CROSS-BORDER VAT IN

AFRICA – CURRENT ISSUES

AND CHALLENGES
Name: WILLIAM KOFI OWUSU DEMITIA
SENIOR ASSOCIATE, ALI-NAKYEA & ASSOCIATES &
LAW LECTURER, CENTRAL UNIVERSITY, GHANA

Date: 11TH MAY 2017

 OUTLINE OF THE PRESENTATION

• Introduction & Background

1
• Design & Implementation of VAT
2
• Cross-border VAT Challenges
3
• Proposed Measures
4

5 • Conclusion

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 INTRODUCTION AND BACKGROUND

 Franceis often credited as the first

country to introduce VAT on an
extensive scale in 1954.

 Since then, there has been a meteoric

rise in the introduction of VAT in many
developed and developing countries
across the world.

 Developing countries embraced

consumption-based taxes such as VAT
due to the existence of a large informal
sector within these economies.
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 INTRODUCTION AND BACKGROUND

Ghana Kenya South Africa

• VAT • VAT • VAT
constituted contributed amounted to
27.7% of 24.9% of tax 26.3% of tax
total tax revenue for revenue for
revenue in 2015/2016 2015/2016
the 2016 fiscal year fiscal year
fiscal year.

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 DESIGN & IMPLEMENTATION OF VAT

 Across the globe, VAT is usually

implemented through the invoice-
credit system.

 Unlikesales taxes, the design of

invoice credit system VAT is aimed at
eliminating the cascading effect of
indirect taxes.

 Thedestination principle remains the

dominant principle for the design of
VAT systems in many countries.

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 DESIGN & IMPLEMENTATION OF VAT

 Itadvocates that supplies and

imports into a domestic market
should be taxed but supplies made to
a foreign market should be excluded
from the tax.

 Most countries implement the

principle by applying a zero rate of
the tax on exports and offering the
exporter a refund of input taxes.

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 DESIGN & IMPLEMENTATION OF VAT

 Although the destination principle is

designed to ensure neutrality in
international trade, its
implementation presents challenges
and issues for cross-border taxation.

 Theapplication of the principle to the

supply of physical goods sold across
borders presents few implementation
challenges.

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 DESIGN & IMPLEMENTATION OF VAT

 However, the growth of the digital

economy poses a huge challenge to
the seamless implementation of the
destination principle to digital goods
and services.

 Thecollection of VAT on cross-

border transactions concluded
through digital means was identified
by the Task Force on the Digital
Economy as a major issue that
requires urgent attention.

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 CROSS-BORDER VAT CHALLENGES

 INBOUND TRANSACTIONS

 Registering Non- Resident Suppliers

 VAT rules in Ghana, South Africa,

Nigeria among others make an
attempt to require non-resident
persons to register and charge VAT
when they provide services to
residents in the country.

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 CROSS-BORDER VAT CHALLENGES

 Registering Non- Resident Suppliers

 However, the following issues

continue to impede the registration
of non-resident suppliers:

o Identifying the Supplier of Digital

Goods & Services.

o Administrative Rules for

Registration.

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 CROSS-BORDER VAT CHALLENGES

 Mechanisms to Ensure Payment of

Tax

 Tax authorities often hesitate to

register non-resident suppliers
because there is no assurance that
the tax will be remitted to the
revenue agencies.

o Nigeria’s VAT Act makes the

recipient of the service a
withholding agent.

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 CROSS-BORDER VAT CHALLENGES

 Refunds of Input Tax

 Confirmation of and timely

payments of refunds especially for
suppliers who export their services
remains a major issue across the
continent.

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 CROSS-BORDER VAT CHALLENGES

 Reverse Charge Mechanisms

 Ghana, South Africa, Kenya and

several other African countries
impose the tax on the recipient of
the imported service.

 Definition of ‘imported service’ in

most VAT legislation envisage the
recipient of the service as the final
consumer.

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 CROSS-BORDER VAT CHALLENGES

 Reverse Charge Mechanisms

 Services received from non-resident

suppliers which are used by the
recipient to make taxable supplies
are excluded from the definition of
‘imported service’ in most VAT
legislations.

 The issues associated with this

approach include:

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 CROSS-BORDER VAT CHALLENGES

 Reverse Charge Mechanisms

o Difficulty of tracking services and

digital goods received by individual
final consumers.

o Individual final consumers have

little or no incentive to pay the tax.

o Huge administrative burden and

cost of enforcing compliance

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 CROSS-BORDER VAT CHALLENGES

 OUTBOUND TRANSACTIONS

 Difficultydetermining the place of

supply for services.

 Place of supply usually determines

the rate of tax.

 For some specific services, Ghana’s

rules provide that the place of supply
is the place where the recipient uses
the service

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 CROSS-BORDER VAT CHALLENGES

 OUTBOUND TRANSACTIONS

 Place
of effective use has many
subjective interpretations

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 PROPOSED MEASURES

 OECD’s International VAT/GST

Guidelines recommends that the
best approach for collecting cross-
border VAT in business to consumer
transactions will be to require the
supplier to register and charge the
tax.

 Registrationprocedures should be
simplified and cost of compliance
should be relatively low.

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 PROPOSED MEASURES

 Revenue authorities can require that

the non-resident supplier should
partner a local bank or appoint a
resident agent to serve as a
guarantee for remitting the tax
collected.

 Simplifiedrules should permit non-

resident suppliers to appoint
resident persons to file returns on
their behalf.

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 PROPOSED MEASURES

 Revenue authorities could rely on

exchange of information agreements
and multilateral instruments for
sharing information on taxpayers to
identify suppliers.

 Normalrules for claiming refunds

and other input tax recovery
methods should be available to non-
resident suppliers who register and
charge the tax.

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 CONCLUSION

 The attempt to satisfy the competing

interests of raising appropriate
revenue from VAT and ensuring that
the tax is implemented in a manner
which ensures neutrality in cross-
border services and intangibles may
require compromises and trade-offs
from revenue authorities, suppliers
and consumers.

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 CONCLUSION

END OF PRESENTATION

THANK YOU

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