EY: Increased scrutiny of companies expected

Budget proposals and recent changesThe 2014/2015 Budget proposals delivered by the Honourable Minister of Finance, Ms Saara Kuugongelwa-Amadhila, on 19 February 2014 contained very few proposed tax amendments impacting the income taxes payable by corporates operating in Namibia. The expected reduction of the corporate tax rate for non-mining companies to 32% communicated in last year’s budget speech was confirmed and no other corporate tax specific changes were mentioned. Mining and oil and gas companies’ optimism and appetite for investing in or expanding operations in Namibia would be buoyed by the fact that no additional income taxes were imposed. In a rapidly changing economy and global business landscape investor confidence can only grow in a stable business environment, which has largely been the case in Namibia from a corporate tax perspective over the past few years.However, the proposed export levy will put severe pressure on margins given current commodity prices. The fact that these levies will be payable irrespective of financial performance will also put pressure on shareholders’ returns and the overall attractiveness of Namibia as in investment destination. Coupled with mining royalties, also payable irrespective of financial performance, the effects of turnover type taxes in a downturn economy may be devastating.Compared to neighbouring countries Namibian corporate income tax rates continue to be higher. The continued downward trend is however encouraging. What is concerning are the proposals regarding the introduction of capital gains tax and the amendments previously proposed to the Transfer Duty Act. While the proposals in isolation are not in themselves detrimental to continued investment, these taxes will make the trading of assets prohibitively expensive and may stifle investment in the long term. Furthermore, in some industries such as Namibia’s fledgling Oil & Gas industry, imposing taxes and duties on trading of licences will make joint operations to fund expensive and high risk exploration nearly impossible.The proposed establishment of an Independent Revenue Authority for Namibia should be seen as a positive aspect and while companies may face more audits in future, the overall effectiveness of the tax system and general ease of doing business should improve – this is a positive development for investors, Namibians and the Fiscus.Current landscapeNamibia has a source based tax system in terms of which income from Namibian sources is taxable in Namibia. In addition, Namibian residents are taxable on income deemed to be sourced in Namibia in terms of specific deeming provisions contained in the Income Tax Act. Non-resident companies are taxable in Namibia on Namibian sourced income, deemed Namibian sourced income eg royalty income, dividend income from Namibian sources and, subsequent to the introduction of withholding tax on services, income from services rendered to Namibian residents.Total company taxes according to the Ministry of Finance’s Estimates of Revenue, Income and Expenditure amounted to N$5.045 billion in the 2012-2013 financial year and are expected to increase to N$5.550 billion in the 2013-2014 financial year and N$6.843 billion in the 2014-2015 financial year. The relative contributions of the diamond mining, other mining and non-mining sectors can be diagrammatically represented as follows:It is clear that the year on year growth in company tax revenue is expected to accelerate from 9% in the current year to 23% in the next year. What is not clear is whether the increase in growth is expected as a result of better economic conditions, more effective tax collection or more taxpayers in the net.When calculating the total contribution of company taxes, taxes disclosed as withholding taxes are often overlooked. Other taxes borne largely by non-resident companies include non-resident share holders’ tax (“NRST”), withholding tax on royalties and withholding tax on services. The total contributions of these taxes amounted to N$508 million in the 2012-2013 financial year and are expected to increase to N$617 million in the 2014-2015 financial year. Despite the fact that withholding tax on royalty income is expected to decline over time, tax from NRST and withholding tax on services is expected to continue increasing over the medium term.Other contributions often overlooked in calculating the contribution of corporates to the Namibian Fiscus include the mining royalties payable by diamond mining companies and other mining companies which amounted to approximate N$ 860 million in the 2012-2013 financial year. Mining royalties are expected to increase to N$936 million in the 2013-2014 financial year and N$1.543 billion in the 2014-2015 financial year.The Ministry of Finance’s Estimates of Revenue, Income and Expenditure for 2014 -2015 does not include any specific reference of the expected contribution of the export levy to be introduced, although this levy is expected to generate significant revenue. In addition to the direct contribution to taxes corporates are also liable for collecting value-added tax and are responsible for administering employees’ taxes thereby assisting Inland Revenue in the collection of these revenues.Where we are headingIt is clear that the Minister of Finance is looking for alternative sources of income and the contribution of corporates can no longer be measured by the corporate income tax paid only. Governments across the world are trying to diversify their sources of revenue to shield themselves from downturns in the global economy and a reliance on corporate income taxes.Currently the corporate income tax paid represents approximately 14% of total tax revenues, while the tax paid by individuals represents approximately 25% of total tax revenues. This trend is expected to continue and estimates are that the corporate income tax paid will continue to represent approximately 14% of total tax revenues, while the tax paid by individuals will represent approximately 28% of total tax revenues in the 2016-2017 financial year. Globally corporate income tax rates are reducing as governments are vying for foreign direct investment and the relative contribution of corporate income taxes are forming a smaller part of total revenues. However, the reduction in corporate tax rates should not be misinterpreted as a shift in focus away from corporates and corporate taxpayers will continue to be the focus of tax audits globally and the tax affairs or large companies are increasingly becoming the focus of governments, NGOs and even the press. According to an international tax publication “MNEs (multinational enterprises) stand accused of dodging taxes all around the world and in particular in developing countries, where tax revenue is critical to foster long-term development. Little wonder demonstrations by angry taxpayers have taken place in several global locations recently.”The new buzzword acronym in the tax world is “BEPS” or base erosion and profit shifting. This is a practice of multinational enterprises in terms of which taxable income is reduced in the location where it is made to other jusrisdictions where less tax is paid. In terms of an Organisation for Economic Cooperation and Development report titled: Addressing Base Erosion and Profit Shifting released in February 2013 the six major contributing factors/practices giving rise to BEPS were: •hybrids and mismatches which generate arbitrage opportunities•the residence-source tax balance•intragroup financing and debt loading•transfer pricing issues•the effectiveness of anti-avoidance rules•the existence of preferential regimes.Namibia is expected to follow suit and the creation of an Independent Revenue Authority with a large taxpayer unit may be one of the early signs of capacity building needed for better enforcement of tax legislation. An increased focus on ensuring that Namibia gets its fair share of corporate income taxes payable by multinational enterprises must be expected.Therefore, although tax rates are coming down, companies, especially multinationals, are expected to be the subject of intense scrutiny going forward. They will also be expected to contribute to various new taxes and levies and to continue to collect taxes such as withholding taxes and employees’ tax on behalf of Inland Revenue. Compliance obligations and reporting are expected to increase going forward placing severe pressure on tax managers and finance teams. Directors should not underestimate the responsibilities they have to ensure companies comply with these onerous reporting obligations.Company profile: EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.Ernst & Young Namibia is a truly Namibian firm dedicated to achieving our global promise “to deliver seamless, consistent high quality client service, worldwide”.Ernst & Young established their presence in Namibia in 1956. They have five resident partners in two offices situated in Windhoek and Walvis Bay, providing professional assurance and advisory services to public, private and governmental clients across the country.Ernst & Young Namibia provides a wide range of services to public, private and governmental clients across the country.Our service lines include:Assurance, Tax, Transactions, AdvisoryContact detailsWindhoek:Tel: 061 289 1100Fax: 061 23 4991Walvis Bay:Tel: 064 20 5847Fax: 064 20 3769Email: EYNamibia@za.ey.com

EY: Increased scrutiny of companies expected

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Republikein 2026-02-03

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EY: Increased scrutiny of companies expected

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