AFRICA: IMPORTANT TAX DEVELOPMENTS OF THE POST-BEPS WORLD

By Esther Geldenhuys,Robyn Berger Tuesday, July 28, 2020
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Tax law is subject to frequent change. This combined with the numerous jurisdictions in Africa, has created a need for regular information in addition to specialist tax advice. Not only do our tax lawyers have knowledge based on years of experience, we also have access to resources to help us monitor tax legislation across the continent. In an effort to keep our clients informed of pertinent tax developments with an Africa-wide impact, we will be emailing Africa Tax Updates as and when they occur.

This newsflash was drafted by members of our Africa-wide Tax Practice, with input from Lolade Ososami, Partner, of UUBO Nigeria. It is the second update concerning the impact of the campaign against ‘base erosion and profit shifting’ on e-commerce.

Action 1 of the base erosion and profit shifting (BEPS) initiative, spearheaded by the Organisation for Economic Co-operation and Development (OECD), seeks to address tax challenges arising from the digitalisation of the economy.

Action 1 observes that, while digitalisation could exacerbate BEPS, it also raises a series of broader tax challenges, identified as ‘nexus, data and characterisation’.

It was acknowledged that these challenges will go beyond BEPS and, therefore, Action 1 called for continued work in this area. To reach a consensus-based solution, proposals were grouped into two pillars:

  • Pillar 1, a unified approach to give countries the right to tax profits of international businesses regardless of whether or not they have a base in the country; and
  • Pillar 2, proposals to counter profit-shifting by multinationals who are subject to low or zero taxation by imposing a global minimum tax applied at the level of the taxpayer rather than the level of the country. 

Pillar 1 addresses the question of business presence and activities without physical presence. Its aim is to determine where tax should be paid and on what basis. It also aims to determine what portion of profits could or should be taxed in the jurisdictions where customers and/ or users are located.

Pillar 2 is meant to help stop the shifting of profits to low or no tax jurisdictions. It will ensure that a minimum level of tax is paid by multinational enterprises and thereby level the playing field between traditional and digital companies.

Proposals under both pillars have not yet been finalised. Many countries were unable to wait for the outcomes of Action 1 (and the finalisation of Pillar 1 and 2) and have proceeded to implement unilateral measures to protect their tax bases.

Some have stopped short at imposing Value Added Tax (VAT) on cross-border e-commerce services into their countries while others have moved beyond merely imposing VAT and have introduced a specific tax regime applicable to cross border e-commerce trades.

Africa is not left out of this unilateral approach. The current position in certain key African markets in relation to the taxation of e-commerce is as follows below.

Kenya 

The Finance Act, 2019, introduced amendments subjecting taxpayers to income tax and VAT on income earned or accrued via a digital marketplace.
 
The amendments further required the Cabinet Secretary of the National Treasury and Planning to publish regulations. The requisite draft VAT regulations setting out the detailed mechanism for the implementation of the VAT provisions have been published but are yet to receive Parliamentary approval.
 
Further, the Finance Act, 2020, has amended the Income Tax Act, 1973, by:

  • introducing a digital services tax payable at the time of the transfer of the payment for the service to the service provider at the rate of 1.5% of the gross transaction value (the tax is an advance tax available for credit against the annual tax liability for resident persons and a final tax for non-residents); and 
  • empowering the Commissioner of Income Taxes at the Kenya Revenue Authority to appoint digital services tax agents to collect and remit the digital services tax.

The above provisions will take effect on 1 January 2021.

Mauritius 

No specific laws for e-commerce; general tax laws apply.

Malawi 

No specific laws for e-commerce; general tax laws apply.

Nigeria

Nigeria has adopted a two-pronged approach to taxing digital businesses and activities:

  • Income Tax

The enactment of the Finance Act, 2019, introduced a new regime of exposure to income tax in Nigeria for non-resident companies providing (i) digital services and products; or (ii) technical, professional, management, or consultancy services, to persons in Nigeria, where it is established that such companies have a significant economic presence in Nigeria. 
 
The Companies Income Tax (Significant Economic Presence) Order, 2020, prescribes the conditions under which a non-resident company will be deemed to have a taxable nexus in Nigeria and therefore subject to income tax in the country. Such companies will be subject to tax in Nigeria whether or not they have a physical presence in Nigeria.

  • VAT

The Finance Act, 2019, also introduced the destination principle into the VAT Act, 1993, which provides that taxable services (such as digital services) are deemed to be supplied in Nigeria if the services are provided to a person resident in Nigeria irrespective of where the services are rendered from.

In relation to taxable goods, the Finance Act provides that goods (such as digital products) are deemed to be supplied in Nigeria where, inter alia, the beneficial owner of the rights in or over the goods is a taxable person, and the goods or rights are situated, registered or exercisable, in Nigeria. 

South Africa

South Africa introduced legislation providing a place of supply rule specific to e-commerce transactions for the first time with effect from 1 June 2014. This required foreign suppliers of e-services to register as VAT vendors in South Africa.

Foreign suppliers of e-services are accordingly required to register as VAT vendors in South Africa and pay 15% VAT, to the extent that they make taxable supplies of electronic services in excess of the VAT registration threshold.

With effect from 1 April 2019, the registration threshold for supplies of e-services was increased from ZAR 50 000 to ZAR 1 million in a 12-month period, and the definition of electronic services was very significantly extended so that many more activities fall within this broader definition.

Uganda 

No specific laws for e-commerce; general tax laws apply.

Zambia 

The Value Added Tax (Amendment) Act, 2019, which became effective on
1 January 2020, introduced the taxation of e-commerce.

Resident and non-resident suppliers are required to account for tax on e-commerce regardless of whether the VAT threshold of ZMW 800 000 in turnover is met. Where a supplier is not resident in Zambia, the supplier is required to appoint a tax agent who will be liable to account for tax. Please note that the VAT rate is currently at 16%.