africa requires time and money.

This is especially true when it comes to dealing with tax legislation, tax disputes and the tax authorities on the continent, says Stephan Spamer, head of tax at multinational law firm Baker McKenzie.

He says companies have achieved great success in understanding issues around customs and excise, but do not give similar recognition to the complexities and challenges around other taxes such as corporate income tax, or value-added tax (Vat).

The firm focused on dealing with fiscal authorities during its Africa tax conference in Johannesburg this week. According to Spamer companies increasingly face tax disputes, Vat audits or assessments, and matters pertaining to tax legislation and tax policy.

Language is a top challenge

He considers language as their top challenge when dealing with African revenue authorities. The firm is currently involved in a dispute in Ethiopia where highly technical legal and tax documents have to be translated and presented in Arabic.

The interpretation of tax legislation remains another major challenge. Many of the countries in Africa are either not affiliated to or not members of the Organisation for Economic Cooperation and Development (OECD), yet their legislation is based on OECD principles.

However, in many instances, as in the case of Ethiopia, it is not interpreted in the same way.

Spamer has cold-shouldered the notion that revenue authorities in Africa do not have a proper understanding of tax. That is the least of their problems when dealing with tax authorities in Africa.

“There seems to be a perception [among] large corporate companies that they can enter a country, meet with the minister of finance, have a discussion with them, and suddenly think they have changed the policy. It does not work that way.”

Involvement

Baker McKenzie is of the view that corporates have to understand the legislative process, know who the decision-makers are, and get involved with the African Tax Administration Forum.

“It is a long commitment, and if they are prepared to commit to that we will see a much bigger influence [on tax policy] across the continent,” says Spamer.

An example of where this has worked well is in the sphere of customs and excise. The area where companies have been most unsuccessful is in the mining sector.

The reason for this is simply because the OECD and governments “hate” mining. They feel these companies are stealing their resources. There is a very negative approach to mining companies, despite these companies doing their utmost to work with the governments and revenue authorities.

“Companies are generally well geared to deal with customs and excise disputes or interactions with fiscal authorities across Africa because they spend a lot of time [and money] to understand it.”

Spamer says the latest trend in tax policy is around ‘big tech’. All the revenue authorities are gearing up against digital companies such as Uber, Facebook and Google. The feeling is that these companies are making money in Africa, but not paying tax here.

South Africa’s own challenges

Locally the South African Revenue Service (Sars) missed its revenue target in the 2018-19 financial year for the fifth consecutive year, with collections almost R15 billion short of the revised estimate of R1.3 trillion.

Elle-Sarah Rossato, head of dispute resolution and tax controversy at PwC, says mismanagement at Sars and revelations of state capture have hurt public confidence in the tax authority and government in general, leading to a general decline in levels of tax compliance.

She says one of the concerns relates to the design of the Tax Administration Act as well as Sars’s interpretation of the act.

Rossato, who chairs the South African Institute of Tax Professionals’ tax administration committee, says the design and interpretation has culminated in a “one-sided piece of legislation which is often narrowly interpreted by Sars”.

This causes prejudice to the taxpayer.

Much hope pinned on the ‘new’ Sars

She says one of the immediate challenges for Sars is to attract and retain skilled employees who have the expertise and experience to manage specialised tax units.

Spamer says that before the exiting of key personnel from Sars, several companies were far advanced in their disputes. Suddenly the Sars auditors “just left” and the matters ended up in the hands of other people. Everything ground to a halt.

Baker McKenzie is been involved in three disputes that now span over four years.

Rossato says the appointment of Edward Kieswetter as the new commissioner is an opportunity for renewal and construction. “This will hopefully lead to Sars reclaiming its position as an efficient, effective and globally admired institution.”

She adds that the re-establishment of the Large Business Centre at Sars will hopefully lead to an emphasis on taxpayer service and result in increased taxpayer confidence.

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SA revenue collection needs a major DISRUPTIVE overhaul. Starting from first principles.

What we have at the moment is a steadily-growing and self-serving industry of Byzantine complexity. And a vested interest by the participants in maintaining this complexity in order to profit from it.

The root cause of this problem is to base taxation on “net profit”.

This immediately opens the door to shenanigans manipulating the final declared “net profit”.

All these shenanigans come to an end when taxation is based SOLELY on “gross turnover”.

Of course, the tax rate on gross turnover would be much reduced (to only a few percent) compared to that for net profit.

The revenue end result of course remains the same.

But the advantages of this greatly reduced tax simplicity is that you don’t need an army of tax accountants anymore, and the taxed base is difficult to fudge from the readily auditible truth.

The headcount at SARS would be reduced to a fraction of what it is now. Same story with the level of disputes and court costs. All the time, energy, costs, and highly qualified people currently playing expensive games, are now freed to work PRODUCTIVELY for the country, instead of playing private shell games for the particular advantage of the wealthy elite.

Shem!

There is much more interesting advantageous stuff to my little tax scheme than this, but the basic idea is that a simplified taxation system will GREATLY invigorate private industry.

The problem with tax reform is that it will get no support from a parasitic accounting industry that actively feeds off the current complexity.

Disruptive change always comes from OUTSIDE an industry.

Maybe Julius could do the trick, eh?

I’m also one that want to see less complexity if certain tax rules (especially if Govt is serious in supporting small businesses): I would either scrap the Provisional Tax system in it’s entirety (and replace it with a simple system based on incremental arrear interest, perhaps at a slightly higher % rate (to compensate for no prov-tax penalties). Perhaps adding a new provision under Section 89quat(?)

Problem with the (much simpler) turn-over tax system, is when a corporation makes a loss for a specific year, they’d still have to pay tax on gross income/turnover. Some companies (depending on industry) will have either a smaller turnover (but higher profit margin), or at other end of scale, corporations with large turn-over, but rely on smaller profit margins (e.g. like your discount wholesalers). The turnover tax will place the latter business at a commercial disadvantage.

But yes, overall I agree….there’s plenty of room to simplify SA’ tax system. (Look at how simple Mauritius’ tax is…and low rates at that.)

Thanks for your expert insight, Michael.

I agree with your comments about the problems that turnover tax could create in certain situations like you suggest, but venture these “problems” are exposed ONLY because of the INHERENT bad unprofitable business model underlying these businesses in the first place.

One pays municipal rates (essentially a local tax) regardless of whether the business made a profit or not. Same story with a turnover tax.

If the business can’t pay, or survive a bad year or two, then it’s become a risky idea, and does not deserve its place in the market, and gets culled. No different to what is happening now with risky businesses in the main street eg Edgar’s.

Your point about “high-volume, low-profit” businesses has merit and requires some thought.

So I had a look at Pic n Pay as an example for this type of business. The figures for 2018 were R81.6B turnover,and R15. 3B gross profit.

Seems to me there is quite enough margin there to pay a few percent turnover tax.

I’m not too interested in paying too much attention to the net profit, because in my opinion this is VERY MUCH a manipulated figure (standard joke by accountants – what do you want this to be?). Ask Iquabal Surve, heh heh!

I don’t think this is an insurmountable problem. VAT is a turnover tax, and these discount houses manage that well already.

But you are right, these problems need convincing answers!

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