Make the most of the African tax opportunities

South African companies wishing to expand their African footprint must maximise their tax opportunities and obtain well-informed advice to ensure they put appropriate cost-saving structures in place.

“When expanding into Africa, companies need to consider tax when deciding on legal structures and business models. If they do, they’ll realise cost-saving benefits and be a step ahead when they want to take on a foreign partner or grow their operations,” says Cor Kraamwinkel, senior manager of Tax Services at PwC.

Africa is a popular investment destination driven by an appetite for higher revenue and profit margins. However, it is also characterised by high domestic- and withholding tax regimes, a developing political environment and relatively uncharted legislative waters.

According to Stephanie Pronk, associate director of Tax Services at PwC, African tax practices are still being developed. “Although there is tax legislation, there may be a difference between the letter of the law and what is currently practiced in some regions. This situation can lead to potentially uncertain outcomes.”

Transfer pricing, for example, was introduced in some countries only a few years ago. “Application of the law is still in an infancy stage in some jurisdictions, with no or little local case-studies to be relied upon. Despite this, some companies tend to set up operations in an area without an advisor, or having taken generic advice, which may not highlight the opportunities and risks inherent in the practical application of the law,” explains Kraamwinkel.

One mistake made by some companies is to look at others which have successfully established operations in Africa and use the same approaches to set up their own operations. “Although practical examples remain very relevant, these approaches need to make business sense and be tailor-made to that business’ industry, operational profile and other complex factors. To maximise tax opportunities in a robust manner, the company should look at adapting its tax structures to its current business model to best operate in foreign territories, rather than deciding on a tax structure and trying to adapt its business model to suite” continues Kraamwinkel.

Pronk adds: “A variety of options are available to optimize the tax structure for Africa. These include tax holidays, special regimes, the use of countries with wide tax-treaty networks in Africa, such as Mauritius, Netherlands, UK, South Africa or France to mitigate withholding taxes, financing structures and the optimisation of the value chain (i.e. principal-agent structures or procurement companies). However, it’s only when a company’s tax structure is truly reflected in the execution of its day-to-day operations that sustainable tax planning can be achieved, substantiated by the underlying legal documentation.”

“Companies need reputable tax advisors with the backing of a global and experienced tax network so they have a seamless connection with advisors in Africa. They need a tax firm that can see the bigger picture and offer them practical solutions that works,” concludes Kraamwinkel.

Both Pronk and Kraamwinkel will present at the 14th African Tax and Business Symposium at the Safari Park Hotel in Kenya. Their colleagues at PwC, along with other specialists – representing more than 25 African countries – will also present topics that cover the tax, regulatory and business aspects of doing business in Africa, in a range of plenary and workshop sessions.