KIBUUKA: Developing tax planning policies and strategies for the new year

Friday January 17 2020

Key drivers of change in tax policies and laws are digital technologies

Key drivers of change in tax policies and laws are digital technologies. FOTOSEARCH 

PAUL KIBUUKA
By PAUL KIBUUKA
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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.

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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: [email protected]

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