ATC 2012: Infrastructure projects in Africa

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As investors seize the opportunities in Africa's emerging markets, the number of infrastructure projects on the continent is increasing rapidly. These projects are vivid and heartening testaments to Africa's economic growth. They also, however, invite the enthusiastic interest of the revenue authorities in the countries concerned. This is something that investors need to be prepared for, says Justin Liebenberg, who heads up Ernst & Young's International Tax Department.

Speaking at the firm's annual Africa Tax Conference, Liebenberg said it is generally the case in cross border projects of this nature that the host country will seek to tax a certain portion of the profits. “This portion is generally determined with reference to established rules and principles, but this is not necessarily the case in Africa. In many African countries the rules are still developing or they are out-dated or may not be uniformly applied. This creates a level of unpredictability that needs to be factored into a project's risk profile.”

Nevertheless, says Liebenberg, there remain a number of ways in which corporates can plan to keep the tax cost of infrastructure projects in Africa to a minimum.

“Tax rates in African countries tend to be high. So it is sensible, for example, to consider splitting the project into offshore and onshore elements, keeping only the necessary on-the ground activities in the high tax African country, other project related functions, such as strategic planning and management, could be performed in a lower tax jurisdiction.”

However, warns Mark Preiss, Associate Director of International Tax at Ernst & Young, it is necessary to remain alert to the “force of attraction principle” that is still applied in some African countries. “This can work to bring all of the profits related to the project into the African county's tax net, even profits from activities performed offshore.”

The tax implications of using sub-contractors are also always important to bear in mind, Preiss says. “To the extent sub-contractors carry out the activities in the African country, the risk arises that the main contractor will be seen as having a taxable presence in the county. This would trigger potential exposure to both income tax and value added tax.”

Albena Todorova, Associate Director in the Tax department of Ernst & Young's Mozambique office, advises investors not to rely too heavily on tax incentives and benefits. “While some still apply in Mozambique to certain basic infrastructure projects, there are none for other types, such as natural resources projects. Current policy is against the grant of new incentives and there is pressure from civil society for existing benefits to be disclosed and renegotiated.”

Todorova says construction projects tend to be highly regulated in Mozambique. “Often they must be executed in terms of a public private partnership and there is a web of regulations that govern work permits and environmental licences.”

Once the project is up and running there is the matter of ensuring the tax efficient repatriation of profits. High withholding taxes in many African jurisdictions make this something of a challenge, says Liebenberg. “There are ways to minimise the tax burden on payments such as dividends, interest, management fees and royalties, but they call for careful research. Not only must the relevant double tax treaties be examined, but also how they are applied in-county.”