Conflicting interests arise for many businesses where decisions have to be made to determine how they consistently achieve profitability, while on the other hand minimise payment of tax. The temptation to minimise profits or even make a loss then becomes a tax risk management strategy. Some businesses that are aggressive tax planners employ several methods some of which do not resonate with ethical business practices. Many organisations are involved in avoidance which by the way is not very different from evasion. If you ask me; they both involve scheming and dodging.
Creation of tax losses may be seen in some cases where interest payments are made in relation to borrowings from a parent company; in other instances, prices at which raw materials or equipment are transferred to group members are fixed; and in others, the costs charged by shared service centres are too high. Those especially not part of a group may for example include personal expenditure within the books of the business. These and others are the things companies go through to create losses so as to avoid income tax. This is not to discount the fact that businesses do incur losses in genuine and legitimate transactions.
In the June 2018 proposed tax reforms, there was a bill that required consistent loss makers to pay a 0.5% income tax on gross income. This would apply to those entities that would have made a loss for 7 years running. The tax would become payable in the 8th year of consecutive loss making. This proposal was not made into law because it was regarded as unfair to struggling but committed investors. There was a feeling too that, wider consultations had not been made then.
After a year of shelving it, this proposal is here again and should it be signed into law (which is very likely) effective July 2019, deliberate loss makers will have to rethink their tax strategy.
There are many businesses that "force" a loss so as not to pay tax. It may be better for a business to declare a profit because taxing profits may be more efficient than taxing gross revenue. It is therefore possible that the 0.5% tax on turnover could be way much higher than the legitimate tax of 30% of taxable profits.
Even if there are still questions around this proposal for example whether withholding tax is allowed as a credit in these circumstances, consistent creation of a tax loss may no longer be fashionable.
Withholding of VAT
Another reform that had been introduced last year but later halted was the requirement to withhold Value Added Tax (VAT) from invoices issued by suppliers. The Minister had gazetted those entities that would withhold VAT and submit it to the URA however many thought that as a country we needed further consultations to address any shortcomings and think through how this would be operationalised.
Unlike the law that was halted which required designated agents to withhold the entire amount of VAT (18%) on the invoice, this time round the proposal is to withhold one third of it. This reduction seems to be mindful of the cash flow problems and the unnecessary processing of refunds that the old proposal would have created. It was also possible with the original proposal for distributors to withhold VAT from their bigger suppliers but in my opinion money is safer in the hands of the big Multinational Corporations. The revision therefore has the possibility of having some entities as VAT withholding exempt in a similar fashion like the current withholding tax system.
Save for relatively smaller companies that have been granted express permission to account for VAT on cash basis; with the current system, VAT is payable even if the client has not yet paid. Suppliers will embrace the change because it takes away part of the pressure to submit VAT on sales even before cash collection. However, extra working capital requirements will arise on the part of the VAT withholding agent if the new changes are effected, because the URA must receive these funds within a certain period, short of which interest kicks in. Previously, clients would negotiate longer credit days and this then meant that the pressure to pay VAT is on the supplier regardless of collections. We see this pressure shifting to the withholding agents (the clients) as they must observe payment timelines.
It is believed that now wider consultations have been made to address any misgivings that had been previously anticipated by the introduction of the proposals and Government will be ready to implement them.
My appeal to our businesses therefore, is to rethink strategy, train staff and do all that is needed to plan early so that these and other reforms do not shock our businesses. Is the loss still worth making?
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