Africa needs guidance on cross-border tax
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.