‘Mistrust’ hampering continental trade

Pretoria – Trade between African countries remains low, despite efforts to harmonise taxation to allow for the free movement of goods and services.

Tax experts this week warned mistrust between countries remains the greatest detractor to achieve harmony and increase intra-trade.

Intra-Africa trade was only 11.3 percent of the continent’s total trade in 2014, according to a recent report by the Mo Ibrahim Foundation.

Ernst & Young tax partner Charles Makola said there has been an increase in bilateral and multilateral tax instruments intended to create harmony in the corporate tax base.

However, in Africa tax is a political instrument. “This leads to an element of protectionism in each state with everyone looking inward and looking at what is best for the country.”

EY will address the proposed continental free trade area from Cape to Cairo, the benefits of uniform tax administration and the impact of international bodies such as the Organisation for Economic Cooperation and Development and the United Nations on tax during its annual Africa tax conference next week (30 September to 2 October).

EY Africa tax leader Jim Deoitte said differences are important in tax policy, since each country is in a different stage of development. “Every country should have the ability to create its own laws and each government should have the ability to provide incentives to sectors which are strategically important.”

However, it is when decisions are taken unilaterally, tax treaties are interpreted differently or the provisions in the treaties are simply ignored that problems arise, he warned.

Constant battle

PwC tax partner Kyle Mandy said there is a risk of a race to the bottom when countries start competing with each other to attract investment.

“The constant competition to offer a better package than other countries ultimately results in countries forfeiting their taxing rights, resulting in no or little tax being collected. This is particularly a concern in the context of corporate taxes where the global trend has been to reduce corporate tax rates,” Mandy said.

The UK has committed itself to reduce its corporate tax rate to 18 percent by 2020. South Africa currently has a corporate tax rate of 28 percent.

Mandy said one area where tax can contribute in making South Africa attractive is to create a regional service hub for Africa.

“This does not necessarily mean we have to offer low or no taxes for such activities. We rather need to eliminate uncertainties and ensuring that no double taxation results from such activities.”

However, offering a low tax rate for cross border services would make South African more attractive. Lowering the general rate would be preferable, as is being done in the UK.

Makola, who is also a member of the SA Institute of Tax Professionals international tax committee, said a common corporate tax rate was not the answer to achieve harmony and greater intra-trade. The focus must be on certainty, predictability and cooperation in the enforcement and collection of tax.