The CFO conundrum: Navigating intricate tax regulations (part 2)

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CFO East Africa chatted with Lafarge Hima Cement Uganda CFO Moses Aman, ICEA Lion Insurance Tanzania CFO Alfred Mtaki and Canal+ Group Rwanda CFO Hermann Malan for this two-part special feature on tax in Kenya, Uganda, Tanzania and Rwanda.

As CFO of Lafarge Hima Cement in Uganda, Moses Aman takes compliance very seriously. He says, “Generally, tax compliance is viewed as the company’s licence to do business and no compromises are made in this area. As a corporate entity, Hima has an obligation to account for and remit its taxes in full. There is, however, increasing pressure on the taxman to close budget funding gaps and, unfortunately, this may sometimes increase the administrative burden on those parties that exist within the relatively narrow tax base.”

Moses Aman

The burden is also felt across the border in Tanzania.

“We are under constant pressure with the taxman,” CFO of ICEA Lion Insurance Tanzania Alfred Mtaki says, "They have stringent targets to meet and therefore you receive regular assessments and audits. The tax law is skewed in their favour and therefore you at times have sleepless nights. We engage with tax consultants to assist us to ensure that we meet the highest level of compliance. We go through very painful processes of providing reconciliations and objections to assessments which take up a lot of time that could be better spent pursuing other business objectives.”

Alfred Mtaki

Daniel Ngumy, managing partner at Anjarwalla & Khanna, notes, "There is also a tax rewrite project which is ongoing in most of East Africa. The Tanzanian tax laws are fairly modern, they have borrowed significantly from international models and that is across your corporate taxes and income tax laws. Kenya has modernised every single one of these tax laws with the exception of income tax whose law was written in 1974. We have been expecting a new income tax law for the past five years.”

The challenge of taxation involves getting the calculation right and ensuring it is paid on time. This is difficult because of the challenge of interpreting the tax laws.

Consequently, most CFOs will at some point in a five-year cycle have a dispute with the revenue authority. If unresolved, they end up at a tribunal or in extreme cases at the high court. The dynamic nature of tax laws exacerbates the problem.

Double tax

In Kenya, the government is working on a tax policy which will do away with the need to change the tax regime frequently. This is important because if tax is easy to compute and easy to settle, it contributes to investors’ overall assessment of the ease of doing business. In this regard, Rwanda is highly ranked while Kenya scores poorly.

“Kenya has the most tax cases that go to court on the basis of interpretation,” Daniel reveals, “By contrast, there are fairly few in Rwanda; their tax laws are published in English, French and Kinyarwanda which eliminates ambiguity as the meaning can be checked in different languages.”

Hermann Malan, the CFO of Canal+ Group Rwanda, adds, “Rwanda distinguishes itself by maintaining a straightforward and comprehensible tax regime. These were my findings after I conducted a tax evaluation to assess the tax environment in Rwanda and its impact on companies. There is transparency regarding the allocation of tax revenue. The government has made significant investments in automated tax declaration platforms and has streamlined tax items into a few distinct categories, simplifying the process.”

Rwanda's major initiatives, Visit Rwanda and Invest Rwanda, both benefit from an accessible and user-friendly tax policy, aligned with the objective of attracting tourists and increasing foreign direct investment. The country is very progressive as it is aiming to consistently reduce the corporate tax rate to about 20 percent which is ten percentage points lower than the rest of East Africa.

At a crossroads
Beyond different tax rates, East African countries lack comprehensive double tax agreements which leads to many instances of double taxation. This is ironic given that the region has been promoting free movement of goods and services. Additionally, transfer pricing is the new frontier as countries compete with each other to maximise collections from multinational companies.

Daniel explains what this means, “Multinationals have shared services where a company in one country charges a sister company in another country for services rendered. These charges are very subjective and a tax authority could claim that the company in their country was overcharged for a service and consequently deny them part of the deduction. Conversely, they could claim that the company undercharged a foreign company and demand a higher taxable income.”

He adds, “This is becoming a very big area of focus. At Anjawarlla and Khanna, we even had to hire someone from the Organisation for Economic Cooperation and Development (OECD) to help build our transfer pricing practice.”

CFOs in East Africa are standing at the crossroads of intricate tax regulations and the pressing need to reduce expenses, which inevitably includes managing tax liabilities. As tax authorities intensify their efforts to boost revenue, CFOs are tasked with the complex challenge of manoeuvring through a constantly evolving landscape. They yearn for greater clarity in tax laws and more equitable collection processes.

Ultimately, their aspiration is to free up more time and resources for value-added activities within their organisations, all the while striving to alleviate the enduring headache that taxation can often be.

This is the second of a two-part special feature on tax in East Africa. Part one is available here.

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