Complexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014
Agenda ►
Introduction
►
Challenges and opportunities of supply chain management
►
Capturing growth in Africa – tax considerations:
►
►
Direct tax and other taxes
►
Transfer pricing
►
Indirect tax
Case studies
Page 2
Complexities, challenges and opportunities of supply chain management
Introduction
Page 3
Complexities, challenges and opportunities of supply chain management
Robust growth forecasted over the next five years In the context of a weak global economy, Africa’s overall economic prospects remain positive.
Note: 5-year forecast Gross Domestic Product growth rates (%) are indicated on a color spectrum from green (higher) to red (lower)
Source: Oxford Economics; EY Growing Beyond Borders, projected GDP Growth rate 2012-17
Page 4
Complexities, challenges and opportunities of supply chain management
Opportunities and risks vary widely African markets are diverse and fragmented Country visible
Source: World Bank; Transparency International; WEF Competitiveness Index; EY Growing Beyond Borders
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Complexities, challenges and opportunities of supply chain management
A fact-based approach to selecting and prioritizing markets in Africa is critical.
Note: a composite risk index is indicated on a color spectrum from green (relatively more positive) to red (relatively less positive).
Botswana Brazil China Ethiopia Ghana India Kenya Lesotho Liberia Madagascar Malawi Mali Mauritius Morocco Namibia Russia Rwanda Senegal Sierra Leone South Africa Tanzania Tunisia Zambia
Challenges and opportunities of supply chain management
Page 6
Complexities, challenges and opportunities of supply chain management
Size, scale and diversity makes Africa inherently complex
►
The sheer size and complexity of the continent, combined with the relative underdevelopment of many of its markets, makes Africa an inherently challenging place to do business: ► Land mass greater than the USA, Europe, China and India combined ► Vast geography, with 54 different markets ► Over 2000 languages and diverse cultural dynamics ► Few individual markets provide scale ► Inadequate infrastructure in many markets
EY office No EY office, but support available
Source: Kai Krause
Page 7
Complexities, challenges and opportunities of supply chain management
Growing supply chains in Africa have challenges But there are enablers to overcome barriers Network design Incorporating: ► Strategic, operational and tax criteria ► Integrated sea and road freight design ► Adaptable to rapid sales growth ► Pan-Africa and sub region planning ► Inbuilt flexibility and resilience, e.g.,addressing physical, product and route-to-market differences
Organization ► Building regional and sub regional level logistics Center of Excellence (CoE), management, supplier contracting and performance management
Systems, processes and ways of working ► Creating a single set of planning and execution processes to reduce complexity, maximize service consistency and instil a common language
Common Market for Eastern and Southern Africa South African Customs Union East African Community South African Development Community Economic Community of Central African States Economic Community of West African States Page 8
Complexities, challenges and opportunities of supply chain management
Internal collaboration, including: ► Cross-site and subregional asset sharing ► Strengthened role of logistics in subregional and regional sales and operations planning (S&OP) alongside manufacturing, finance and commercial functions
External collaboration, incorporating: ► 3 party logistics shipping lines integration (organization, process and IT) ► Single-sourced and 4 party logistics providers ► Shared risk and reward pricing
Patterns of growth are evident
Growth
Africa follows a typical path of growth and organizational development
Phase 2 Proximate regional expansion Phase 1 Single market Establish competitive position; grow, defend and unlock potential; optimize performance and returns
Expand core market geographically; leverage core capabilities; build growth capabilities
Phase 3 Multiregional hub and spoke Include multiple hubs; leverage growth capabilities, develop scalable infrastructure; adapt to changing risk and compliance profile
