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Complexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

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Page 1: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Complexities, challenges and opportunities of supply chain management in Africa

EY Africa Tax Conference

September 2014

Page 2: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 2

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

Complexities, challenges and opportunities of supply chain management

Page 3: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 3

Introduction

Complexities, challenges and opportunities of supply chain management

Page 4: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 4

Robust growth forecasted over the next five years

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

In the context of a weak global economy, Africa’s overall economic prospects remain positive.

Complexities, challenges and opportunities of supply chain management

Page 5: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 5

Opportunities and risks vary widely African markets are diverse and fragmented

Note: a composite risk index

is indicated on a color

spectrum from green

(relatively more positive) to

red (relatively less positive).

A fa

ct-b

as

ed

ap

pro

ac

h to

se

lec

ting

an

d

prio

ritizin

g m

ark

ets

in A

frica

is c

ritica

l.

Source: World Bank; Transparency International; WEF Competitiveness Index;

EY Growing Beyond Borders

Country visible

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

Complexities, challenges and opportunities of supply chain management

Page 6: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

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Challenges and opportunities of supply chain management

Complexities, challenges and opportunities of supply chain management

Page 7: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 7

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

Source: Kai Krause

Complexities, challenges and opportunities of supply chain management

EY office

No EY office, but support available

Page 8: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 8

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

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

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

Complexities, challenges and opportunities of supply chain management

Page 9: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 9

Patterns of growth are evident Africa follows a typical path of growth and organizational development

Gro

wth

Complexity

Phase 1

Single market

Establish competitive position; grow, defend and unlock potential; optimize performance and returns

Phase 2

Proximate regional expansion

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

Phase 5

Post-integration hybrid

Disaggregated country and subregional structures within context of an integrated global operating model

Complexities, challenges and opportunities of supply chain management

Page 10: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 10

Capturing growth in Africa Tax considerations

Complexities, challenges and opportunities of supply chain management

Page 11: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 11

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

Complexities, challenges and opportunities of supply chain management

Page 12: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 12

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

Corporate tax rate 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

Exchange controls Generally

relaxed Strict Relaxed

Strict outside

FCA

Strict 0.2%

levy

Strict outside

FCA Relaxed Strict Strict Relaxed

Double tax agreement

(DTA) network

(approximately)

29 none 9 8 2 24 53 11 8 9

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.

Complexities, challenges and opportunities of supply chain management

Page 13: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 13

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

Exchange controls Relaxed Relaxed Strict Strict Strict Strict Relaxed Relaxed Relaxed Relaxed

DTA network (approx.) 37 51 7 11 12 73 9 52 9 22

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.

Complexities, challenges and opportunities of supply chain management

Page 14: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 14

Reflecting the growth and importance of transfer pricing in Africa over the last 10 years

1995 – 2000 2001 – 05 2006 – 10 2011 – 14

1. South Africa

2. Zambia

1. Namibia

2. South Africa

3. Zambia

1. Algeria

2. Egypt

3. Kenya

4. Malawi

5. Namibia

6. South Africa

7. Zambia

1. Algeria

2. Angola

3. Egypt

4. Cameroon

5. Ghana

6. Kenya

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.

Countries with transfer pricing legislation and rules

Complexities, challenges and opportunities of supply chain management

Page 15: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 15

Transfer pricing landscape

South Africa: TP legislation based on OECD,

documentation requirements, thin cap and active revenue authority

Egypt: TP legislation, documentation

requirements, thin cap, active revenue authority

and APA program

Uganda: TP legislation based on OECD,

documentation requirements, onerous penalty

provisions and thin cap

Algeria: TP legislation based on OECD,

documentation requirement and 25% penalty on

TP adjustment

Kenya: TP legislation based on OECD,

documentation requirements, thin cap and active

revenue authority

Tanzania: TP legislation based on OECD

Guidelines, UN TP Manual issued in 2014,

documentation requirements and thin cap

Namibia: TP legislation based on OECD and 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

Burkina Faso: TP legislation based on OECD and

documentation requirements

Angola: TP legislation based on OECD and

documentation requirements

Ghana: 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

Rest of Africa:

TP regulated through general anti-avoidance or arm’s length principles

Zambia: TP legislation based on OECD, thin cap

Senegal: TP legislation , documentation

requirements and thin cap

Sierra Leone: Expansion of arm’s length principle

in tax act, transfer pricing agreements in advance

are available

Gabon: TP legislation based on OECD,

documentation requirements and thin cap

Transfer pricing updates across Africa

Page 16: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 16

Transfer pricing landscape

► There is an increasing need for TP

documentation in Africa. However there are

differences:

► 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.

