We regularly read articles and comments about the principle of tax base erosion. For those among us that are not familiar with financial lingual, tax base erosion happens when you have business operations in one country, but the profits are moved to another country with more beneficial tax rates and tax is only paid in that country. The country where the business are conducted receive no or limited tax from such operations. The tax base of the country where the business is conducted was therefore eroded.
We have seen the implementation of environmental taxes and export levies on certain products recently. The export levies legislation can be seen to include an element of limiting tax base erosion. Other forms of legislation implemented to counter the use of tax base erosion are thin capitalisation rules, withholding taxes on certain payments to foreign taxpayers and transfer pricing rules. These forms of legislation are however very technical and difficult to police and enforce.
We have expressed the opinion previously that using technical and difficult to enforce provisions in the income tax act has its place, but should be done when the current legislative stipulations have been exhausted.
We believe that the best way to deal with tax base erosion transactions is to have factual information available to use in the enforcement of current legislative provisions. The current income tax returns used in Namibia contains a lot of different sections of information that must be completed by taxpayers. Compliance with the different sections of providing this information is however limited in a lot of cases. We believe that if the income tax returns are completed fully and with the correct attached information therewith the Receiver of Revenue would be in a position to enforce those sections of the current legislation that will limit the effect of tax base erosion.
Namibia currently uses a principle of source basis of taxation and not residency basis of taxation as many other countries in the world. That means that if the profits are made in Namibia it is taxable in Namibia, subject to certain specific exemptions. We are however of the opinion that a lot of business are done in Namibia that should be subject to tax in Namibia, which are not.
Namibia is party to certain double taxation agreements that will limit cases of double taxation between Namibia and other countries, but Namibia still has certain preferential taxing rights on the sources of income generated in Namibia that should be enforced fully.
Again the question arises, how will the regulators know? The first port of call should be the tax returns of local entities and its supporting documentation since that information is available. If you know how to interpret financial statements and information submitted in the income tax returns then you will be able to enforce a substantial amount of these legislative measures. We have in the past offered to assist the regulators with training in this regard in order to enable the assessors to identify areas for further investigation.
The application of pay-as-you-earn (PAYE) in Namibia is another area of taxation which is subject to manipulation in many forms. Again there are quick and easy ways to establish if an employer or if employees are manipulating the system. It can easily be determined from the review of individual tax returns and even the financial information submitted by employers in the country.
We believe that with some training for regulators and with an effective computerised information system, the regulation of the Namibian tax legislation, in particular the income tax legislation, can be enhanced to cater for the limitation of tax base erosion in Namibia. The information is available in many instances. The critical link is to know how to read such information and to ensure that the tax return forms submitted are fully completed.