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Tax continues to remain a threat for companies doing business in Africa: PwC Africa Tax Survey

22 November 2016 Alan Seccombe, PwC
Alan Seccombe, Partner in Charge of PwC’s Africa Coordination Centre.

Alan Seccombe, Partner in Charge of PwC’s Africa Coordination Centre.

Tax remains the second-most significant threat for companies doing business on the African continent, after political instability, according to PwC’s latest Africa Tax Survey. Nigeria, Angola and South Africa were identified as the countries that pose the greatest tax challenges in Africa. Nigeria and Angola also doubled as the most problematic from general business and regulatory perspectives, with the addition of the DRC.

Alan Seccombe, Partner in Charge of PwC’s Africa Coordination Centre says: “The key findings of the survey confirm that doing business on the African continent is still arduous. The most significant challenges relate to the obtaining of certainty around the application of legislation and dealing with the tax authorities. Another interesting conclusion is that tax is still considered to be one of the primary constraints on doing business in Africa.

“This is a unique obstacle, since decision-making should ideally be informed by business considerations, with tax matters being a mere formality. The demanding tax environment is probably one of the reasons for the relatively high appetite for tax planning.” The findings mirror that of our 2013 survey.

PwC’s Africa Tax Survey was initiated by PwC’s Africa Coordination Centre. A total of 48 respondents completed the survey, which was made up of questions about tax, business and regulatory challenges facing companies operating in Africa. Most respondents’ companies have been operating on the African continent for more than five years; while over half have been active there for more than 10 years. The aim of the survey is to provide organisations and other stakeholders with a comprehensive overview of the main challenges faced by multinational companies doing business in Africa.

In our 2013 survey, South Africa was ranked by 33% of respondents as presenting the greatest business and regulatory challenges. In spite of the tough economic climate, including slowing growth and rising labour unrests, the country’s overall business and regulatory ranking has dropped to 19% of respondents this year. However, exchange controls remain an issue in South Africa and the recent immigration laws regarding visa applications and work permits have made the country extremely challenging to do business in.

Transfer pricing, thin capitalisation and withholding taxes were ranked as the three most challenging tax areas in Africa. Since the 2013 tax survey, transfer pricing has overtaken withholding taxes as being the biggest tax area of concern for most multinational companies in Africa. This is not surprising. With the increasing focus on transfer pricing globally and legislation in Africa coming up to speed with global standards, transfer pricing features as a key challenge for companies across Africa. Immigration regulations and customs and excise obligations also appeared to be challenging from a compliance perspective, with over 40% of respondents indicating that these are not easy.

It is encouraging to note that payroll taxes for local nationals seem to [be] the least difficult to comply with. However, tax compliance for expatriates is still an area of concern as the individuals concerned still have obligations to meet in both their home and host countries.

Political instability remains the most significant threat to business growth in Africa – however, the ranking has reduced from 33% to 23% of respondents. The other two threats identified were the huge tax burden (17%) and a shortage of skilled personnel (13%). The tax burden issue is mostly prevalent in jurisdictions that have multiple tax collection authorities. In addition, cross-border transactions have proved to be extremely challenging, in particular with regard to the application of tax treaties, where we continue to see a total disregard to tax treaties in some jurisdictions. The third top-most threat of skilled personnel remains a problem for business growth in Africa, especially for industries that require human resources, like the oil and gas industry. “This challenge is likely to continue as upskilling may take some time and immigration rules continue to be very challenging,” adds Seccombe.

It is positive to note that the number of companies with a documented tax strategy has increased from 21% in 2013 to 38% in this year’s survey. Ibikunle Olatunji, Senior Manager in PwC’s Africa Coordination Centre, comments: “Overall, there has been a steady improvement in companies’ tax strategies based on respondents’ feedbacks from the first in 2007 to the most recent one. According to the survey findings, companies are communicating their tax bill to senior management, and risks managed by the tax function are identified and reported. This shows that companies are continuously aligning their tax function with their business strategy.”

In addition, there has been an increase in appetite for tax planning opportunities from 44% of respondents who were willing in 2013 to undertake tax planning opportunities, provided it is within the ambit of the law, to 79% this year. Mauritius and South Africa were chosen by respondents as the preferred holding company location for the Africa region. “The South African regime provides for the repatriation of dividends, interest and royalties without withholding tax where certain conditions are met,” adds Olatunji. Senegal, while not as popular for use as a hub as Mauritius and South Africa are, is growing in popularity as a hub for investments into Francophone countries, while Kenya is becoming a hub for East Africa.

On the international tax front, there have been a number of developments regarding Base Erosion and Profit Shifting (BEPS) since July 2013, when the Organisation for Economic Co-operation and Development (OECD) published the 15-point BEPS Action Plan. In this year’s survey, 67% of respondents indicated that BEPS is an area of concern when making investment decisions, whereas 33% of respondents did not view BEPS as a concerning factor.

A high percentage (80%) of companies indicated they had been subjected to tax audits in Africa. This is a significant increase from the 2013 survey, in which only 28% of companies had been subject to tax audits shortly before the survey. The ambiguity of legislation in many countries further contributes to lengthening the audit process.

Companies suggested a number of ways in which tax advisors could improve the service they provide to clients doing business in Africa. What stood out in particular is that 40% believe it is most important for advisors to prioritise understanding their clients’ businesses and tax risk appetites better as well as being more commercially minded. Another improvement that respondents suggested was that advisors should respond faster, meet deadlines and provide more frequent tax updates.

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