According to EY’s 2014 annual Africa Attractiveness survey, Executing Growth, Africa’s share of global foreign direct investment (FDI) projects reached the highest level in a decade.
However, as African markets offer exciting growth and investment opportunities for investors, there are also a number of common challenges faced by inbound multinationals with regards to Compliance and Reporting advancements.
Broadly these challenges are the reliance on manual tax compliance, the lack of precedent (and consistent application thereof), language barriers, local accounting requirements and an increase in tax audits.
Whilst there is a shift to electronic tax compliance (for example in Kenya) there is still a strong reliance across Africa on manual filings, where taxpayers or their representatives have to physically complete and file returns. Added to this would be the physical payment process where cheques need to be drawn and handed in at a Revenue Authority office. This becomes particularly challenging when a multinational does not have a physical presence in country, a growing trend as businesses transform their finance functions and move resources to Centres of Excellence or low cost shared services centres.
The second category would be the lack of available court precedent to manage a complex dispute with cross border legislation.
Thirdly, language barriers are often difficult to overcome and in many instances financial statements and tax returns need to be filed in local languages. Coupled with this is the fourth challenge, namely that many countries in Africa have different financial statement reporting requirements (such as OHADA and local GAAP).
Companies starting to operate in a new country need to open sales and marketing operations in country, while outsourcing non-core finance and tax functions to a reputable in country service provider, which can protect a company’s brand in country by ensuring compliance with the local laws and regulations.
A good mantra for companies that are transforming their finances to fit the new globalised economy is “standardise, digitise, globalise.” This process should include making all components of compliance and reporting global and efficient, not just the income tax returns. Almost two-thirds of companies’ surveyed by EY have established global processes for tax accounting, but many have omitted income tax compliance, value added tax returns, financial statements or some other important filings.
Fortunately, most finance executives are aware of the risks. The survey shows that 69% think that failing to globalise compliance and reporting will lead to incomplete or inaccurate data, 68% think it will add to the cost of compliance and reporting, 57% think it will result in missing deadlines and incurring penalties, and 50% think it will lead to an increased tax burden.
The practical challenges of operating across Africa are there, but can be overcome using local knowledge and lessons learned.
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