Workers at a gold mine south of Johannesburg, South Africa. Mining companies operating in Africa can wait months, sometimes years for refunds on value-added tax on exported materials. (AP)
It's one of many situations pitting cash-strapped African nations and beleaguered tax administrations against large multinational corporations. But the script has been flipped. Many anti-poverty advocates, often fierce critics of multinationals' reluctance to pay national taxes, are urging tax authorities to pay the refunds, even if it means cutting back on crucial services — and to put in place better procedures, or even laws, to ensure that VAT revenue isn't fully spent before appropriate refunds can be granted. The costs in the short term are worth establishing a VAT, and the perception of fair tax enforcement and rule of law, VAT advocates claim.
The issue affects not only the poorest developing nations but also South Africa, often seen as the continent's leading democracy and an economy emerging onto the global stage.
Some tax professionals are starting to wonder if VAT isn't quite the miracle pill for raising revenue its defenders have claimed.
"There is a general notion across the continent that for many of the developing countries, VAT is the tax of the future," said Alvin Mosioma, executive director of Tax Justice Network Africa, based in Nairobi, Kenya. "The refund component indicates that it's not as easy a tax to administer as it is assumed."
Initially developed in Europe and based on wartime consumption taxes during World War I, the value-added tax eventually spread to most European nations and took the developing world by storm in the 1980s. For tax authorities struggling to work through the complexity of income allocation — especially against the well-funded legal teams of large multinationals — taxing consumption at its source offers an appealing option for raising revenue. Economists prefer the tax for its neutrality across the economy, while critics note that taxing consumption is inherently regressive, as the wealthier tend to spend a smaller percentage of their income every year. In Africa, VAT accounted for 40 percent of all revenue collection in 2016, according to a report from the the African Tax Administration Forum.
The typical VAT system is enforced through invoices, as each company in a production chain receives a credit for the taxes paid on what it has purchased. When the good is sold, each producer pays only the tax on what it has contributed itself — the "value added."
The cost is ultimately borne by the final consumer, but it's paid only once. With a sales tax, the consumer pays the tax several times, because it's been built into the price each time a transaction is involved. The VAT system is self-enforced, another plus for administrations; all parties in a transaction have an interest in ensuring the tax is correct, so it's harder — although certainly not uncommon — for taxpayers to defraud the system.
But the entire logic behind VAT falls out of balance when the initial tax on raw materials isn't refunded. For extractive companies in Africa, which export all of their product, it becomes a tax on raw turnover, often on top of royalties paid to the local tax authority and an additional income tax.
"If you don't refund, it becomes a cumulative tax. It accumulates on every stage of the production chain. This becomes known in the market, and it can have a huge impact on investment decisions," said Rita de la Feria, a professor of tax law and a specialist in VAT at the University of Leeds in the United Kingdom. "It's really underresearched and undermentioned because it's basically not a problem that exists in developed countries."
Continentwide figures are hard to come by, but clearly billions are involved. The Democratic Republic of Congo suspended its VAT in 2016, and in September 2017 its president said it owed more than $1.2 billion to mining companies. Aside from Congo and Zambia, the International Monetary Fund has warned Mozambique, Tanzania and Uganda to comply with their own laws on refunds in a timely manner. According to Paying Taxes 2018, published by the World Bank Group and PricewaterhouseCoopers International Ltd., average wait times for VAT refunds can range from 15.5 weeks in Uganda to 47 weeks in Ethiopia and 90 weeks in Gambia.
Taxpayers in many of these countries assert their claims for refunds are met with audits, not payments.
"As soon the company claims a refund, an audit is started," said Gerhard Badenhorst, director of tax and exchange control at Cliffe Dekker Hofmeyr Inc. in Johannesburg. "As soon as one audit is complete, a new audit starts. That causes particular problems with mining companies."
