The value of Value-Added Tax in Africa underestimated
Charles de Wet, Head of Indirect Tax, PwC Africa
Africa operates within a connected global economic system, with countries relying on global cooperation to address trade imbalances, the abuse of tax havens and the coordination of financial stabilisation efforts. There has been an increase and focus on cross-border trade and the VAT base has been broadened to include new types of supplies, across the continent. The recently released PwC ‘VAT in Africa Guide’ includes details about VAT systems in a number of African countries.
There is pressure on governments to increase the emphasis on VAT instead of income tax relying less on unpredictable taxpayer profits in order to ensure a sustainable economy. Tax authorities across Africa recognise this, with 36 countries having a VAT system in place.
Tax Authorities are also building up tax resources and introducing legislative changes. Tanzania enacted an entirely new VAT Act in 2015 and prior to that, Ghana in 2013 and Kenya in 2012. Across the globe, India passed a GST law in 2016 and the UAE plan for all GCC countries to introduce VAT any time from 1 January 2018 to 1 January 2019.
Contrary to corporate income tax where taxpayers often benefit from double tax treaties signed between two contracting states with the aim to reduce the risk of double tax, there are no such tax treaties for VAT/GST. It is good tax policy for VAT/GST to be neutral in international trade but this needs to be achieved through the local VAT/GST legislation. Differences in the various VAT/GST systems however, expose businesses to risks such as double taxation or penalties, interest and additional taxes in the event of not paying the VAT/GST correctly. The risk of not being compliant with VAT/GST legislation in a particular country is increased due to inconsistencies and complexities in the application of the particular country’s legislation.
This results in common issues which businesses experience across Africa, often with no clear answers or conflicting views. These include the extent of the activity which will trigger a VAT registration liability; the extent to which exported services are subject to the zero rate, when imported services will be subject to VAT and if VAT may be claimed as a refund or merely reflected as a credit to be offset against other taxes payable. In addition, non-residents may appoint a tax representative agent in some countries yet whether that agent is entitled to claim tax credits or tax refunds is contentious.
There are similarities in VAT systems in African countries, for example educational services as well as health and medical services, which are generally exempt from VAT. However South Africa and Ghana are exceptions as far as private health and medical services are concerned. International transport services would generally be either exempt or subject to VAT at the zero rate. Again, there are differences in interpretation of the VAT legislation in many countries, specifically which portion of the transportation supply chain would fall within the exempt category and which portion would be taxed at the zero or standard rate.
In Kenya there is currently ambiguity on whether VAT should be charged on membership/entrance fees, subscription fees and other charges to members. South Africa has always been clear in that VAT at 14 percent should be accounted for relating to sports, social and recreational activities. The claiming of input tax on such membership fees and entertainment is generally expressly denied across Africa.
Different rules also apply in respect of the rate applicable to services rendered to non-residents. South Africa and Namibia take the view that services rendered to non-residents may, under certain circumstances, be subject to the zero rate. Madagascar and Ivory Coast on the other hand provide that, because the services are rendered locally, the service would also be subject to the standard rate. There is some uncertainty in Mauritius as to whether such a service would be zero rated or not, with the legislation providing for the zero rate to apply, while a court decision states the contrary. The Mozambican VAT Code provides that most services will be subject to VAT as the services are provided by a resident in Mozambique. Only certain services provided to non-residents will not be subject to VAT, such as consultancy, advertising and telecommunication services.
In 2014, South Africa introduced provisions requiring foreign businesses providing defined electronic services to South African consumers to register as VAT vendors. It has now been proposed that the regulations be updated to broaden the scope of electronic services. Uganda has similar provisions, while Ghana has a provision that allows for such services to be supplied through an agent.
VAT rates also vary across Africa, with Djibouti applying a rate of 10 percent, Botswana 12 percent and South Africa, Swaziland and Lesotho 14 percent. Ethiopia, Gambia and Namibia have a VAT rate of 15 percent, whereas countries like Benin, Cameroon, CAR and Guinea Conakry have much higher rates of between 18 and 20 percent.
Navigating the VAT landscape in Africa remains a challenge but there is a drive towards harmonising legislation and aligning it with global best practice. The Organisation for Economic Co-operation and Development (OECD) is leading the debate in the International VAT/GST Guidelines and many African countries are considering the impact of the Guidelines. The conversation has only just begun and understanding the tax environment and ‘getting it right’ remains a priority for businesses until there is better alignment across the continent and more consistency in applying the legislation.
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