If Africa ain’t for sissies, African tax certainly isn’t and many African countries have some strange provisions in their tax law which can catch out the unwary. Here are some examples of some African peculiarities in Kenya and Nigeria that can be particularly piquant.
Kenya - VAT on exported services
Kenya’s capital, Nairobi, is a major business hub for the African continent. Many businesses provide services from there to customers in other countries. Most countries use their VAT system to encourage “exported services” like this, by using a zero percent VAT rate for them. This means that the provider of the services can claim back the VAT paid on inputs (things like rent, computers, electricity, etc.), but the foreign customer is not required to pay VAT in the supplier’s country. Well in 2022, the Kenyan government must have decided that Kenyan industry was too competitive, as it imposed VAT on exported services at the normal rate of 16%. This does not apply to “business process outsourcing” which remains zero rated.
This is damaging to Kenyan businesses which export services as it makes their services more expensive than they would otherwise be. It appears that the government has recognised this, and now plans to change the law, again. Exported services are now, once again, be zero rated, as they should be. This is a very welcome development, which shows that the Kenyan government does listen, and this should help Kenya retain its role as a leading centre for business services to the rest of the continent and beyond, and as a location for regional head offices.
Kenya, again - Taxation of interest free loans
Companies often finance subsidiaries in other countries using debt, rather than just equity. Sometimes, this may be done to reduce taxes, as the interest is tax deductible. But there can be other good reasons for using debt, such as protecting the shareholder from currency devaluation, or greater simplicity in repaying surplus funds to the shareholder.
Interest paid to a foreign lender often suffers withholding taxes, and increasingly countries limit the amount of interest that can be deducted, especially on loans from related parties. Kenya applies both restrictions, but then goes further. If a loan from a foreign related party (such as a shareholder) to a Kenyan company is interest free, then obviously there is no interest expense for the Kenyan company to deduct. Often, the reason for the loan being interest free is because the Kenyan company is not able to pay any interest – the loan is in many ways more like capital than debt.
You may then think that there would be no withholding tax on interest to worry about here, as no interest is paid. But you would be wrong! Kenya deems that interest was charged at a market rate, and withholding tax must be paid on that deemed interest. As it is not actual interest, there is no deduction for this for the Kenyan company.
This enables Kenya to collect withholding tax, even though no interest has been charged or paid. This puts an extra burden on the Kenyan borrower, which in many cases it will not be able to afford. In effect, it increases the costs of investing in Kenya. It seems to be a heavy-handed measure, which penalises companies for not paying “enough” interest – whereas other parts of the tax law try to discourage companies from paying interest to related parties.
Nigeria - Company tax rate
The Nigerian rate of corporate income tax is often quoted as 30%. In a way, this is true, but it is misleading. This is because Nigeria has at least three taxes on company profits, so how do we know what rate applies and when?
For most companies (that is, those that are not small, and do not have a tax holiday or exemption), the Corporate Income Tax is indeed 30%. But they also must pay the Tertiary Education Trust Fund Tax (TET), which is now 3% of profit as computed for income tax but before capital allowances and losses brought forward are deducted.
Companies must also pay the Police Trust Fund Tax, at 0,005% of profits. This at least is a small amount, but it still adds to the cash tax and compliance burden.
Companies in some industries (such as banks, insurance companies, telephone companies) pay yet another tax, the National Information Technology Development Agency (NIDTA) levy, of 1% of accounting profit. Companies in some sectors (such as banking, telecommunications, ICT, aviation, maritime, and petroleum) must also pay another ta of 0.25% of accounting profit before tax, to fund the National Agency for Science and Engineering Infrastructure (NASENI). Finally, some industries also have additional taxes, but these are mostly charged on sales or costs, rather than on income.
So, for a company which is not required to pay the NIDTA levy, it will have to pay income taxes of more than 32,5%, and the rate will be higher for a company which spends more on capital assets.
This is all before considering withholding taxes on dividends.
Nigeria, again - Company versus personal income tax rates
The headline rate of company income tax is 30%, but on top of that, a company will pay the Tertiary Education Trust Fund Tax of 3%. Some companies also pay the NIDTA levy of 1%, and the NASENI levy of 0.25%, but let’s ignore them for this purpose. So, this leads to an overall income tax of 33%, which is pretty hefty.
When a company declares a dividend, there is a withholding tax of 10%. This is reduced by some double taxation agreements, but not all of them. Thus, a shareholder looking at the overall tax paid directly, and indirectly through the company, will suffer a tax rate of 39,7%.
On the other hand, an individual pays income tax at a maximum rate of 19,2%. The maximum rate shown in the Personal Income Tax Act is 24%, but a portion of income is exempt. A further aspect is that interest income earned by an individual is only subject to a withholding tax of 10%. The summary is that there is a large gap between tax rates for companies and individuals, which can be particularly relevant when structuring transactions for privately owned businesses.
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Meet the Author
This article was written by our man in Africa, Russell Eastaugh. Russel has extensive African experience, in particular in Nigeria and Kenya, and extensive experience of the betting industry. Contact Russell at firstname.lastname@example.org