Pit­falls when in­vest­ing in a for­eign ju­ris­dic­tion

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ELAN­DRE BRANDT

THERE are in­stances in which in­di­rect taxes may be re­cov­ered by way of what is com­monly re­ferred to as re­verse charge VAT. This ap­plies where the trans­ac­tion in­volves a sup­ply of goods or ser­vices from out­side the coun­try of the re­cip­i­ent.

The tax is re­cov­ered by re­quir­ing the re­cip­i­ent to with­hold the tax from the re­mit­tance to the sup­plier and pay it to the rev­enue au­thor­i­ties.

It has emerged that the re­verse charge VAT may have dra­matic ef­fects on the con­duct of op­er­a­tions in Congo, where the op­er­a­tions are fi­nanced from out­side the coun­try by way of share­holder loans. The sup­ply of loan fi­nance by re­lated par­ties or com­pa­nies is treated as a tax­able trans­ac­tion in that coun­try. In­ter­est payable by the lo­cal sub­sidiary is there­fore sub­ject to VAT, and the com­pa­nies that pay the in­ter­est are re­quired to pay VAT at 18% plus a sur­charge of 0.9% by way of de­duc­tion from any re­mit­tance to the

It has emerged that the re­verse charge VAT may have dra­matic ef­fects on the con­duct of op­er­a­tions in Congo

non­res­i­dent lender. There is also a with­hold­ing tax in re­spect of in­come tax on the in­ter­est in­come at the rate of 20% and a 1% trans­fer tax on re­mit­tances that are paid out of Congo. In SA the lender will in­cur a li­a­bil­ity to tax on the amount of the in­ter­est net of VAT and the re­mit­tance tax. In ad­di­tion a for­eign tax re­bate will be avail­able in re­spect of the with­hold­ing tax on in­come im­posed by Congo. How­ever, the South African tax on the net in­come may be in­suf­fi­cient to ab­sorb the 20% with­hold­ing on gross in­come.

There are means of mit­i­gat­ing tax ex­po­sure in Congo. For in­stance, the rate of with­hold­ing tax may be re­duced or the in­ter­est may en­joy par­tial or com­plete ex­emp­tion if fi­nanc­ing is in­tro­duced from a ju­ris­dic­tion that has ne­go­ti­ated a tax treaty with Congo.

Ex­emp­tion may ap­ply if the fi­nanc­ing is from a fi­nan­cial in­sti­tu­tion or if it has been pos­si­ble to ne­go­ti­ate a spe­cific ex­emp­tion with the rel­e­vant Con­golese agency. Any­one look­ing to in­vest in op­er­a­tions in a for­eign ju­ris­dic­tion should look be­fore they leap.

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