The multiplicity of Value Added Tax (VAT) systems across Africa exposes multinational companies to tax risk, errors and inconsistencies in the application of the law, according to a new report issued recently by Professional Services Firm PwC.
Most of Africa’s 54 countries have VAT systems in place which foreign investors and businesses cannot afford to be ignorant about, according to PwC’s report entitled an Overview of VAT, 2011.
Taiwo Oyedele, Tax Partner, PwC Nigeria, says: “A potentially lucrative deal in Africa can easily turn sour if the parties do not take into account the potential liability for VAT registration or the basic structure of VAT in the relevant country.”
The fourth edition of ‘Overview of VAT in Africa” guide has been compiled by PwC VAT specialists in the following African countries: Botswana, Cameroon, Cape –Verde, Chad, Congo, Côte d’Ivoire, Equatorial, Guinea, Gabon, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe. The guide, which is based on the law in effect as at 31 July 2011, outlines the VAT principles, regarding VAT rates, the registration of VAT, output tax, exemptions, zero-rating, input tax, international trade, VAT accounting, record keeping, as well as the basic principles relating to other indirect taxes in each of these countries.
Oyedele points out that many multinational companies encounter two major hurdles when entering into transactions in Africa. Firstly, the VAT laws tend to be complex in most countries. Secondly, they have to deal with different rules across a multiplicity of jurisdictions.
“The VAT systems in Africa are not aligned, which has a major effect on a company’s operating and financial systems. Oyedele says that the tax authorities expect compliance with the laws in their respective jurisdictions. “As a result the compliance burden on companies may be onerous,” he says.
Compliance with the VAT laws is more difficult for multinational companies due to the diversity of laws in different tax administrations, he says. He points out that companies are expected to comply with the tax legislation in their own countries, regardless of the VAT laws in other jurisdictions in which they are operating.
Furthermore, many companies are unable to claim VAT refunds as a result of unsophisticated tax systems and changes in legislation, and unreasonable deadlines for submitting claims. Companies with cross-border transactions are also unable to track their VAT payments due to the complexities in the legislation. South Africa uses a screening process to determine whether a VAT refund is to be audited or whether the amount may be paid. Other countries, such as Kenya require an audit before an amount may be released. In Nigeria the law provides for a VAT refund subject to an audit but in practice it is extremely difficult to obtain any refund.
Oyedele says that the VAT compliance burden for companies is high. “It takes far longer for companies to comply with the VAT rules than corporate income tax.” He says that Africa is also known for its stringent penalty regimes. For instance, in Kenya penalties of up to US$1170 are payable per month in the case of not filing a VAT return, plus interest on the outstanding balance. In South Africa, additional tax of up to 200% may be imposed for the evasion of tax, including criminal prosecution. In Nigeria penalty of 5% and interest up to 21% may be imposed on an annual basis for default.
According to Oyedele there is also uncertainty on the VAT rules applying to financial services and products across the continent. Many companies have had to resort to the courts on occasion. “Tax administration needs to be clear, simple and straight forward. Nigeria does not have a well-administered VAT system that is in line with international norms although the VAT rate of 5% is much lower than the global average rate of between 18% to 20%.” He says that a significant number of African countries, including Nigeria, South Africa and Botswana, have a single rate system in place, which is easier to administer.
Other countries are looking into introducing VAT into their systems as a means of efficiently collecting revenue. For example, Swaziland recently announced plans to convert from a General Sales Tax system to that of a VAT. The Democratic Republic of Congo is also introducing a VAT system next year.
Oyedele concludes that there are considerable variations in the level of the VAT threshold across African countries. In 2009 South Africa increased its threshold from R300 000 (N6 million) to R1 million (about N20 million), and a number of jurisdictions have also implemented special regimes for small and micro businesses. South Africa, Kenya, Zambia and Tanzania have introduced a tax based on the turnover of a business. Nigeria does not have a VAT threshold or a special regime for small and micro businesses.
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