Africa needs guid­ance on cross-bor­der tax

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker & Ger­hard Baden­horst

IT HAS been a year since the Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and Devel­op­ment (OECD)’s global fo­rum on value-added tax (VAT) pub­lished its in­ter­na­tional VAT/GST guide­lines (the OECD guide­lines).

Th­ese are aimed at re­duc­ing the un­cer­tainty and risks of dou­ble tax­a­tion and un­in­tended non­tax­a­tion re­sult­ing from in­con­sis­ten­cies in the ap­pli­ca­tion of VAT in a cross-bor­der con­text.

The guide­lines set forth a num­ber of prin­ci­ples for the VAT treat­ment of the most com­mon types of in­ter­na­tional trans­ac­tions to as­sist pol­icy mak­ers to eval­u­ate and de­velop the legal and ad­min­is­tra­tive frame­work in their ju­ris­dic­tions. A com­par­i­son of African VAT sys­tems against the guide­lines in­di­cates that, although many African ju­ris­dic­tions fol­low the prin­ci­ples laid down by the guide­lines, guid­ance re­gard­ing the prac­ti­cal ap­pli­ca­tion of such prin­ci­ples is of­ten lack­ing.

The main rule of the OECD guide­lines (which is also the in­ter­na­tional norm sanc­tioned by the World Trade Or­gan­i­sa­tion) is that VAT should gen­er­ally be im­posed by the coun­try of im­port where fi­nal con­sump­tion oc­curs (the des­ti­na­tion prin­ci­ple), as op­posed to ju­ris­dic­tions where the value was added (the ori­gin prin­ci­ple).

The ap­pli­ca­tion of the des­ti­na­tion prin­ci­ple achieves neu­tral­ity in in­ter­na­tional trade on the ba­sis that, in re­spect of ex­ports, the sup­plier makes the sup­ply free of VAT in its ju­ris­dic­tion but re­tains the right to full in­put tax credit on re­lated in­puts, whereas im­ports are taxed on the same ba­sis and at the same rates as do­mes­tic sup­plies.

Im­ple­ment­ing the des­ti­na­tion prin­ci­ple for in­ter­na­tional trade in ser­vices and in­tan­gi­bles is more dif­fi­cult than for in­ter­na­tional trade in goods. Although the des­ti­na­tion prin­ci­ple is ap­plied by a va­ri­ety of African ju­ris­dic­tions, a num­ber of coun­tries are yet to pro­vide clear guid­ance re­gard­ing its ap­pli­ca­tion.

In terms of the Kenyan VAT Act no 35 of 2013, a sup­ply of ser­vices is gen­er­ally deemed to be made in Kenya if the place of busi­ness of the sup­plier from which the ser­vices are sup­plied is in Kenya, but the “ex­por­ta­tion of tax­able ser­vices” shall be zero-rated. A ser­vice would not be re­garded as “ex­ported” if such ser­vice is “con­sumed lo­cally”, ir­re­spec­tive of the res­i­dence of the per­son to whom the in­voice is is­sued. How­ever, the act does not pre­scribe guide­lines for de­ter­min­ing the place of “use” or “con­sump­tion” of ser­vices. This un­cer­tainty has led to var­i­ous dis­putes be­tween tax­pay­ers and the Kenya rev­enue au­thor­i­ties.

In Mozam­bique, the gen­eral rule is that any per­for­mance of ser­vices is tax­able if the ser­vice provider has its head­quar­ters, per­ma­nent estab­lish­ment or domi­cile from which the ser­vices are ren­dered, in Mozam­bique. How­ever, ser­vices re­lated to im­mov­able prop­erty lo­cated in Mozam­bique do not qual­ify for zero-rat­ing. No guid­ance is pro­vided re­gard­ing the spe­cific in­ter­pre­ta­tion of “ser­vices re­lat­ing to im­mov­able prop­erty”, cre­at­ing un­cer­tainty for tax­pay­ers.

