Mbabane: There is a well concocted blunder in the making – arguably a huge one. It’s a perceived error that is being engineered by the Ambrose Mandvulo Dlamini led government and it is bound to hurl the country’s economy to a worst state than what it is at the moment. Minister of Finance Neal Rijkenberg seem to be the mastermind of what appears would be a disastrous master-plan aimed at turning Eswatini into a tax haven, something which could worsen the country economic crisis in three years.
The fact that government is hell-bent on turning the tiny kingdom to a tax haven is well outlined in the Kingdom of Eswatini Strategic Roadmap 2019-2022. A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Government’s plan to reduce corporate income tax to a record lowest level was laid bare in the strategic roadmap. It projected to reduce corporate income tax in phases, starting from July 1, 2020 until 2023. It was planned that corporate income tax would be reduced from the current 27.5 to 20 per cent by July 1, 2020; down to 17.5 per cent from July 2021; down to 15 per cent from July 1, 2022 and down to 12.5 per cent from July 1,2023.
Amusingly, by 2023, Eswatini’s Corporate Income Tax rate will be the lowest in Sub-Saharan Africa. Currently, Mauritius, which is one of the well-known tax havens, has a flat Corporate Income Tax rate of 15 per cent. Government’s main reason for reducing Corporate Income Tax is the attraction of foreign direct investments (FDI) and job creation.
The anticipated tax reduction, commentators say will have negative effects to the country’s revenue streams. The basic logic dictates that Eswatini will have to forego a large chunk of its revenue it gets
from corporate income tax collection in the short term. Eswatini Revenue Authority (SRA) statistics show that corporate income tax is the third major contributor to the country’s tax revenue, coming after Pay-As-You-Earn (PAYE) and Value Added Tax (VAT) respectively.
According to the SRA’s Integrated Annual Report 2017/18, individual tax (PAYE) contributed E3.044 billion, VAT contributed E2.520 billion and Company Income Tax (corporate income tax) E1.373 billion against a target of E1.600 billion. In the period under review (2017/18), the
SRA reported that total revenue collection amounted to E8.453 billion, only 1.0 per cent above the target of E8.340 billion.
Presumably, with the planned reduction of Corporate Income Tax to 12.5 per cent in 2023, this could result in government losing over E800 million in 2023 – which is almost half of what corporate tax
contributes to government coffers. This estimate is based on the recent corporate tax contribution at the rate of 27.5 per cent.
A tax professional from one of the country’s audit firms slammed government’s intended move to turn the country into a tax haven so quick. “We should not start from a point of vulnerability where we seem desperate for foreign investment. The country’s policymakers need to understand that FDI does not bring development but rather, development is what attracts FDIs,” said the expert.
The expert said the proposed major reduction of Corporate Income Tax looks like a rather selfish move aimed at enriching the current existing companies and those which might come to open shop in the country. Backing this assertion, the expert said the reduction of Corporate Income Tax alone will not result in the attraction of Greenfield FDIs or persuade those declaring their taxes to other jurisdictions to start declaring them in Eswatini.
Studies show that high taxes are one of the stumbling blocks for the attraction of FDIs but they are not the main hindrance. “According to the Ease of Doing Business 2019, Paying Taxes is the second-best area in which Eswatini is doing very well and that suggest that tax is not the main hindrance.
Eswatini was ranked at 63 out of 190 economies. There are other areas that need to be tackled first before interfering with taxes, especially Corporate Income Tax. Look at South Africa; its Corporate
Income Tax is higher than ours, but it is the second economic powerhouse in Sub-Saharan region, after Nigeria and an investor destination,” the expert said.
Eswatini is ranked best in Africa in trading across borders- 32 out of 190 and 85 out of 190 economies in Getting Credit. Areas in which itis poorly ranked are Enforcing Contracts (172), Getting Electricity
(163), Starting a Business (159), Protecting Minority Investors (140), Resolving Insolvency (119), Dealing with Construction Permits (107) and Registering Property (107).
The professional went on to say that government need to be careful when making the tax policy reforms, arguing that there are no guarantees that more companies would flood the country to open
businesses soon after the implementation of tax reduction. “Like I have said, investors are looking at the Ease of Doing Business holistically, hence it is of vital importance that government does not
rush to turn the country into a tax haven because this might push the
country to a brink of collapse,” he said.
SRA Commissioner General Dumisani Masilela did not want to be drawn to comment on the issue, telling Independent News that: “This is a policy issue not an operational one, therefore I cannot comment on it.”Another tax practitioner who also asked to comment on condition of anonymity said the decision and timing of Corporate Income Tax reduction was miscalculated.
The expert said in his view, the decision was based on a delusion that there is profit shifting that is
currently being done by some companies – reporting profits generated in Eswatini in other jurisdictions. “Such is possible, but it cannot be necessarily confirmed that those suspected companies would then report the profits in Eswatini after the tax reduction, because they believe that the tax reduction will then encourage most of these companies which could be reporting their profits in other
jurisdictions including Mauritius,” said the tax practitioner.
