More African tax authorities are now focused on cross-border transactions, especially those between related or connected parties. Major tax issues concerning foreign investments in Africa's cross-border deals are highlighted below:
Transfer pricing is seen as an important issue to prevent tax leakage and to ensure sufficient revenue to fund growth in the region
Understanding is needed on withholding tax implications related to structuring opportunities that are available to investors and services supplied by non-residents; and the interplay between domestic law and double taxation agreements
Exchange control restrictions on foreign loan funding and limitations on the deductibility of financing costs for tax purposes
Capital gains tax implications on exiting a particular investment directly or indirectly
Realising the need for capacity building, co-operation and sharing of best practices to tackle cross-border transactions, the Africa Tax Administration Forum (ATAF) was set up with the launch of ATAF in Uganda in November 2009.
Since various tax administrations in Africa share a common area of focus, it was not surprising that transfer pricing tops the ATAF’s agenda list. As the forum came into being, a handful of countries, such as Malawi, Uganda, Ghana, and Nigeria have introduced specific transfer pricing provisions in their tax legislations.
Until the well-known Vodafone case in India propelled the issue of taxation of capital gains from an indirect disposal onto the global tax stage, tax administrations in Africa did not focus much on transactions where an investment situated in Africa had been disposed of between two non-resident parties. But that’s no longer the case. Tanzania, Uganda and Mozambique recently introduced provisions seeking to tax any capital gain derived by a non-resident on a direct or indirect disposal of shares in a company where the underlying asset consists of immovable property situated in that country.
Double taxation avoidance
Possible solutions are available to mitigate capital gains tax exposure arising from indirect disposal of investments in the future.
One option would be to consider holding the investment through a country that has a double taxation agreement with the country where the asset or target is situated: this could mitigate the withholding tax implications on income streams during the life cycle of the investment and also capital gains tax on exiting from such investment.
For instance, Mauritius has set up a Global Business License (GBL) regime which has been used by a number of multinationals for holding investments in both Africa and/or Asia. In addition, Botswana and South Africa have now entered the scene by setting up tax regimes (known as IHQ for South Africa and IFSC for Botswana) whose objectives are similar to Mauritius' to attract Pan-African investments by using either of the country as an intermediary holding jurisdiction.
As seen in the diagram, a company can invest in Mozambique through Mauritius providing the two nations already have a favourable double taxation agreement in place. This is crucial when it comes to taxation of capital gains derived from the disposal of shares.
Given the limited treaty networks within Africa and between the continent and the rest of the world, there is little room for such an opportunity to work. Even when a double taxation agreement exists between the two countries of the investor and the investee, the scope is still limited since many African nations levy withholding taxes on cross-border payments to non-residents. At the same time, the treaties generally do not reduce the withholding tax to more than 50% of withholding tax payable in accordance with the respective domestic law.
In the event where a treaty country is interposed as an intermediary holding jurisdiction, you need to consider whether any general tax avoidance or specific anti-treaty shopping provisions in either of the investee country’s domestic law or the treaty itself could impact the proposed holding structure.
A few jurisdictions including Ghana, Uganda and Tanzania have introduced anti-treaty shopping provisions in their domestic laws which limit the claiming of benefits provided for by the treaty to residents of the investor's country. This is seen in the case of a company held by more than 50% of individual shareholders who are resident in the investor's country.
Tax, mining and natural resources
Recent tax changes in Uganda, Tanzania and Mozambique concerning the taxation of capital gains tax derived from indirect tax disposal of an investment were prompted by revenue or potential revenue loss on transactions whereby the tax administration from these three nations were litigating in their extractive industries.
Furthermore, an investor may want to consider whether to enter into a fiscal stability agreement (FSA) with the government of the country where the asset or target is located when considering investments in either mining or natural resources sectors. One of the rising risks confronting investors in extractive industries is political risk: to the dismay of investors, the laws of the country may change after their capital was invested in the nation.
Oftentimes, FSAs are very important tools in obtaining funding or shareholder approval. However, stabilisation clauses in a FSA do not seek to prevent any change in the law. Rather, they seek to address the economic and tax impact in the event of such a change.