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ACCOUNTANCY IRELAND
APRIL 2015 VOL.47 NO.2
OPPORTUNITY
AFRICA
Positive images of Africa are replacing the negative ones as Irish
businesses now look to this vast continent as the land of opportunity,
reports Colm O’Callaghan.
S
ceptics may debate its progress and
potential, but Africa offers a wealth
of opportunity for Irish businesses
looking to expand.The continent is
increasingly economically driven
and achieving year on year growth.
Sub-Saharan Africa's GDP is projected to
reach $2.3 trillion by 2020 and many African
countries are growing at 7% per annum
(Figure 1). By 2020,Africa will account for
seven out of the ten fastest growing global
economies.
The bulk of
this growth is
being driven
by megatrends
sweeping the
continent, each
representing both
an opportunity
and a challenge to
Irish
businesses
looking to Africa.
African leaders are
consciously
working
towards improving the
economic health of their
countries and actively engaging with foreign
investors to achieve this. Governments are
also improving the infrastructure of their
countries as evidenced by the emergence of
mega cities and mega corridors.The political
situation in African countries is also
stabilising – with efforts from the
international community to bring peace to
war-torn nations such as Somalia.
Africa’s population is expected to double
by 2050, while Europe’s is expected to
shrink. An estimated 50% of Africa’s
population will be under 24 years old by
2050 and with this comes a change in
consumer
b e h av i o u r.
Nowhere is
this
more
apparent than in
m o b i l e
communications with
almost 900 million
mobile phone connections
across a (mostly poor)
population of 1 billion. Africa
has the highest mobile
broadband growth rate across
the world, and with this comes a
population that is increasingly willing
to accept change, new products and/or new
concepts. The use of social media and
various other platforms readily available on
most mobiles used by the African population
has heavily influenced recent consumption
trends.
The development of payment
transactions through mobile is disrupting the
banking industry in many African countries.
As an illustration of this in action , the MPesa system in Kenya allows 18 million
people (out of a population of 25 million
over the age of 15) to pay their taxi fares,
electricity or restaurant bills, to transfer
money to relatives or to withdraw cash at
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ACCOUNTANCY IRELAND
APRIL 2015 VOL.47 NO.2
local kiosks with their mobile phones. Eight
million transactions are completed every day,
creating a parallel banking system, which is
extremely useful in a country where almost
everybody has a mobile phone but not
everyone has a bank account.
Broadband access is triggering a radical
transformation of African society and each
sector of the economy will be impacted by
this development, while the expected
change will be faster and more radical than
elsewhere due to a low level of
development.
Africa has the fastest growing middle class
population in the world and the continent
currently has over 313 million middle class
citizens. Rapid urbanisation is a key driver
of economic change with an additional 350
million people expected to live in Africa’s
cities over the next 15 years. Nigeria, which
is seen as being at the forefront of economic
development, plans to transform Lagos into
a megacity with the construction of the Eko
Atlantic urban district, an ambitious project
that shows Africans are thinking big. In the
future, it is predicted that Africa will house
some of the largest cities in the world,
including Lagos, Kinshasa and Abidjan.
OPPORTUNITIES FOR IRISH
BUSINESSES
On the back of these positive changes, many
“
OPPORTUNITIES EXIST FOR IRISH
BUSINESSES TO
PARTICIPATE IN AFRICA'S SEARCH
FOR GROWTH AND DIGITAL
TRANSFORMATION.
”
Irish businesses are for the first time
considering a move into Africa. In particular,
opportunities exist for Irish businesses to
participate in Africa's search for growth and
digital transformation. This includes
opportunities not only for technology
companies but also for financial services
providers, payment providers, food
companies,
infrastructure
and
pharmaceutical operations and research and
development companies.
While the opportunities are significant,
there are also considerable challenges.
Cultural nuances, poor infrastructure,
unfamiliar tax and regulatory regimes, and
profit repatriation often impose significant
up-front barriers for new market entrants.
Corruption is still considered a threat to
Irish-African trade, with most African
Figure 1: Sub-Saharan Africa GDP to Reach USD
$2.3 trn by 2020
2,500
2,000
1,500
1,000
500
0
1985
1990
1995
2000
2005
2010
2015
2020
GDP
Source: IMF Regional Economic Outlook 2012
45
countries still in the lowest quartile of the
World Bank's transparency index. Despite
this, many Irish businesses operating in
Africa say that the perceived risk is greater
than the real risk, and once risk comes down,
so too will the returns on offer.
