Double taxation a headache for SA corporates

By Ing Lamprecht

African countries are turning to tax collection.
JOHANNESBURG – After a number of years where some African countries have generally focused on attracting investment, developing infrastructure and creating jobs, a number of countries are now turning their attention to tax collection in an effort to supplement their state coffers.

With donor funds coming under pressure amidst the debt crisis, tax authorities are “waking up” and introducing more stringent legislation, says Steven de Backer, director – Africa Group at Webber Wentzel.

“I don’t think this is a bad development – I think countries should tax companies making money in a country, but now a balance needs to be found,” he says.

One of the headaches currently plaguing South African service providers, is that although tax treaties exists with a number of African countries, the application thereof often allows for different interpretations. This can have severe financial implications.

Double tax

One such example is the withholding tax on service fees in Tanzania, says Fieta Slendebroek, director – Africa Tax at Webber Wentzel. A lot of South African companies are offering their services to miners operating in Tanzania, she says.

Slendebroek says the Tanzanian tax authorities force the mines to withhold 15% tax on services rendered by these companies, however the tax treaty between the two countries does not allow for such a tax to be levied. This effectively means that while the South African company only gets 85% of its revenue, it is still taxed on 100% in South Africa – thus resulting in a double tax.

In some cases, companies provide for a gross up’ clause in their contracts to circumvent the issue, although it might put them at a disadvantage when competing for contracts, De Backer notes.

Slendebroek says although the issue has been taken up with the Tanzanian Revenue Authority (TRA) on a number of occasions – and it insist that its interpretation is correct – a large number of South African companies now hope to address this issue by collectively taking up the matter with the TRA and also involving the commissioner-general – the person at the helm of the revenue service.

Apart from the favourable economic growth prospects for Tanzania, its stability, language (English is a national language) and the fact that the legal system is quite similar to what South Africans are used to, decision-makers are also quite easily accessible, says De Backer.

There is an African proverb that says: The path to the chief’s house does not grow grass, he notes.

While the issue of double taxation has also been discussed with the South African Revenue Service (Sars), it would be unfair to expect Sars to give a credit to South African companies which were subjected to the withholding tax, since it should never have been paid in the first place, Slendebroek says.

“To be fair, it is not just (a problem in) Tanzania. I see this happening in Africa a lot. Tax treaties are still relatively new to most African countries, other than the ones that originally had tax treaties because they were colonies,” she says.

While local tax officials are well informed with regards to their own tax laws, the application of tax treaties are often difficult because of a lack of experience in implementing it, Slendebroek says.

While there is a tax act in Tanzania, the act is not as detailed as the one South Africans are used to and there is margin for interpretation. “We find it very challenging,” she says.

The TRA has an investigation unit which is quite aggressively targeting multinationals doing business in Tanzania, probably because in the past a lot of companies entered the country, did their jobs and left again, without registering for tax and paying taxes.