In terms of the Ugan­dan VAT Act, ser­vices are treated as ex­ported from Uganda if the ser­vices are sup­plied for use or con­sump­tion out­side Uganda as ev­i­denced by doc­u­men­tary proof ac­cept­able to the com­mis­sioner-gen­eral, such as a con­tract with a for­eign pur­chaser.

The OECD guide­lines also rec­om­mend the col­lec­tion of VAT through the re­verse charge mech­a­nism where for­eign ser­vice providers de­liver ser­vices in ju­ris­dic­tions where they are not es­tab­lished. This mech­a­nism switches the li­a­bil­ity to pay the tax from the sup­plier to the cus­tomer. In the ab­sence of such a mech­a­nism, for­eign sup­pli­ers would in prin­ci­ple have to reg­is­ter for VAT pur­poses and ful­fil all VAT obligations in th­ese ju­ris­dic­tions.

Most African ju­ris­dic­tions ap­ply the re­verse charge mech­a­nism, with a num­ber of them al­low­ing such re­verse charge as an in­put tax de­duc­tion in the hands of the cus­tomer. For ex­am­ple, in terms of the Rwan­dan VAT Act, VAT payable on im­ported ser­vices can be claimed as in­put only where such ser­vices are not avail­able in Rwanda, whereas in Uganda the re­verse VAT on im­ported ser­vices is not al­lowed as an in­put tax de­duc­tion in the hands of the cus­tomer even if the ser­vices are utilised to make tax­able sup­plies. “Im­ported ser­vices” are not de­fined by the Ugan­dan VAT Act and, in prac­tice, a ser­vice can be con­sid­ered to be im­ported into Uganda if it is con­sumed or used in the coun­try.

OECD guide­line 2.6 stip­u­lates that, where spe­cific ad­min­is­tra­tive re­quire­ments for for­eign busi­nesses are deemed nec­es­sary, they should not cre­ate a dis­pro­por­tion­ate com­pli­ance bur­den for the busi­nesses, and it may be ap­pro­pri­ate for tax ad­min­is­tra­tions to im­pose spe­cific com­pli­ance re­quire­ments on dif­fer­ent cat­e­gories of busi­nesses.

In line with this guid­ance, a num­ber of African coun­tries have re­cently in­creased their VAT reg­is­tra­tion thresh­olds. The Botswana Value Added Tax (Amend­ment) Act 2015, pub­lished on Jan­uary 23 2015, in­creased the VAT reg­is­tra­tion thresh­old from 500,000 pula (R594,000) to 1-mil­lion pula; the 2015-16 Mau­ri­tius bud­get, pre­sented on March 23 2015, in­creased the VAT reg­is­tra­tion thresh­old from 4-mil­lion Mau­ri­tian ru­pees (R1.3m) to 6-mil­lion Mau­ri­tian ru­pees; Namibia’s 2015-16 bud­get of March 31 2015 in­creased the VAT reg­is­tra­tion thresh­old from N$200,000 (R200,000) to N$500,000; and the Togo Fi­nance Law 2015, adopted on De­cem­ber 31 2014, in­creased the reg­is­tra­tion thresh­old to CFA franc 50-mil­lion (R1m) of an­nual turnover.

The big­gest chal­lenge in African VAT sys­tems re­mains the prac­ti­cal im­ple­men­ta­tion of OECD guide­line 2.5 — en­sur­ing that for­eign busi­nesses do not in­cur ir­recov­er­able VAT by in­ter alia en­abling re­funds through lo­cal VAT reg­is­tra­tions. Although most African VAT sys­tems pro­vide for re­funds, in prac­tice, tax­pay­ers rarely re­ceive such re­funds.

African ju­ris­dic­tions fol­low guide­lines but ap­pli­ca­tion is of­ten de­fi­cient

Celia Becker is an Africa busi­ness in­tel­li­gence ex­ec­u­tive and Ger­hard Baden­horst is a tax ex­ec­u­tive at ENSafrica.

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