November 2015 Issue
The wave of optimism on which Africa is being carried provides not only a great deal of good news from the continent, it also provides reasons and statistics which suggest that Africa could potentially reach, by around 2030, the same stage of economic development that China has reached today. However, while many major global players are lining up to invest in Africa, there remains a general, excessive tax pressure in the vast majority of African states. This tax pressure limits the access of African countries to this accelerated growth.
“In this world nothing can be said to be certain, except death and taxes.” These words written by Benjamin Franklin in a letter to Jean-Baptiste Leroy in 1789 remain true to this day, and especially so in Africa. A World Bank report released in 2014 underlined this fact; according to the report, African small and medium enterprises (SMEs) endured a global effective tax rate of 52.9 percent. The average worldwide rate is 43.1 percent.
The result is that the local development of SMEs is slowed and they are therefore unable to provide their full potential contribution to the continent’s employment rate, the training of staff and the burgeoning African middle class, which is the real engine of continental growth. The African middle class has a crucial role to play in helping to reduce poverty on the continent and is often the target of multinational corporations developing their operations in Africa. Solutions to remedy this situation must be explored.
In this context, international groups react and adapt to the situation. This brings multinational corporations, which are as present in Africa today as they have ever been, to limit the substance of their presence on the continent as much as possible. Further, these major players establish the economic functions they need for their African development (such as purchasing centres, service hubs, etc.) outside the continent, as far as they can. Lastly, these enterprises structure their transfer prices in order to legally record the profit margin they derive from their business as far as possible outside the continent.
Transforming African taxes into a booster for sustainable economic development
Under the pressure of their respective populations, African governments are generally taking steps to implement more democratic regimes and better governance. The endemic corruption and instability Africa is renowned for is in decline, and African politicians must take into account the rising expectations of their people. In this context, the investments of multinational corporations in Africa and the substance of their local presence will be key to providing African states with the taxes they need to face these challenges. This context brings us to the question of the tax regime that Africa needs to bring these enterprises closer to a more sustainable business model for the continent.
The necessity of a business friendly tax regime
There is no doubt that Africa needs to review its general tax regime if it wants to maintain the benefits of development. Lower tax pressure and less aggressive taxes will surely be a signal and will offer encouragement to international investors to reconsider the traditional structuring of their African operations.
Moving progressively toward a unified tax regime, at least at the level of African sub regions (unified today in the WAEMU, CEMAC, COMESA and SADC) would be another positive move as it will create momentum for the harmonisation of African taxes, which will simplify management of the tax aspects of African business activities.
Further, a think-tank on the African taxable basis may well underline the potential advantages of a general move away from the computation of African taxes based on the results, to taxes assessed on turnover and via withholdings on transactions (such as services, royalties and interest payments). Since it is easier to pilot a result than pilot turnover, this approach should help local African tax authorities to better control tax declarations and the corresponding taxable basis of African taxpayers.
Therefore, this approach will probably increase African tax collection, ease its review by local tax authorities, and increase the presence of international groups on the continent.
The Mauritian route
Many people are not aware that the micro-island of Mauritius is the first foreign investor in India, regularly responsible for more than 40 percent of foreign direct investments in the peninsula. However, this small Indian Ocean republic is now targeting Africa, its mother continent, with the same ambition. It is therefore worth analysing why so many companies decide to set up their intermediary holdings, regional service hubs and headquarters in Mauritius in order to structure their Indian and African investments.
It is true that the package proposed by this little African state is quite unique and largely meets the priorities of major players investing in Africa, including a stable political situation, a favourable business climate, a secure and reliable legal environment, the availability of trained and competitive local human resources, and fairly well developed infrastructure. It also includes a reasonable tax regime (with a standard 15 percent tax rate for corporate tax, income tax and VAT, and an underlying tax system which allows companies to offset taxes paid abroad to compute the Mauritian tax due).
This low and simple approach to tax has played an important role in encouraging foreign investors to set up on the island before investing in Africa. As a result, Mauritius often emerges as number one in the Mo Ibrahim index which analyses the prevalent business climate among different states of the African continent.
In conclusion, implementing a tax reform in other continental states will surely lead Africa to a more successful economic business model.
François de Senneville is a international tax attorney, partner and head of the Africa Desk at Lazareff Le Bars. He can be contacted on +33 (0)1 4001 1010 or by email: f.desenneville@lazareff-lebars.com.
© Financier Worldwide
BY
François de Senneville
Lazareff Le Bars