The tax specialist said government is of the believe that once more companies start reporting their profits in Eswatini, they would be contributing 12.5 per cent tax of a higher figure, something which is highly unlikely because a lot of companies operating in Eswatini are head-quartered in South Africa and others are bigger multinationals head-quartered in Mauritius – one of the tax havens and the companies are bound to continue declaring their profits in their current
preferred jurisdictions.
“With the introduction of the initiatives of Global Forum and Inclusive Framework that compels all countries to share information of multinational companies so that every economy can determine taxing rights correctly, to avoid profit shifting, Eswatini, through the reduction of tax is responding to a problem in a costly fashion,” the specialist said.
Minister Rijkenberg comes gun blazing to defends his policy
But Minister of Finance Neal Rijkenberg came up with all guns blazing to defend government’s decision. The minister told Independent News that: “In line with the Eswatini 2018 – 2023 Strategic Roadmap, which was agreed upon and endorsed after significant consultations with
relevant stakeholders, adding that these reductions form part of a broader assessment and realignment of the National Tax Policy.”
Rijkenberg explained that government made sure that they aligned the strategy with regional and international best practice, in order to “prevent any suggestion of Eswatini becoming a Tax haven.”
He said other taxes, such as certain consumption taxes, withholding taxes and fuel levies will increase and strategies will be put in place to improve tax compliance and provide relief for Small and
Medium businesses. He downrightly denied that the move to reduce Corporate Income Tax to 12.5 per cent was designed to turn Eswatini into a Tax haven. “Not at all,” he said.
He stressed that Eswatini is a compliant signatory to all relevant International Protocols against
Base Erosion and Profit Shifting (BEPS) and Tax havens.
Asked if the Corporate Income Tax was not systematically designed to benefit Montigny Investments, a company in which he is a shareholder of, Rijkenberg responded: “I am not unilaterally responsible for introducing these amendments, and the recent approvals for the increases in VAT, Licenses and Fuel Levies have had a significantly negative impact on the businesses that I am a shareholder of. The adoption and implementation of these policies are certainly not for any personal gain.”
Rijkenberg went on to say that despite the imminent Corporate Income Tax reduction, tax revenue will actually increase as structural distortions “in our policies, such as the large Shadow Economy, will be addressed.” Addressing the issue of what guarantees government does has that the reduction of tax will yield the desired results, the minister said tax policy is only one part of the Strategic Roadmap and the best guarantee they have of an economic turnaround would be the
successful implementation of the entire policy.
Detailing the perceived benefits of the about to happen Corporate Income Tax reduction, Rijkenberg said there are three main benefits; the first one being that more Foreign Direct Investment and local
companies will be incentivized to invest more, adding that it is important to remember that money not paid in taxes is not lost to the economy, as it will be spent on investment, capital expansions and new
technologies.
The Minister of Commerce, Industry and Trade Manqoba Khumalo recently announced six significant investors, including Kelloggs and Johnson Workwear. Rijkenberg promised that more are in the pipeline, and they are looking forward to announcing these soon. Secondly, the minister said people and entities that are currently not paying their fair share will be taxed. “Eswatini has a disproportionately large Shadow Economy, which currently largely falls outside of the tax net. These distortions will be addressed.”
Thirdly, Rijkenberg said the collection of taxes will be made easier and more efficient, leading to higher compliance rates. “There will also be less reason to evade, or even avoid, paying your fair share,”he said.
Other than the expected Corporate Income Tax reduction, government recently passed the Special Economic Zones Act, 2018, which also has the hallmarks of a tax haven. One of the incentives offered to foreign investors is an exemption from Corporate Income Tax for an initial period of 20 years, with subsequent tax charged at 5.0 percent forever. Special Economic Zones are the Royal Science and Technology Park (RSTP) and King Mswati III International Airport? The
legislation also allows for unrestricted repatriation of profits by
the foreign companies.
Commentators and economists are wondering what the justification is for a 20-year tax holiday for FDI companies and how the repatriation of profits by these companies would benefit Eswatini.
“Does a 20-year tax exemption make sense? If these companies do not pay tax for 20 years, who will be paying for the maintenance of the roads and infrastructure they will be using? Besides, 20 years from now, the industry would have undergone so many changes, so what benefits would Emaswati derive from such investments?”
Country Tax Rate
Chad 35.0%
Congo 35.0%
Equatorial Guinea 35.0%
Guinea 35.0%
Sudan 35.0%
Zambia 35.0%
Cameroon 33.0%
Seychelles 33.0%
Mozambique 32.0%
Namibia 32.0%
Gambia 31.0%
Morocco 31.0%
Angola 30.0%
Ethiopia 30.0%
Gabon 30.0%
Kenya 30.0%
Malawi 30.0%
Nigeria 30.0%
Republic of the Congo 30.0%
Rwanda 30.0%
Senegal 30.0%
Sierra Leone 30.0%
Tanzania 30.0%
Uganda 30.0%
South Africa 28.0%
Eswatini 27.5%
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