Phase 4 Integrated pan-Africa Integrated pan-African management; infrastructure and risk management; embedded common culture and values
Complexity Page 9
Complexities, challenges and opportunities of supply chain management
Phase 5 Post-integration hybrid Disaggregated country and subregional structures within context of an integrated global operating model
Capturing growth in Africa Tax considerations
Page 10
Complexities, challenges and opportunities of supply chain management
Growing into Africa – tax considerations Potential tax implications of changes in business models Issues
Africa
Tax authorities’ understanding of changes in business models and associated tax implications
Limited focus and experience
Tax authorities’ understanding of transfer pricing
Early stages, limited practical experience although some mature markets are catching up fast
Availability of tax incentives and tax holidays
Limited and typically industry specific
Availability of free trade zones
In some countries
Foreign exchange controls and remittance challenges
Majority of countries
Uniformity of tax codes
Very different
Organization for Economic Co-operation and Development (OECD) interpretation (e.g., permanent establishment and commissionaire structures)
Limited and increasing
Capital gains and conversion (exit) tax
Very limited – operate more on General Anti-Avoidance Rules (GAAR) principles
Customs
High complexity, with no single market and significant variations in transparency
Withholding tax
High complexity
Double tax agreements
Limited availability
Regulatory and business licenses
Highly regulated – business licenses needed
Page 11
Complexities, challenges and opportunities of supply chain management
Growing into Africa – tax considerations Potential tax implications of changes in business model Algeria
Angola
Botswana
Cameroon
Democratice Republic of the Congo (DRC)
Côte d’Ivoire
Egypt
Ethiopia
Ghana
Kenya
25% and 19%*
35%**
22% and 15%***
38.5%
35%/30%#
25%
20% and 25%~
30% and 35%@
25%@@
30% and 37.5%∞
Capital gains tax
X
X
X
Income tax
Income tax
X
Income tax
X
X
Suspended
Business licenses
X
X
X
X
X
X
X
X
X
X
Permanent establishment (“PE”)
X
X
X
X
X
X
X
X
X
X
Conversion and exit tax^
GAAR
GAAR
GAAR
GAAR
GAAR
GAAR
Ch 9 OECD TP Guide
GAAR
Ch 9 OECD TP Guide
Ch 9 OECD TP Guide
Value-added tax leakage
X
Consumption tax
X
X
X
X
Sales tax
X
X
X
Importer of record
X
X
Relevant for imports from outside SACU
X
X
X
X
X
X
X
Customs valuation
X
X
X
X
X
X
X
X
X
X
Export controls
X
X
X
X
X
X
X
X
X
X
Generally relaxed
Strict
Relaxed
Strict outside FCA
Strict 0.2% levy
Strict outside FCA
Relaxed
Strict
Strict
Relaxed
29
none
9
8
2
24
53
11
8
9
Corporate tax rate
Exchange controls Double tax agreement (DTA) network (approximately) X * ** *** ^ # ~ @ @@ ∞
Relevant Reduced rate can be applied for manufacturing or production activities. The Ministry of Finance may grant a reduced industrial tax rate of 17.5% to companies incorporated in most disfavored regions, or to companies setting up industries based on local resources. The reduced tax rate is granted for a maximum period of 10 years. The tax rate for a branch is 30%. The reduced 15% rate for approved manufacturing companies does not apply to branches. GAAR indicates that there are no specific conversion or exit taxes, and that it will by covered by anti-avoidance rules. Reduced rate applies to mining activities. The 20% applies to the first EGP10m and the 25% rate applies to the excess. Increased rate applies to mining activities. Manufacturing enterprises, other than those engaged in agro-processing and the production of cocoa by-products, located in regional capitals other than Accra and Tema are entitled to a 25% income tax rebate, while manufacturing enterprises located outside regional capitals are entitled to a 50% tax rebate. The rate of 37.5% applies to nonresident companies. The corporate tax rate for companies newly listed on a securities exchange approved under the Capital Markets Act is reduced to 20% for a five-year period.
Page 12
Complexities, challenges and opportunities of supply chain management
Growing into Africa – tax considerations Potential tax implications of changes in business model Mauritius
Morocco
Mozambique
Namibia
Nigeria
South Africa
Tanzania
Tunisia
Uganda
Zambia
Corporate tax rate
15%!
30%/37%#/ 17.5%@
32%
34%/18%*
30%/20% **
28%
30%/25%$
30%/35%..
