In the African tax sphere, the trend remains for headline tax rates to continue to remain stable or decrease. Withholding tax rates have generally remained stable, although the experience of Dentons and our clients is that African tax authorities are requiring tax to be withheld from payments that have not previously been considered to be withholdable. We consider that taxation of the capital gains of non-residents is an obvious area for African governments to look to broaden their tax base, thus making it essential for investors to have the backup of a double tax treaty in the event of a change of law. Tax wise, life is likely to get tougher for those in the extractive sectors: it will get increasingly harder, although by no means impossible, to obtain bespoke incentives from governments. Individuals across Africa will pay more income tax in both absolute and percentage terms.
Legislation is being introduced to counter perceived tax avoidance, and we would expect to see more specific and general anti-avoidance rules being introduced, as well as a more heavy handed approach by more savvy tax authorities to transfer pricing.
Mauritius seeks to continue to grow its double tax treaty network, with many new African treaties entering into force, awaiting ratification, awaiting signature or being negotiated. Yet, while it is proactively taking steps to make sure it is not adversely impacted by the OECD's BEPS project, we would expect its role as a tax-efficient African hub for investment to come under some pressure in the medium term. The new (and much more favourable to Rwanda) Mauritius-Rwanda treaty came into force, thus proving that, if a treaty looks too good to be true, there is a real risk of it being renegotiated. The Mauritius-Nigeria treaty remains stubbornly unratified by Abuja — perhaps we will finally see movement after the February presidential election. The UK entered into a replacement treaty with Zambia, but did not agree any tax treaties with new countries; Senegal is the only African country with which the UK does not currently have a treaty where it is actively looking to negotiate one. France has treaties with 31 African countries, but has not entered into a new one since the France-Kenya treaty entered into force in 2010.
Several North African countries have levied withholding taxes on cross-border payments of service fees, even where strictly speaking the applicable treaty limits withholding to royalty payments. The mandatory conversion of branches to corporations after two years, following a recent change in law in 17 OHADA (Organisation pour l'Harmonisation en Afrique du Droit des Affaires) countries, is likely to give rise to capital gains and corporate income taxes. In certain West and Central African countries, specific limitations have been adopted in order to restrict deductions for financing costs, or management or other service fees paid to foreign related parties, going beyond a standard transfer pricing rationale.
We are aware of inconsistent applications of domestic laws to international business, especially VAT recovery and corporate income taxes, in relation to natural resource contracts.
The risk of perverse judicial decisions remains substantial. The Saipem case from this year involved a consortium agreement between Saipem Portugal, Saipem France and Saipem Nigeria with Shell Nigeria. The work done by the Portuguese and French entities was to be performed exclusively outside Nigeria. The Nigerian Revenue Authority confirmed to Saipem that the offshore work was not subject to Nigerian corporate tax. They changed their mind. In short, the Lagos Federal High Court held:
- The Nigerian Revenue Authority was not bound by its ruling.
- The Portuguese and French companies were liable to Nigerian corporate tax.
- They could ignore the France-Nigeria double tax treaty, which on the face of it prevents Nigeria from taxing the French company. (There is no treaty with Portugal, so that argument could not be run for Saipem Portugal.)
This decision, which we would expect to be at least partly reversed if it is appealed, is consistent with our thesis that African countries will be looking to internationalise their tax base while bringing down their rates, and will not necessarily wait to change their legislation to do so.
The case also illustrates the importance of seeking to structure contracts and investments to obtain bilateral investment treaty (BIT) protection. Few people appreciate that accessing BITs provides — for free — protection against arbitrary behaviour, by government, parliament and the judiciary.
A BIT is a treaty between two countries that gives rights and protections to individuals and companies. BITs can also protect investors against broader political risks and governmental interference — such as protection from expropriation/nationalisation without compensation, discrimination and unfair treatment. "Investments" are often defined very broadly to include both tangible and intangible rights, as well as contractual rights.
BITs are governed by international law and not the law of the country of the investment, which means that countries cannot hide behind their own law or domestic courts to justify their actions. The simple message is to make sure you have BIT protection — it is the cheapest and most comprehensive political insurance risk that you will find!
Structuring investments so as to benefit from BITs may simply involve inserting an additional company in the corporate chain. The terms of many BIT treaties accommodate tax-efficient investment structures. There are over 3,400 BITs worldwide, and this number is increasing, including across Africa. South Africa is currently reviewing its approach to BITs and looking to renegotiate terms: a trend that hopefully won't be repeated across the continent.
Dentons proactively works with many of its clients in terms of devising legally robust, tax-efficient structures for clients that can look to maximise returns whilst having regard to the clients' corporate social responsibility commitments and reputational concerns. Unfortunately, Dentons also regularly sees a number of structures that fall well short of these requirements. Where these exist, they can usually be remedied before they create significant costs but, the longer the delay, the more challenging the restructuring becomes.