Comprehensive local transfer pricing documentation

Annexure to master file is required

Annexure to master file is optional

Niger Mali

Morocco

Algeria

Sudan Chad

Ethiopia

South Africa

Gh

an

a

Nigeria

Tanzania

Zambia

Central African

Republic

Botswana

Angola

Democratic Republic of Congo

Kenya

Lesotho

Malawi

Mozambique

Swaziland

Uganda

Zimbabwe Mauritius

Mayotte Comoros

Tunisia

Cameroon

Gabon

Equatorial Guinea

Cote d’Ivoire Togo

Benin

Senegal Gambia

Guinea

Burkina Faso

South Sudan

Transfer pricing updates across Africa

Page 17: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 17

Indirect tax rates across Africa

Complexities, challenges and opportunities of supply chain management

EY office

No EY office, but support available

Page 18: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 18

Challenges of regional trade integration

More Sovereignty Less

Free trade agreement

Covers substantially all trade (80%+)

Customs union

CET and shares trade policy management

Common market

Free movement of services capital and

common policies

Monetary union

Single currency and financial integration

Economic union

Shared political and other institutions

SADC (2018)

COMESA (2026)

EAC (2018)

AU (2028)

SADC (2016)

COMESA (2018)

EAC (2015)

AU (2026)

SADC (2015)

COMESA (2015)

EAC (2012)

AU (2023)

SACU (1910)

SADC (2010)

T-FTA (2020)

COMESA (2012)

EAC (2010)

AU (2022)

SADC (2000)

COMESA (2000)

EPAs (2014)

T-FTA (2015)

Complexities, challenges and opportunities of supply chain management

Page 19: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 19

Case studies

Complexities, challenges and opportunities of supply chain management

Page 20: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 20

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

Complexities, challenges and opportunities of supply chain management

Page 21: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 21

Case study A Operations in South Africa and expansion of distributor network via subsidiaries

Mode of entry and expansion

Partnerships –

distribution and micro-

partnerships

Organizational model Regulatory

requirements and

limitations

Supply chain –

sourcing of

products and

logistics

Compliance

Workforce

Incentives

Direct tax – statutory tax

rate, withholding tax,

capital gain tax, etc.

Innovation and

route to market

Foreign

exchange

control

Facilitation fees

Indirect tax – VAT and

refunds, customs duties

and trade zones

Distributor operations in a few markets. Expansion of market footprint and change from import to local

manufacturing in Africa.

Complexities, challenges and opportunities of supply chain management

Page 22: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 22

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

Complexities, challenges and opportunities of supply chain management

Page 23: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 23

Case study B

Complexities, challenges and opportunities of supply chain management

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.

Current distribution subsidiary

Third-party distributors

Potential manufacturing locations

Distributor operations in a few markets. Expansion of market footprint and change from import to local

manufacturing in Africa.

Page 24: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 24

Case study B

Complexities, challenges and opportunities of supply chain management

Mode of entry and expansion

Partnerships –

distribution and micro-

partnerships

Organizational model Regulatory

requirements and

limitations

Supply chain –

sourcing of

products and

logistics

Compliance

Workforce

Direct Tax – statutory tax

rate, withholding tax,

capital gain tax, etc.

Innovation and

route to market

Foreign

exchange

control

Facilitation fees

Indirect Tax – VAT and

refunds, customs duties

and trade zones

Incentives

Distributor operations in a few markets. Expansion of market footprint and change from import to local

manufacturing in Africa.

Page 25: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 25

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

Complexities, challenges and opportunities of supply chain management

Current distribution subsidiary

Third-party distributors

Potential manufacturing locations

Page 26: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

Page 26

One-minute recap

Complexities, challenges and opportunities of supply chain management

Page 27: EY Africa Tax  · PDF fileComplexities, challenges and opportunities of supply chain management in Africa EY Africa Tax Conference September 2014

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