30%/25% to 45%’’
15% - 40%;;
Capital gains tax
None
X
Income tax
None
X
X
Income tax
Income tax
X
None
Business licenses
X
X
X
X
X
X
X
X
X
X
PE
X
X
X
X
X
X
X
X
X
X
Conversion and exit tax^
GAAR
GAAR
GAAR
Ch 9 OECD TP Guide
Ch 9 OECD TP Guide
Ch 9 OECD TP Guide; Exit charge on cessation of residence
Ch 9 OECD TP Guide
GAAR
Ch 9 OECD TP Guide
Ch 9 OECD TP Guide
Value-added tax leakage
X
X
X
X
X
X
X
X
X
X
Importer of record
X
X
X
X
X
Relevant for imports from outside SACU
X
X
X
X
Customs valuation
X
X
X
X
X
X
X
X
X
X
Export controls
X
X
X
X
X
X
X
X
X
X
Relaxed
Relaxed
Strict
Strict
Strict
Strict
Relaxed
Relaxed
Relaxed
Relaxed
37
51
7
11
12
73
9
52
9
22
Exchange controls
DTA network (approx.) X ! # @ * ** $ .. ‘’ ;; ^
Relevant Can be reduced to between 0% and 3%, based on setting up a Mauritian-headquartered company structure with dividend and royalty income. The increased rate is applicable to financial institutions and the general insurance industry. The reduced rate applies to companies that are classified as Moroccan export companies after five years. Export turnover in the first five years are exempt from tax. The tax rate for companies that have been awarded manufacturing status is 18% for their first ten years of registration as a manufacturer and 34% thereafter. The reduced rate of 20% applies during the first five tax years for a Nigerian company engaged in manufacturing activities. The reduced rate is applicable to companies listed on the Dar es Salaam Stock Exchange. The increased rate is applicable to the oil and gas, financial services and telecommunication industry. The variable rate is applicable to the mining industry. There are various tax rates that are based on the activities of the Zambian entity; manufacturing activities are subject to a 35% tax rate. GAAR indicates that there are no specific conversion or exit taxes, and that it will by covered by anti-avoidance rules.
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Complexities, challenges and opportunities of supply chain management
Reflecting the growth and importance of transfer pricing in Africa over the last 10 years Countries with transfer pricing legislation and rules 1995 – 2000
►
►
2001 – 05
2006 – 10
2011 – 14
1.
South Africa
1.
Namibia
1.
Algeria
1.
Algeria
2.
Zambia
2.
South Africa
2.
Egypt
2.
Angola
3.
Zambia
3.
Kenya
3.
Egypt
4.
Malawi
4.
Cameroon
5.
Namibia
5.
Ghana
6.
South Africa
6.
Kenya
7.
Zambia
7.
Malawi
8.
Nigeria
9.
Namibia
10.
Senegal
11.
South Africa
12.
Tanzania
13.
Uganda
14.
Zambia
Driven by the African Tax Administration Forum’s (ATAF) focus on transfer pricing, there has been an almost 100% increase in growth in transfer pricing regulation within three years. Countries in Africa have placed a greater emphasis on arm’s length compliance regarding cross-border transactions.
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Complexities, challenges and opportunities of supply chain management
Transfer pricing landscape Algeria: TP legislation based on OECD, documentation requirement and 25% penalty on TP adjustment
Egypt: TP legislation, documentation requirements, thin cap, active revenue authority and APA program
Senegal: TP legislation , documentation requirements and thin cap
Uganda: TP legislation based on OECD, documentation requirements, onerous penalty provisions and thin cap
Sierra Leone: Expansion of arm’s length principle in tax act, transfer pricing agreements in advance are available
Kenya: TP legislation based on OECD, documentation requirements, thin cap and active revenue authority
Burkina Faso: TP legislation based on OECD and documentation requirements
Tanzania: TP legislation based on OECD Guidelines, UN TP Manual issued in 2014, documentation requirements and thin cap
Ghana: TP legislation based on OECD, documentation requirements and thin cap
Zambia: TP legislation based on OECD, thin cap
Nigeria: TP legislation based on OECD Guidelines, UN TP Manual documentation requirements, thin cap and APA program
Malawi: TP legislation based on OECD, documentation requirements and thin cap
Cameroon: TP legislation based on OECD, documentation requirements and thin cap
Zimbabwe: TP legislation based on OECD and thin cap
Gabon: TP legislation based on OECD, documentation requirements and thin cap Angola: TP legislation based on OECD and documentation requirements
South Africa: TP legislation based on OECD, documentation requirements, thin cap and active revenue authority Rest of Africa: TP regulated through general anti-avoidance or arm’s length principles
Page 15
Transfer pricing updates across Africa
Namibia: TP legislation based on OECD and thin cap
Transfer pricing landscape Tunisia Morocco Algeria
► Niger
Mali
Sudan
Chad
Senegal Gambia Ghana
Guinea Burkina Faso Cote d’Ivoire Togo Benin
Nigeria Central African Republic Cameroon Equatorial Guinea Gabon
►
Ethiopia
South Sudan
Uganda
Kenya Democratic Republic of Congo
There is an increasing need for TP documentation in Africa. However there are differences:
►
Tanzania
Angola
Malawi
Comoros Mayotte
Zambia
Botswa na
Zimbabwe
Mauritius
Mozambique Swaziland Lesotho
South Africa
► ►
► Comprehensive local transfer pricing documentation Annexure to master file is required Annexure to master file is optional
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Transfer pricing updates across Africa
Sophistication levels of revenue authorities vary, i.e. new legislation; new practice tend to focus on low-hanging fruit e.g. documentation. 54 countries, each with different requirements where customization is required, ONE transfer pricing document for Africa is not necessarily correct. There is limited availability of comparable data. TP documentation is required for exchange control purposes. TP legislation and practice in Africa are typically based on the OECD TP guidelines. Some countries also consider the United Nations TP manual.
