Key drivers of change in tax policies and laws are digital technologies. FOTOSEARCH
Tax, previously relegated to the background as simply another
cost of doing business, is high on the agenda of CEOs and boards of
multinational enterprises (MNEs)—and small and medium enterprises (SMEs)
in global trade and international business.
Paradoxically,
at a time when countries in East Africa are using tax and investment
incentives to attract foreign direct investments and to stay competitive
with other regions offering similar incentives, the veritable magnitude
of changes in tax policies and laws made in recent years necessitates
that directors and senior executives of MNEs—and the preponderance of
SMEs—give due consideration to tax issues.
Currently,
beyond maximising shareholder value, there is growing concern about the
handling of negative publicity, enduring heightened pressure from
nonprofit advocacy groups to take less aggressive tax positions, and
getting to grips with the impact of tax on business decisions. At the
same time, community expectations of private sector companies in East
Africa to pay their “fair share of taxes” are increasing.
Against
this backdrop, companies need to deliberately devise appropriate tax
planning strategies and to actively engage senior executives, the board,
and the finance and tax executives.
A factor further
complicating the intrinsically technical field of tax is the fast pace
of changing policies and laws as the region’s tax authorities cope with
the upshot of rapid technological innovations, global
interconnectedness, disruptive business models, and the new era of
talent mobility. Moreover, contemporary tax policies and laws are built
on centuries-old principles and goals.
From these
observations, we can appreciate the significant scale of the changes and
their possible lasting consequences on business, trade and investment
activities.
But what is giving impetus to the rapidly changing tax
environment in East African countries? The Base Erosion and Profit
Shifting (BEPS) project of the Organisation for Economic Co-operation
and Development (OECD) aims to combat tax avoidance by MNEs. It is one
of the key drivers of change in tax policies and laws and has resulted
in unparalleled changes around East Africa.
For
example, Kenya recently signed the MLI Convention, an outcome of the
OECD/G20 BEPS project, to implement BEPS-related measures into 14 of its
existing tax treaties, and to prevent the use of these treaties for tax
avoidance. Tanzania also replaced its previous transfer pricing
regulations issued in 2014 with the new Tax Administration Regulations,
2018, which are largely consistent with the OECD transfer pricing
guidelines.
Drivers of change
Other
key drivers of change in tax policies and laws are digital technologies
that are creating new challenges for authorities, and the perceived
aggressive planning arrangements by MNEs.
The OECD is
trying to find global consensus among more than 130 countries on the
allocation of taxing rights in the digital economy by June 2020. As the
OECD continues its efforts, reaching an international agreement to
tackle the global issue of taxing the digital economy is crucial. But
that is no mean feat.
Some countries in East Africa
have already explored expanding their taxing jurisdiction with regard to
the digital economy. In 2018, Kenya unveiled a provision requiring
non-resident tech companies to pay taxes on domestic income accrued from
a digital platform. More countries contemplate doing so, which may lead
to double taxation.
Yet despite these approaches to
expanding the tax bases, governments in the region are endeavouring to
entice investments and generate jobs by providing investors with
generous fiscal and investment incentives.
Uganda
offers 100 per cent allowance for, inter alia, mineral exploration
expenditure in the year of expense: Kenya offers an investment deduction
of 150 per cent for eligible investments exceeding Ksh200 million ($2
million), and Rwanda offers a preferential corporate income tax (CIT)
rate of zero per cent for international companies with their regional
offices in the country.
Ethiopia offers Customs duty
exemptions of up to 100 per cent on imports of capital goods for
qualifying investments, and Tanzania offers a reduced CIT rate from 30
per cent to 20 per cent for new manufacturers of pharmaceutical or
leather products who have a performance agreement with the government.
Changes
in tax policies and laws provide senior executives and the board the
opportunity to engage actively with respect to tax policy development,
by sharing practical insights and perspectives on the impact that the
changes can have on a company, an industry, or a sector.
Policy
makers typically seek views from senior executives and the board
through chambers of commerce, private sector associations, and policy
think-tanks. Effective interactions, consultations and exchanges between
the business community and tax policy makers can as well assist to
determine whether a particular tax policy and legislative initiative
will achieve its objectives.
The above developments
give rise to, or increase, tax and tax-related risks, which recurrently
occur and can have a significant impact on a firm’s bottom line.
Consequently,
senior executives and the board need to evaluate these risks, despite
the fact that tax is not the only issue to be considered in business
decisions regarding technology, business and talent models, new market
entry and outsourcing relationships.
Outside tax expertise can be extremely valuable, especially considering that tax is a dynamic and fast-paced technical field.
Bearing
in mind the effects that tax planning strategies, government tax
policies and tax legislation can have on a company, active
engagement—not just involvement—by the board of directors in routinely
deliberating about tax policy and legislative developments in 2020 and
beyond is merited.
Paul Kibuuka, a tax and
corporate lawyer and tax policy analyst, is the CEO of Isidora &
Company and the executive director of the Taxation and Development
Research Bureau. E-mail: tax@paulkibuuka.com
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