Complexities, 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
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Introduction
Complexities, challenges and opportunities of supply chain management
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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
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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
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Challenges and opportunities of supply chain management
Complexities, challenges and opportunities of supply chain management
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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
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
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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
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Capturing growth in Africa Tax considerations
Complexities, challenges and opportunities of supply chain management
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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
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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
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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
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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
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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
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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
Indirect tax rates across Africa
Complexities, challenges and opportunities of supply chain management
EY office
No EY office, but support available
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
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Case studies
Complexities, challenges and opportunities of supply chain management
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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
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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
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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
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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.
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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.
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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
One-minute recap
Complexities, challenges and opportunities of supply chain management
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