Indirect tax rates across Africa
EY office No EY office, but support available
Page 17
Complexities, challenges and opportunities of supply chain management
Challenges of regional trade integration
More
Less
Sovereignty
Economic union Monetary union Common market
Customs union Free trade agreement
CET and shares trade policy management
Covers substantially all trade (80%+) SACU (1910) SADC (2010)
Page 18
Free movement of services capital and common policies
SADC (2000)
T-FTA (2020)
COMESA (2000)
COMESA (2012)
EPAs (2014)
EAC (2010)
T-FTA (2015)
AU (2022)
Shared political and other institutions
Single currency and financial integration SADC (2018) COMESA (2026) SADC (2016)
EAC (2018)
COMESA (2018)
AU (2028)
SADC (2015)
EAC (2015)
COMESA (2015)
AU (2026)
EAC (2012) AU (2023)
Complexities, challenges and opportunities of supply chain management
Case studies
Page 19
Complexities, challenges and opportunities of supply chain management
Case study A Operations in South Africa and expansion of distributor network via subsidiaries Facts ►
A multinational fast moving consumer goods (FMCG) company has a distribution company in South Africa.
►
There are a few third-party distributors outside South Africa that are managed by the South African subsidiary.
►
The sales revenue and market penetration outside South Africa is at a low scale.
►
To capture the growth opportunities in Africa, it is most critical for the multinational FMCG company to control the route to market and point of sales.
Current subsidiary Third-party distributors
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Complexities, challenges and opportunities of supply chain management
Case study A Operations in South Africa and expansion of distributor network via subsidiaries Distributor operations in a few markets. Expansion of market footprint and change from import to local manufacturing in Africa.
Partnerships – distribution and micropartnerships
Direct tax – statutory tax rate, withholding tax, capital gain tax, etc. Foreign exchange control
Compliance
Supply chain – sourcing of products and logistics
Innovation and route to market
Indirect tax – VAT and refunds, customs duties and trade zones
Incentives Mode of entry and expansion
Regulatory requirements and limitations
Workforce
Facilitation fees
Page 21
Complexities, challenges and opportunities of supply chain management
Organizational model
Case study A Operations in South Africa and expansion of distributor network via subsidiaries
►
Partners and joint ventures
►
Mode of entry
►
Incentives
►
Exclusive distribution right fees
►
Free trade zones
►
Innovation and product customization
►
Advance pricing agreements
►
Foreign VAT registrations
►
Customs unions
►
Shared services Current subsidiary Third-party distributors
Page 22
Complexities, challenges and opportunities of supply chain management
Case study B Distributor operations in a few markets. Expansion of market footprint and change from import to local manufacturing in Africa. Facts ►
A multinational FMCG company has distribution companies in a few African markets.
►
There is currently no manufacturing activity in Africa. All products are imported from Asia or Europe.
►
To capture the growth opportunities in Africa, it is critical for the multinational FMCG to expand its distributor network.
►
The increasing demand in Africa will require local manufacturing in some African markets instead of relying of imports.
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Potential manufacturing locations Current distribution subsidiary Third-party distributors
Complexities, challenges and opportunities of supply chain management
Case study B Distributor operations in a few markets. Expansion of market footprint and change from import to local manufacturing in Africa. Direct Tax – statutory tax rate, withholding tax, capital gain tax, etc.
Partnerships – distribution and micropartnerships
Foreign exchange control Compliance
Supply chain – sourcing of products and logistics
Indirect Tax – VAT and refunds, customs duties and trade zones
Innovation and route to market Incentives Mode of entry and expansion
Regulatory requirements and limitations
Organizational model Workforce
Facilitation fees
Page 24
Complexities, challenges and opportunities of supply chain management
Case study B Operations in South Africa and expansion of distributor network via subsidiaries
►
Partners and joint ventures
►
Workforce
►
Regulations
►
Products
►
Brand building
►
Regional approach
►
Logistics
Current distribution subsidiary Third-party distributors Potential manufacturing locations
Page 25
Complexities, challenges and opportunities of supply chain management
One-minute recap
Page 26
Complexities, challenges and opportunities of supply chain management
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