Other challenges include increased
competition from local companies who are
beginning to develop the financial capital to
engage new market entrants in price wars.
When coupled with a lack of local
consumer awareness to demand quality
products, this can represent a significant
threat to overseas businesses especially in the
consumer goods sector.
Education is a major issue.While primary
education coverage has improved across the
continent, overseas companies still struggle
to find the right quality of local human
capital. Many failed cases involve companies
that lack transition strategies when they seek
to move from expatriate human capital to
local talent.
STRUCTURE AND EXIT
The most immediate and obvious
differences show up in the regulatory, legal
and tax systems when compared to more
traditional markets.They can appear alien to
an Irish business and require up-front
planning to understand and navigate. In
particular, key decisions are required
regarding the type of legal entity to be used,
the appropriate business model and the
overall tax strategy.
Local partnerships and acquisition led
entrants are the most popular strategies for
the African market, and each is important
for medium-term growth and gaining a
local supply chain. Local advice is essential
to understand the pitfalls of the local
commercial and legal systems.
A golden rule is to also formulate your
exit strategy when your expansion is being
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APRIL 2015 VOL.47 NO.2
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a practical understanding of the local
tax and regulatory environment while
working with partners and advisors
who do.
Ensure that the company holding
structures as well as the operating and
exit strategies provide sufficient
flexibility, substance and tax efficiencies
to/access tax treaties.
Keep a tight control on the cash taxes
deducted at source in the form of
withholding tax.Where the tax is not
legally due, strive to avoid paying it as
it is often difficult to get refunds.
When having discussions or
negotiations with the tax and
regulatory
authorities
engage
appropriate senior officers at the
authorities and ensure that you are
accompanied by knowledgeable and
pragmatic advisers who understand the
local business culture/environment.
Do not conclude tax settlements
outside set formal procedures. Ensure
you receive appropriate supporting
documentation for taxes paid and/or
agreements reached with regulatory
authorities.
Understand the applicable rules
relating to exchange control and
immigration regulations in order to
avoid having trapped funds.
When reorganising a group structure
that overlaps multiple jurisdictions,
seek advice to ensure any related tax
implication triggered in other territories is well understood and managed.
Get reliable access to changes in the tax
and regulatory landscape and manage
how these affect your business in the
local territory and as a group.
Transfer pricing is now being
practically implemented across Africa;
therefore, ensure that profits are
allocated to the appropriate entities
and all relevant transfer pricing policies
are duly supported with appropriate
documentation.
Keep up to date with tax compliance
and ensure that you receive proof of
the returns filed and all payments
made.
planned, not after it has taken place.
TAX AND INCENTIVE
In a newly established business in Africa, the
local entity may have commercial
relationships not just with the head office
but also with other affiliates. The basis for
allocating profits between these entities
presents both a risk and an opportunity. In
general, corporate tax rates in Africa are
higher than in Ireland and the temptation
might therefore be to attribute as much
profit as possible to Ireland. This, however,
is not a straightforward matter since Transfer
Pricing and how this is impacted by the
location of business functions, trademarks
and intellectual property comes into play.
Appropriate structuring of the relevant
business functions and location of
intangibles will, in principle, produce the
best after tax result. Some African countries,
however, do not follow the standard OECD
Transfer Pricing guidelines, while others
impose restrictions on the tax deductibility
of royalty payments which can have a very
significant impact on the after-tax result.
Common commercially efficient
business models can easily be eroded in
jurisdictions such as Kenya and Nigeria
where there are significant withholding tax
regimes which, while creditable and
nominally refundable locally, may result in a
permanent tax credit but restrictions on cash
flow.
FINANCE AND CASH
Funding the new local business is a question
that needs attention from the outset. In some
countries, the choice between debt and
equity will be dictated by regulatory and
banking rules stipulating minimum debt
equity ratios. Others impose additional
restrictions, in the form of local banking or
legal requirements to restrict the movement
of capital, giving rise to significant foreign
currency and cash flow issues that may not
be foreseen initially.
In Africa, as elsewhere, good planning is
the key to successful overseas expansion.
Take the time to design an appropriate
structure and strategy for your African
business and make sure that it is capable of
flexing as each new border is crossed. This
will ensure you are poised to successfully
exploit the opportunities afforded by Africa
as an emerging economic powerhouse.
Colm O’Callaghan, ACA, is a Director in
PwC’s Private Business Services Group.