Tax challenges and opportunities in Africa
“Increasingly, I see Dutch companies trying to exploit the opportunities - opportunities in abundance - that the African continent offers as an expanding market. On the other hand, doing business in Africa is also complex and challenging, not least because of the tax aspect. Thorough preparation is essential. I’ve set out a number of points below to demonstrate the tax challenges and opportunities for an entrepreneur wanting to do business in Africa.
Be aware of high taxes levied on income at source
Practically all African fiscal systems apply high taxation to outgoing flows of money. Western economies generally limit taxation at source to dividends, royalties or interest, but in most African countries, any arbitrary flow of money crossing a border is subject to taxation at source. The rates are also often very high; 20% or higher is not exceptional. Tax at source is applied to the gross flow of money (therefore before the deduction of any costs), so that tax payments are extremely high. On top of that, most of the taxation on income at source is not creditable by the receiver of the flow of funds, or only to a very limited degree.
Set out the pros and cons of forming a local entity
Starting activities by means of a branch instead of a separate legal entity can reduce the impact of high taxation at source. Flows of money between a branch and the primary establishment are normally disregarded, fiscally speaking, so no taxation at source is applicable. Nevertheless, you have to be careful: setting up a branch can also have disadvantages. Certain African countries apply a higher rate of corporation tax to branches than to legal entities. Set out the pros and cons in detail beforehand in order to make a well-considered decision.
Also make use of tax advantages for foreign investors
Many African countries are trying to attract overseas investors with attractive tax legislation and regulations. For example, Ghana has free trade zones, Nigeria offers a ‘pioneer status’ for new, innovative investment and Ethiopia and Tanzania encourage foreign investment by exporting companies with ‘tax holidays’. This legislation and regulation often means that there is less of a burden of compliance, that rates of corporation tax are lower and that taxation at source is low or non-existent. My advice is to start a research on beforehand, whether the country you want to do business in has a special set of rules for foreign investors. In addition, you have to find out what you have to do to apply for these rules.
Make sure that you don’t become subject to local taxation
The liability of foreign companies to pay local taxes on profits only arises if there is a ‘permanent establishment’. The OECD has developed several standards and conditions that must be met, before a business can be regarded as a ‘permanent establishment’. These standards are adopted by most western countries and only diverge from them to a very limited degree. This is often not the case in Africa. Entering into just one contract or carrying out just one project for a couple of months, could lead to a classification as a permanent establishment, and as a consequence of that, this could lead to liability of tax. Although the Netherlands has various tax treaties with African countries that often apply the term ‘permanent establishment’ in accordance with the definition used by the OECD, it is often not a reason for various African countries not to levy taxes. You have to find out in what way the country you want to do business in, defines and applies the term ‘permanent establishment’.
To conclude: Africa is big. The continent includes an enormous diversity of countries, each with their own cultures, customs and tax rules. It is impossible to provide a complete overview of the challenges in respect of taxation with which the entrepreneur can be confronted. What I want to emphasize is that doing business in Africa is often different than doing it in Western Europe. Be prepared of the differences and do not let the conquer of this enormous expanding market become a tax disaster.”
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