“Change is inevitable, except from a vending machine”. Namibia: A Tax update

fhbc_dec_mailer_01_07Earlier this year the Minister of Finance, Calle Schlettwein, delivered the annual Budget Speech for the 2018/2019 period where he made various proposals regarding the amendment of the Income Tax Act, No 24 of 1981. He also introduced new initiatives and made a statement wherein he, inter alia, called on the support of the private sector’s contribution towards the objectives of national development. This update serves as a summary of some of the important proposals and introductions made with regards to tax.

Overview of the Proposals

Amendment to definitions:

Introduction of:

Other:

“gross income”
“resident”

Local Dividends Tax
Withholding tax on dividends
Debt to equity ratio
Limit on assessed losses
VAT for listed asset managers

Trusts, religious-, charitable- and educational organisations now deemed to be companies

Tax policy proposals

 

 

Economic background

In March this year, the Namibian economy was at a turning point as it endured its most risky phase – as mentioned by the Minister during the Budget Speech. It was recorded that the budget shortfall decreased with 3% over the past two years from 8.2% in 2015/2016 to 5.4% by 2017/2018. However, debt metrics increased because of the financing instruments acquired to cover this shortfall. The Minister said that growth in non-core spending must be contained, revenue must be raised, historical cost drivers must be effectively managed and that the implementation of enabling structural reforms must be hastened, in order to achieve positive results.

Tax related amendments and proposals

  1. Definitions
    1. “Gross Income”

      For Residents: For Non-residents:
      The gross income will include all income received or accrued, regardless of the source of the income being from a different country. Thus, all residents will be taxed on their world-wide income. Along with this amendment, the Namibian Government should bear in mind that they will have to invest in more double taxation agreements in order to prevent the double taxation of income from foreign sources. The total amount of income generated from a source within Namibia will be taxable.

      (if the person falls within the parameters of the “physical presence test” – see the short explanation below under “Resident”/Natural Persons).

       

    2. “Resident”

      Natural persons: Companies and related entities:
      This definition will be amended to include the following:

      • Residents whom are ordinarily present in Namibia; and
      • Persons whom are physically present in Namibia for longer than 183 days in the particular year of assessment and 915 days over a five-year period.

       

      The principle here, is that entities conducting business in Namibia are deemed to be residents for tax purposes. This includes foreign companies which have offices in Namibia.

       

  2. Introduction of new tax rules
    1. Dividends tax and withholding tax on dividends
      The proposal made in this regard entails a 10% tax to be levied on dividends. The definition of “dividend” is proposed to be amended to include all amounts:
      • Declared, transferred or applied by a company for the benefit of a shareholder whether by way of;

      • A distribution or;
      • As a consideration for the acquisition of any share in that company;
      • Without including any liability in respect of any loan, or like financial agreement, with regards to that share or interest. Meaning that no loan repayment may be taken into consideration before withholding tax is applied.
    2. A twist in the plot for Trusts
      This proposal is quite drastic in relation to the other amendments and its effect will be that trusts will henceforth be deemed to be companies for tax purposes. Thus:

      • any distribution made from a trust to a beneficiary will be deemed to be dividends;
      • which will trigger the 10% withholding tax (as mentioned above);

      Also, the definition of “company” will be amended to include trusts specifically as well as the following:

      • charity-;
      • religious-; and
      • educational organisations doing business or established in Namibia.
  3. Debt-to-equity ratio

    Currently the Income Tax Act doesn’t make provision for a debt-to-equity ratio. Still, a 3:1 ratio is being applied in practice, which will now become a statutory rule – providing for thin capitalisation.How will the thin capitalisation rules work?Should a resident company’s debt-to-equity ratio be above the 3:1 prescribed ratio:

    • at any point during the year of assessment;
    • the company will not qualify for the deduction of interest;
    • paid to a foreign shareholder (where the shareholder has 50% or more control or interest in the Namibian company);
    • in relation to any loan or financial agreement; or
    • foreign currency exchange losses incurred.
  4. Assessed Losses

    According to the proposed amendment concerning the carry-forward of assessed losses there will be a limit implemented with regards to a five-year period and the deduction of foreign losses will not be allowed.

  5. Individual Tax

    Regarding the tax brackets for individuals, it is proposed that the lower tax bracket be decreased from 18% to 17%, whilst increasing the top bracket with 2%, from 37% to 39%. Moreover, a new bracket is expected to be introduced for income above N$ 2.5 million, with a 40% tax rate.

  6. VAT for listed asset managers and the introduction of VAT on property share transactions

    Fees for listed asset managers are exempt from VAT in terms of the current tax rules. It is proposed that it will be standard rated. This will reduce the applicable costs, because the managers will be able to claim input tax. Though, applicable management fees will also be vatable, meaning that non-registered investors will have additional costs of 15%. Furthermore, the sale of shares or member’s interest in a company or close corporation owning commercial property will also be subject to 15% VAT.

  7. Other proposals and incentives

    The listed items below were also proposed to be amended. It is expected to be introduced and executed in 2019.

    1. Manufacturing Tax Incentives
    2. Repeal of Export Processing Zones
    3. Profit tax on betting and gaming entities
    4. Sin taxes
    5. Export levy
    6. Fuel levy
  8. Tax administration reforms

    Some of the main reforms for 2018/2019 will include:

    • The launch of the Namibia Revenue Agency by 1 March 2019;
    • The implementation of the Integrated Tax System by July 2018;
    • Developing regulations for small businesses which are currently not registered for tax purposes;
    • Leveraging regional and international tax cooperation in respect of transfer pricing; and
    • Improving the programme of taxes in arrears (after the ending of the Tax Arrears Recovery Program on 11 March 2018).
  9. In conclusion

    These proposed amendments to existing tax legislation and the introduction of new rules, as summarised above, will not only bring positive change, but will probably also bring new challenges and possible problems. Yet, change isn’t something new – especially in the tax and legal sphere as change opens doors to new horizons, which hopefully will be the case for Namibian taxpayers.

If you have any enquiries, please contact FHBC Consultants Namibia (Pty) Ltd at admin@fhbcnam.com

Credit to Chantél Coetzee who compiled the article.

Source Reference:

FY 2018/19 Budget Statement, Presented by Calle Schlettwein, MP, Minister of Finance. (Available at www.mof.gov.na).

Namibian Budget 2018/2019 Commentary. High Impact initiatives towards prosperity – Deloitte.

Re-Imagine the Possible 2018/2019, PWC.

Income Tax Act, No 24 of 1981 (Namibian Income Tax Act).

Quote in the title: Robert C. Gallaghar.