Taxation of services provided by foreign persons - The newfound focus of the Senegalese Revenue Services
Thomas Friedman’s best seller from 2005 “The World is Flat” opened many people’s eyes to globalization. 14 years later, spreading the idea of a flat earth is no longer a far fetched notion. Africa has been the perfect exemple of that with an exponential growth in Foreign Direct Investments (FDI) in then past two decades and the diversity of the provenance of these funds. In the past, countries in Africa almost exclusively received foreign investments and loans from their colonial “masters”. All of that has changed with the emergence of new leaders around the world such as China, India, Turkey, Germany among others. These FDI’s do not just come in the form of cash but also in the transfer of expertise and technology. The tax authorities in Senegal and most West African nations have increased their vigilance on the tax treatment of transactions / operations effected by foreign persons.
Article 202.1.c of the Senegalese tax Code states that “Withstanding international tax treaties, give rise to a withholding tax when they are paid by a person established in Senegal, to a person or entity subject in to income tax or corporate income tax, that do not have a permanent professional installation in Senegal all monies paid in exchange for a service provided or used in Senegal.” The section of the tax Code seems pretty straight forward although the very definition of “provided or used in Senegal” has been a subject of debate between tax payers and the Revenue services as of late with no remedy in sight due to the lack of legal precedent. Unlike Americans, Senegalese are not a very litigious group of people and therefore interpretation of the tax law is left to the Revenue agents who usually impose their “opinion” on the taxpayers [this will be the subject of a future post].
As tax professionals, we have witnessed an increase in tax penalties being levied against companies especially branches and subsidiaries of foreign entities on their intercompany transactions. it seems to be the “IT” that revenue agents are aiming for when showing up for an audit and therefore, we believe that managers, accountants and in-house tax counsel’s must be well versed in the rules and legislations to navigate this complex issue.
What taxpayers need to know and apply for their operations with foreign persons with no permanent establishment in Senegal is the following:
Determine if the service is provided in Senegal or if it has been used in Senegal - If one of the two applies, you go to step 2 ;
Determine the nature of the service provided (training, management fees, transfer pricing adjustments, etc.) ;
Check if a tax treaty exists between Senegal and the country of origin of the service provider - If Yes - consult the appropriate (management fees, royalties, interest, etc.) section of the tax treaty for guidance. If no tax treaty exists, proceed to step 3 ;
Apply the withholding tax (WHT) on the gross amount at the rate of 20% (25% with a 20% standard deduction) ;
Determine if the transaction is subject to VAT - if Yes, apply the VAT that will be paid to the tax authorities on behalf of the foreign service provider (Please note that this VAT in some cases is deductible) ;
File your WHT and VAT return at the latest 15 days after month end and pay the amount to revenue services
To illustrate the above, here are a few examples of how this withholding tax is applied:
Your Google Suite subscription for the management of your company emails in Senegal which charges around 8 Euros a month per user and is billed from Google’s Ireland subsidiary is subject to the withholding tax and the VAT.
The fees charged by a life coach from Ivory Coast who was retained for your Senegalese branch’s team building activity in Dakar is subject to the withholding tax and VAT. Although there exists a tax treaty between the countries (UEMOA), a life coach transfers knowledge to the your Senegalese staff and in application of the dispositions of the tax treaty, the WHT is applicable
The fees paid to a freelance engineer you retained to help on a projet in South Africa is not subject to the withholding tax due to the fact that the services are provided outside of Senegal and used by the final client in South Africa
It is to be understood that the value of the transaction is of no effect to its tax treatment. Every situation must be treated independently and to ensure of your compliance with the tax Code, we suggest you consult your tax professional to ascertain of the applicability of the WHT to your case.
Rubiks Advisory’s team is at your disposal to walk you through your transactions with foreign persons.