Selling to Africa - what could be simpler?

Nine tax considerations to ignore at your peril

You may have heard sales-people talking about Africa as the last untapped market, with its 1,5 billion population, which is young and increasingly sophisticated, and with some growth in prosperity.? Forecast revenues wax lyrical about the huge potential to get in on the ground with growing demand and so it seems everyone is jumping on the bandwagon of selling their product (be it goods or services) to “Africa.”

Well today, we highlight some key tax considerations to think about if you’re trying to tap into the African market.? This is by no means a comprehensive list, but rather some key points that we find are sometimes missed.

One point at the beginning, which makes us think of Paris Hilton who spoke about visiting South Africa and West Africa, is that Africa, of course, is not one market.? There are 54 countries, ranging in population from Nigeria with some 233 million, down to the Seychelles with about 130,000.? In addition, there are about four dependent territories.? Each of these have their own different (sometimes very different!) laws and tax systems, as well as differences in language, culture, preference and ease of access and exit.? So, the question should not be so much about selling “to Africa” as selling to a particular country in Africa. In this newsletter, we will assume that you have decided you do not want (or need) your own subsidiary in the country you will be selling to.? This is in itself a big decision that should not be taken lightly.

As always, (we who knoweth we do not wageth the dog) the first points to think about are more commercial than anything:

• Will you sell to customers directly from your home country (or somewhere else where you already have an established presence)?;
• Will you use one or more third-party distributors in the new target market?
• Will your product need any licences or regulation, or customisation for the market, or be subject to any import restrictions?

Once these have been considered and answered, we can go on to some of the thornier tax issues, noting three of these are related to WHT, Africa’s favourite tax tool:

1. Is there any risk of creating a permanent establishment (PE) or some other form of taxable presence in the target country, which would require you to register as a taxpayer in-country with all the concomitant hassles?? This requires consideration of how the sales effort will be managed, whether there will be a local sales force and what its level of authority will be; whether the company will have premises identified with it, and whether it will keep some stock in the country.? If the product has to be installed, or maintained, how will that be arranged?
2. Even without a PE or similar tax presence, some countries now require VAT registration for foreign suppliers, especially for services.? Alternatively, a Digital Services Tax may apply for some types of foreign suppliers.
3. If you will have a local sales force or other staff, how will your people be paid?? Will this itself give rise to a need to register the company in the country for employees’ taxation (PAYE) or social security, and can this itself require registration as a branch?
4. Normally, registering a branch will lead to extra bureaucracy, at the very least. But it can be worth checking if it also brings any advantages, in particular this can sometimes lead to a lower effective tax rate as corporate tax would apply on net revenues instead of WHT on gross amounts.? Who’d have thunk it?!
5. Most countries in Africa have a VAT system and even sometimes a reverse VAT system. For goods, VAT is normally collected along with customs duties (ah customs!) at the port of importation.? However, Nigeria expects foreign suppliers of goods or services sold electronically to register for VAT and to charge it.? For services, it is common for the customer to be required to self-charge for the VAT, under a reverse charge system. And in some countries, including Rwanda, VAT on imported services cannot be recovered by the customer as input tax.? Whereas in Zambia, the VAT can only be recovered if the supplier has appointed an agent in Zambia to operate the VAT system.? Meanwhile, in Nigeria, the customer will deduct the VAT at source and pay it to the tax authority, even if the foreign supplier is required to charge VAT.? The supplier will then have to reflect this deduction at source as a VAT payment on its VAT return.? All of this VAT complexity clearly leads to more bureaucracy, and the potential for a less competitive price.
6. How will you be paid?? You will probably not want to be paid in most local currencies, but will your customers be able to find foreign currency with which to pay you.? Also many African countries have exchange control restrictions which may require special approval for your clients to pay you outside the country or in foreign currency.
7. Will you suffer withholding tax (WHT)?? Even if it is not strictly a legal requirement, will your customer agree, or will it be more afraid of the tax authority penalising it in future for not deducting WHT?? If you will suffer WHT, what is the rate?? Is there any way of reducing this?? If there is a lower rate provided by a Double Taxation Agreement, for example, does this apply automatically, or do you need to apply for it?? Have you agreed with your customer on how this will work?
8. If, or more likely when, you suffer WHT, will you be able to obtain a double taxation relief in your home country, to set off against your tax liability in that country?? Or at least a tax deduction, to reduce the pain?
9. A final point on Africa’s favourite tax, if WHT must be paid, is it possible to increase your price to accommodate this so you will not be economically impacted? For instance, can you include a “gross-up clause” in the contract, so that the amount you receive is the amount you expected to receive, and the customer effectively pays a higher price?? This is essentially a commercial issue to be agreed with the client as it will increase the end-cost.? But, in Nigeria once again, the customer will not be allowed a tax deduction for the gross-up element, so it will be better for them to agree to a higher price rather than a simple gross-up clause.

In summary

There are clearly a few potential pitfalls involved in selling into an African market, and some of these can be expensive if not understood in time.? PE risk is maybe the one many professionals are most alert to.? WHT risk is extremely common, but there can be ways of mitigating it.? For VAT, some research and advance information is useful, to help plan, and also to meet any bureaucratic requirements such as registration and filing. ?So while the African market may be a fertile and virgin market, tax considerations and expected tax costs need to be carefully factored into any economic analysis. Furthermore, upfront consideration needs to be given as to the optimal structure of all entities and transactions to ensure the best outcome.? With Africa, it’s really true – a failure to plan means you’re planning to fail.

So, the moral is think very, very carefully before venturing into Africa, contact us to discuss how to navigate the complexities and opportunities while doing business in this endlessly fascinating continent.

Meet the author: Russell Eastaugh

Russell has extensive African experience, in particular in Nigeria and Uganda, and extensive experience of the betting industry. He is a Fellow of the Chartered Institute of Taxation of Nigeria. Contact Russell at [email protected].