ATC 2012: Africa tax: the critical role of multinationals

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The pace of investment into Africa has been extremely rapid, while the reforms required to harness its full potential are urgent and far reaching. Such high velocity change is not conducive to the legal and regulatory certainty that business may wish for. What is certain, though, is that if the revenue authorities on the continent get it right, multinational companies will play a hugely important role in Africa's development. So said Senior Tax Policy Advisor to Ernst &Young, Dr. Jeffery Owens, at the firm's annual Africa Tax Conference.

During the last decade, foreign direct investment (FDI) and portfolio investment into Africa increased almost five-fold, with FDI peaking in 2008 at USD$72 billion. The global financial crisis saw FDI inflows into Africa falling by 20% but estimates for 2012 point to a reversal of this trend.

“It is not easy for governments to strike the right balance between providing a business friendly tax environment for investors while at the same time ensuring that foreign investors pay their fair share of the tax burden. But the balance must be found if Africa is to continue its stellar performance and reap the rewards of development”, said Owens, who previously served as Director of the Centre for Tax Policy and Administration at the Organisation for Economic Co-operation and Development (OECD).

Logan Wort, Secretary of the Africa Tax Administration Forum (ATAF) agreed that taxation is essential to sustainable development. “Of course, a tax system that is complex, unpredictable and inconsistent is an impediment to everyone, but it is necessary to appreciate that tax itself is an enabler to doing business rather than a burden.”

Wort said good tax policy is often a great catalyst for a thriving business environment. “This is because effective revenue mobilisation is not only key to enable developing countries to escape dependence on aid; it promotes accountability, improves state administration and encourages good public financial management.”

Globalisation and open borders mean that the taxation of multinational enterprises is an increasingly prominent and important feature of tax authorities' work, said Owens. This throws transfer pricing rules firmly into the spotlight. “Well implemented transfer pricing rules are critical to allaying the widespread concern over the potential for multinationals to use their transfer pricing to distort the level of profits properly attributable to each country.”

Wort said that African tax administrations are well aware that the implementation in Africa of effective transfer pricing rules will be fundamental to the continent achieving its fair share of the benefits of globalisation. At the same time, there is a reticence around adopting adopt transfer pricing guidelines and practices that have been developed by rich countries for rich countries. Important debates are thus taking place, under the auspices of the United Nations and in collaboration with the OECD about the development of transfer pricing rules that take into account the particular needs and expectations of developing countries.

Wort points to another challenge in the quest to widen the tax base in Africa, being the tendency for businesses to demand incentives and exemptions. “While incentives or exemptions may serve to attract a measure of investment, they not only erode the tax base but there is evidence to suggest that levels of corruption and bribery increase in the wake of such concessions”. A growth oriented tax system should be able to facilitate the creation of an attractive business climate without the need for special incentives, Wort said.

The information contained in this article / publication provides general guidance.  It is not intended to constitute substantive information and cannot replace the specific advice which should be sought from an appropriate professional advisor in relation to the actual facts of a matter, before taking any particular course of action.

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Following on from Ernst & Young’s successful integration in 2008 of 87 countries into one area from across Europe, Middle East, India and Africa (EMEIA), the firm has launched its Africa Business Center™ (ABC), which aims to enhance the effective and efficient links between its geographic reach and areas of expertise. The firm enjoys representation in 33 countries across Africa.