Pitfalls when investing in a foreign jurisdiction
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.