VAT slows down growth of multinationals in Africa

Conflicting value added tax (VAT) laws across the region are slowing down the expansion of multinational companies that have pitched camp in Kenya to tap the integration of markets, a report released on Wednesday by consulting firm PwC indicates.

The report titled, ‘Overview of VAT in Africa’ says that taxation systems of most of the continent’s 54 nations expose foreign investors to tax risk, errors and inconsistencies that significantly raise the cost of compliance.

“A potentially lucrative deal in Africa can easily turn sour if the parties do not take into account the potential liability for VAT registration or its basic structure in the relevant country,” said Rajesh Shah, a tax partner at PwC Kenya.

Among the key areas of VAT regimes that foreign investors find confusing are differences in rates, registration procedures, exemptions and zero-rated items. The differences in VAT accounting standards and record-keeping have also featured as top concerns for multinationals.

Mr Shah said that multinationals that sought to take advantage of Kenya’s attractive geographical location as the gateway to the region have encountered hurdles in complex VAT laws and different rules in different countries.

“The VAT systems in Africa are not aligned, which has a major effect on a company’s operating and financial systems. As a result the compliance burden on companies may be onerous,” said Mr Shah.

The report comes after Finance minister Uhuru Kenyatta appointed a taskforce last year to review the VAT Act with a view of making it investor-friendly.

The proposed changes, which include scrapping existing exemptions, were put under public scrutiny in August last year and are contained in the VAT Bill 2011 that is expected in Parliament before this fiscal year ends in June.

While the original VAT Act had initially exempted only exports, subsequent amendments allowed Finance ministers to zero-rate import of essential items, a loophole that would soon balloon to a list 200 items, attracting protests from donors.

“Apart from reducing tax collection, the growing number of exempted and zero-rated items ended up making the VAT very complex – the twin issues that the Bill seeks to address,” Mr Francis Kamau, Associate Tax Director at Ernst & Young told the Business Daily on Wednesday.

The PwC report was compiled in Botswana, Cameroon, Cape Verde, Chad, Congo, Côte d’Ivoire, Equatorial, Guinea, Gabon, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Morocco, Mozambique, Namibia, Nigeria, Rwanda, Senegal, South Africa, Tanzania, Tunisia, Uganda, Zambia and Zimbabwe.

According to the report, multinationals that seek to sell their businesses in Kenya are forced to seek approval of Kenya Revenue Authority or are charged VAT if they fail to do so. The transaction is free in other countries.

The VAT report comes as a setback to Africa’s intensified campaign to integrate regional markets and raise its international profile.
Multinationals in Kenya are free to extend their operations and enjoy preferential trade terms within the five-member East Africa Community and the 19-member Comesa trading blocs.

They are also expected to expand their network in Africa to take advantage of the an EAC-Comesa-SADC free trade area of 26 nations, which is expected to come into force this year.

Yet within EAC, which launched its common market protocol in 2010, Kenya for instance charges VAT at 16 per cent compared to 18 per cent rate preferred by Rwanda, Burundi, Tanzania and Uganda.