Namibia’s Changing Tax Landscape – From Simple to Complex

Author: Cameron Kotzé, Partner, Ernst & Young Namibia

The collection of revenue for the Namibian fiscus has been under scrutiny for some time.  Questions have been posed as to whether Namibia should change from a territorial (source) based tax system to a residency based system to increase the potential base from which revenue can be collected.

A study was done more than 10 years ago to advise the Namibian government on changes to the existing tax laws.  This study concluded that the Namibian tax base should be broadened but stopped short of recommending that the basis of the income tax system should change from territorial to residence.  Many of the recommendations made by the advisors have been implemented albeit that it has taken quite a long time get the proposals enacted into law.

One of the recommendations of the study was to simplify the legislation so that every Namibian taxpayer understood the need to contribute tax to the State and how the amount that should be contributed is calculated.  Amendments made to the existing legislation have fallen far short of this goal.  In fact, some amendments that have been made to the Income Tax Act lack clarity and require careful analysis by experienced tax law experts.  Given the technical capability of the current staff of Inland Revenue, the application of some provisions that have been introduced into law is questionable.

The officials at the Inland Revenue office have displayed a pragmatic approach for many years in the past.  This was mainly attributable to the shortage of skilled trained tax professionals in the country.  Namibia’s taxpayer population has never actively pursued complex tax schemes to engineer a low effective tax rate and, coupled with the pragmatic approach of the officials at Inland Revenue, this resulted in a very cordial relationship between the tax collector and taxpayer.  This relationship has been affected in recent times due to the collapse of the administrative capacity of Inland Revenue as well the draconian penalty system for non-compliance.  Late payments of tax attract interest at a rate of 20% per year (calculated daily and compounded monthly at one stage) but the overpayment of tax attract no interest at all and still attracts no interest.  In addition to this, the late payment of tax in some cases also attracts a penalty of up to 100% of the tax payable.  Taxpayers have been confronted with these penalties even in cases where no malice was intended.

It is clear that Inland Revenue is (correctly) seeking to tax income that that has escaped the tax net before.  For example, a few years ago a withholding tax on interest earned from local banks and collective investment funds was introduced.  Apart from a change in the law to subject the interest component of a distribution by a collective investment fund to tax, other interest income was always subject to tax but most individuals failed to disclose the interest income in their tax returns albeit that the banks submitted interest earning declarations to Inland Revenue .  Stakeholders however were not consulted sufficiently prior to the introduction of the tax and those affected by the new tax sought plans to avoid it.  This resulted in Inland Revenue having to refine the rules to ensure they collected the expected tax.

A withholding tax on services rendered by non-residents to residents has also been introduced recently, and applies irrespective of where the services are rendered.  Thus, the source based principle has been extended to catch services rendered outside Namibia, on the basis that the Namibian taxpayer can claim a deduction for the amount paid to a non-resident.  Services rendered within Namibia have always been subject to tax but previously escaped the tax net due non-disclosure by service providers and poor policing mechanisms employed by the Inland Revenue Directorate.  Unfortunately the withholding tax on services legislation has been very poorly drafted and has created a lot of uncertainty amongst many taxpayers.

The income contributed by the mining industry to the fiscus is also questioned by the Government.  Comparative studies have shown that the contribution of the Namibian mining industry in the form of v taxes and levies are amongst the highest in the world.  Some of recent proposals made by the Ministry of Finance would have had a devastating impact on the industry and were withdrawn after robust consultations.  A levy on the export of raw minerals is still under investigation and will be introduced in the future.

A transfer tax on the transfer of shares in property owning companies has recently been proposed.  This proposal will ensure that the effective transfer of ownership of all properties (residential and commercial) will become subject to transfer tax.  The draft legislation is very complex and will probably result in taxpayers seeking various avenues to reduce the tax payable.

A further example of broadening the tax base is the environmental taxes that will be introduced soon.  The basis of the tax is that the polluter (consumer) will pay the tax on goods used which are considered to be harmful to the environment.

Other recent amendments to broaden the tax base include ring fencing of income from loss making trade and gains on the disposal of mineral rights.  The taxing of gains on the disposal of mineral rights is the first move towards taxing capital gains in Namibia.

The study conducted to advise on the changes to the tax laws of Namibia recommended that a capital gains tax should be considered.  This will clearly broaden the current tax base and generate extra income for the fiscus but there are concerns that the introduction of such a tax may not generate sufficient net revenue after taking into account the cost of collection.

Formal cross border thin capitalisation rules will be introduced in the foreseeable future.  This is very necessary as there is uncertainty about Inland Revenue’s formal position on how to calculate a taxpayer’s capital base for purposes of determining whether the thin capitalisation provisions of the Income Tax Act are triggered.  The thin capitalisation provisions became effective in 2005 but the Inland Revenue Directorate has not focussed on this aspect of the law when assessing taxpayers.  There could be a significant opportunity for Revenue to collect extra tax once these guidelines become effective.

Tax incentives are also under consideration.  Inland Revenue holds the view that the current incentives contained in the Income Tax Act have not encouraged significant investment in attracting new investment in the manufacturing industry in particular.  Although this may be true, the question must be asked whether the process that has been followed by Inland Revenue in recognising the incentives has been executed efficiently and equitably.  The perception is that Inland Revenue Directorate made it as difficult as possible for an investor to obtain manufacturing status. The officials involved in the evaluation process lacked the skill to make an informed decision on the nature of taxpayer’s activity and had no clear guidelines to follow when applications were considered.  No plausible reasons for turning down applications were provided to applicants.  Given this background it is no wonder that investors have not queued up to invest in Namibia – the environment is just too uncertain and it is not worth taking the risk.

It is very likely that the export processing regime currently in place will also be phased out.  The impact of phasing out is under investigation and affected investors will have to be consulted before a final decision is taken.  The benefit from having export processing zone status has also not attracted a significant amount of investors to Namibia – mainly due to the compliance burden that the investor has to take on, and limitations where the final product is exported to South Africa.

The possibility of an autonomous Revenue Authority is also under investigation.  The lessons learned by other countries in Africa which have opted for autonomous revenue authorities are compelling, in that revenue collection had increased substantially after creation of such a body.  The culture of compliance by taxpayers had increased dramatically and the tax base had broadened naturally.

What was once a stable and uncomplicated tax environment will be changing and become complex.  This will require a significant lift in the skills level of the staff at the revenue authority.  I believe that Namibia has the capacity to answer to this call and such a change will be good for Namibia’s citizens and those wanting to do business in the country.