Here is a short analysis of how tax affects Africa investments. Essentially we consider how taxes affect the decisions of people looking to invest in Africa. But, to begin with, it is important to state that each African country has its own tax laws and rules hence taxes are not one one size fits all scenario. Nonetheless, there are some overlaps in tax laws especially for custom duties within regional communities in Africa.
By way of example, the Republics of Burundi, Kenya, Rwanda, South Sudan, Tanzania, and Uganda are within the East African Community (EAC). The EAC has a fully functional customs union. This means that imported goods coming to any of the countries will be subject to the same custom duties rules. The same would apply to other customs unions like Southern African Customs Union (‘SACU’) etc.
Another important thing to mention is that tax affects investment decisions. Most businesses are looking to save costs and tax is a cost. Moreover, businesses want to focus on their core functions and time spent on tax compliance issues is time wasted. Noting this, business people are looking for low tax costs with painless compliance requirements.
In what ways does tax affect investment in Africa?
Complicated tax laws or high tax rates lead to tax planning which affects investment decisions. For instance, a common tax a planning strategy is completely avoiding a taxable presence in a country. This does not mean that a business is not operating in a country but that it is doing so either virtually (online) or through someone else.
Another common tax planning strategy that affects investments in a country is that businesses minimize risks in a country. How does this add up to tax planning? Well, there is a whole cluster of tax rules referred as ‘transfer pricing’. Under these rules, a business in country A is allocated taxable profits based on, among other things, risks assumed. How is risk a good thing for investment purposes? It is a big deal because this is what would advise lending loans to a business in an Africa country for activities like business expansion.
Alternatively, a business could opt to reduce assets in a country. This again is a tax planning strategy. A business doing this intends to reduce profits that may be allocated to a country based on the assets used by that business to generate profits. Overall, reduced risks and reduced assets mean that businesses within African countries cannot expand or employ a lot of domestic resources.
In addition to reducing the level of investment businesses can choose to not investment at all. Low tax jurisdictions exist in abundance. Moreover, globalization and existing global value chains give business numerous choices. In the existing circumstances a business is as faithful as its choices.
African countries should balance the desire to collect revenue against the impact that this will have on investments. Look out for discussions on ‘how tax affects Africa investments’.
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