A withholding tax in Namibia is expected to place an increasing tax burden on multinational companies who provide business consulting and management services to Namibian entities, warns professional services firm PwC. “The withholding tax, which is considered to be among one of the highest tax rates in Africa, may also have the effect of discouraging foreign multinational companies from providing business services to Namibian entities,” says Elandre Brandt, International Tax Director and Leader of the Africa Desk at PwC in Johannesburg.
Namibia introduced a 25% withholding tax on payments to non-residents of management, consulting, entertainment and directors’ fees with effect from 30 December 2011. The requirement to withhold tax applies to Namibian residents including companies incorporated or managed and controlled in Namibia, as well as natural persons ordinarily resident in Namibia.
The definition of ‘management’ and ‘consultancy’ services as provided in the tax legislation is broad and includes amounts payable for administrative, managerial, technical, consultancy or any similar services, whether such services are of a professional nature or not. Furthermore, the Namibian Revenue Authority has on occasion requested the payment of the tax on all services, including commission. This is based on the argument that the intention of the law was to apply the withholding tax on all payments to non-residents for services.
However, Brandt points out that non-residents whose countries have concluded Double Taxation Agreements (‘DTAs’) with Namibia (i.e. South Africa, France, Botswana, Germany, India, Malaysia, Mauritius, Romania, Russia, Sweden and UK) may either not be subject to the withholding tax or alternatively get an exemption from domestic tax on any income received.
For instance, the Namibia/South Africa DTA provides that business profits made by a South African resident enterprise shall not be subject to tax in Namibia unless the SA enterprise has a permanent establishment (‘PE’) in Namibia. Where a PE is created in Namibia, the profits of the enterprise which are attributable to the PE will be subject to tax in Namibia. A PE is defined for this purpose as a fixed place of business through which the business of the enterprise is wholly or partly carried on. Examples of a PE include a place of management, branch, office, factory, workshop, building site, construction or installation project and the provision of consultancy services by an enterprise through employees or other personnel for an aggregate of six months or more within any twelve-month period.
Similarly, the Namibia/South Africa DTA, provides that income derived by an individual who is a resident of South Africa in respect of professional services or other activities of an independent character shall be taxable only in South Africa unless he has a fixed base regularly available to him in Namibia for the purpose of performing his activities. An individual who is a resident of South Africa will be deemed to have a fixed base in Namibia if he stays in the country for an aggregate of 183 days in any 12-month period commencing or ending in the year of assessment concerned.
Directors’ fees and similar payments derived by a South African resident are an exception to this since the DTA grants taxing rights for income earned in one’s capacity as a member of the board of directors of a company resident in Namibia. Similarly, the Namibia/South Africa DTA provides that income derived by entertainers such as theatre, motion picture, radio or television artists, musicians, and by sportspersons, from their personal activities exercised in Namibia may also be taxed in the country.
Domestic relief from double taxation is available under the provisions of the Namibia/South Africa DTA. This means that South African residents, who derive income or capital gains and are taxed in Namibia, shall be allowed a deduction from the tax on income or capital gains payable in South Africa. The deduction will be equal to the tax paid in Namibia, subject to certain limitations.
Brandt says there are indications that the Namibian Revenue Authority is seeking to re-negotiate existing treaties to give Namibia a taxing right on all fees paid to non-resident entities, including income derived by non-resident individuals who do not have a fixed base in the country.
Most companies, however, continue, to apply the lower DTA rates, which has not been openly opposed by the tax authorities. “It is recommended that adequate supporting documentation in the form of incorporation documents and proof of registration with the local tax authorities is made available to Namibian customers to support the application of the lower DTA rates,” he says.