Some countries will grant credits in lieu of actual payments, but those can be of limited use in countries with unstable or inaccessible currencies, or if the taxpayer operates at a loss. In Uganda, where taxpayers have also complained about seemingly punitive audits, companies with credits of more than 5 million Uganda shillings ($1,350) must either apply for a cash refund or for approval to credit it against other taxes, according to Jackline Komuhendo, a senior associate with PricewaterhouseCoopers (Uganda) Ltd.
"Usually it takes quite a while," Komuhendo said, as the Uganda Revenue Authority reviews the taxpayer's status with all other taxes.
Komuhendo also noted a dynamic present in many other African countries — many of the largest multinationals have enough cash flow to work with the tax authority and wait for the refund, but it can be prohibitive for smaller or medium-size companies, or startups.
"It would really be a shock to them," she said.
Even large companies operate on thin enough margins that they might find waiting for refunds in a particular country unfeasible. But ceasing them may not be a great option, either.
"In lots of instances, the client is already aware of the problems with the VAT refunds, but they've got substantial investments there. They can't just withdraw," Badenhorst said. "In certain instances, the mining companies close their operations. The margins are so small, if you don't get the refund, then you can't operate profitably."
For struggling countries that neglected to put aside money for refunds in the past, current refunds can present an almost impossible choice — cut back on needed services or infrastructure projects to pay multinationals for exports, or withhold the refunds and risk promoting a reputation as a country with an unprincipled and undesirable tax system? The latter can pose a serious threat to future growth.
"One of the things that's always struck me, in a number of studies, investors say they're more concerned about the stability of the regime than the rate," said Daniel Mulé, a senior policy adviser in tax and the extractive industry for Oxfam America. "The lack of stability makes it hard to plan, and that's a more challenging factor."
And yet, the issue doesn't just affect the poorest African nations. South Africa had a gross domestic product of $349.3 billion in 2017, according to the International Monetary Fund, and in 2010 it joined Brazil, Russia, India and China in the BRIC group of emerging global economies, which was rechristened BRICS. But the South Africa Parliament has recently investigated allegations that the South African Revenue Service was holding onto VAT refunds to boost its annual revenue figures.
"For some reason, SARS is using a brush to paint all taxpayers. In a sense, there almost seems to be this suspicion on the part of SARS that if you have a refund that's payable, that could be a fraudulent refund," said Seelan Moonsamy, a consultant with Baker McKenzie in Johannesburg. "SARS is one of the pre-eminent tax administrations in the world; you should think they have the tools and practices in place to be able to conduct refunds quickly and robustly."
As with much of the rest of the continent, South Africa's economy is heavily dependent on mining. South Africa is the world's largest producer of both diamonds and platinum.
"It's a problem with no end in sight. The problem hasn't improved. It escalated, if you ask me," Moonsamy said. "If the client has the appetite, they can bring an application to SARS to approach the court for relief. That can obviously be an expensive exercise. Most clients aren't willing to go that route."
Mosioma of Tax Justice Network Africa notes that VAT fraud is not a frivolous concern for these nations. Despite having much more sophisticated collection tools at their disposal, a recent European Union report suggests that EU member states lose out on €160 billion ($184 billion) annually to various forms of VAT fraud.
"We have seen many of these cases in Kenya, and in other countries, where [VAT] has been an avenue for tax avoidance, or for other tax evasions, or for companies making wrongful VAT requests," he said. "That is one of the reasons why it has led revenue authorities to be more stringent in auditing the kind of VAT requests that are being made in countries."
Mosioma said improvements in information technology could help with better enforcement, while better synchronizing refund distribution with the annual budget could remove incentives to delay refunds to massage statistics or make budgeting ends meet.
De la Feria at the University of Leeds notes that nixing the VAT for a sales tax, as Zambia has done, could ultimately lead to more fraud, as well as other economic distortions.
"It's throwing the baby out with the bathwater," she said. "The retail sales tax is well known for being less neutral, and a lot less efficient because it's very prone to fraud. It basically doesn't have some of the self-enforcement features that the VAT has."
--Editing by Robert Rudinger.
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