African gateways jostle for investors’ attention – July 2011

July 2011: Foreign investor interest in Africa is growing fast, with virtually every country on the continent now catching the eye of investors. This is in turn highlighting the importance of “gateway” countries that investors can use as a springboard into other African markets.

“Investment interest is spreading like wildfire across Africa,” says Roxanna Nyiri, director of Transfer Pricing and International Tax at auditing firm BDO. “Before 2004, foreign investors were mostly active in the major economies such as Nigeria and Zambia but a huge shift has since taken place.  Interest has spread right through the continent, with mining and construction being the two primary industries that investors are targeting.”

Nyiri bases this view on BDO’s presence in every African country (except Somalia). She says the fact that investment is no longer concentrated in isolated pockets but throughout Africa has magnified the value of gateway countries that serve as entry points and regional headquarters for investors. “Increasingly, clients with operations across Africa or a region are seeking a base from which to operate their African networks.”

Several countries are jostling for position as the investment gateway of choice. In Nyiri’s view, Mauritius, Botswana and South Africa are the main contenders. However, other commentators also cite Kenya as an important gateway, particularly in the light of opportunities opening up in Southern Sudan.

“Kenya has always been a regional centre by virtue of our location, transport infrastructure and relative political stability,” says Oliver Fowler, Partner at Nairobi-based Kaplan & Stratton, the Kenyan member of Lex Africa, an Africa-wide network of leading law firms. “All traffic that goes east into Rwanda, Burundi, eastern DRC and Southern Sudan depends on Kenya’s infrastructure.  As a hub for air, road and rail transport, there is nowhere close that is comparable to Kenya.”

Fowler says such advantages have tended to outweigh Kenya’s shortcomings as a financial and investment centre. These include high withholding tax and the lack of intra-African double tax treaties. “We have double tax arrangements with the United Kingdom and India but not with our neighbours, Uganda and Tanzania,” he says. “Corruption, the state of government registries and lack of confidence in the judiciary remain sources of significant concern to the business community.  Another major issue for foreign investors is delays in the issuing of immigration permits for expatriate staff.” “

Even so, foreign companies operating in East Africa continue to choose Kenya as their regional base – and Fowler believes that its importance is set to grow. “There is a fair degree of optimism around Kenya following the introduction of the new Constitution, which is generating business and investor confidence. In addition, Southern Sudan is going to become more and more important as an investment destination, and all its imports and exports are expected to come through Kenya. That opens up all sorts of avenues.”

While Kenya has become a significant regional base despite negligible tax and investment incentives, Mauritius is reaping the benefits of an extremely investor-friendly climate. “We are selling these structures left, right and centre – like hot cakes,” says BDO’s Roxanna Nyiri, referring to demand for the Mauritian global business company structure, the GBL 1.

The attractions of Mauritius include the complete absence of exchange control thin capitalisation and a highly favourable tax regime for global business companies. Effective income tax rate of 3% for the GBL1 and there is no dividend tax, no withholding tax on the remittance of branch profits or on interest paid to non-residents, and no stamp duties, registration duties or levies, among others. Mauritius also has good double tax treaties with about 30 countries.

But this tax-friendly environment should not be misinterpreted says Camille Pouletty, lawyer at  De Comarmond & Koenig and CEO of CK (Corporate Services), the offshore services branch of De Comarmond & Koenig , the Mauritian member of the Lex Africa network. ”Mauritius is not a tax haven, it is a low tax jurisdiction,” she says. “Anti-money laundering legislation, the regulation of the global business sector, cooperation agreements for the disclosure of information and rules for good corporate governance have been put in place to promote the use of Mauritius as a jurisdiction of substance.”

BDO’s Nyira agrees, adding that Mauritius is seen as a “clean” jurisdiction by South Africa and the rest of the world. “Bear in mind that when you set up an entity, your business motive must come first, then tax. You must have a solid business case, and tax should never be your primary motive.” In the case of Mauritius, she says, one solid business advantage as a gateway into Africa is its good location and proximity to regional markets, translating into lower transport costs. “And because there is no exchange control, there is an easy flow of money from Mauritius, which is important in granting loans to African countries.”

Meanwhile, South Africa has woken up to the growing success of Mauritius as an investment hub. “Mauritius has been able to persuade a growing number of foreign and South African companies to use it as a base for investing into their African operations, largely on the basis of its benign tax regime,” says Ernest Mazansky, director Werksmans Tax. “This success did not go unnoticed by South Africa.”

Galvanised into action, the country’s new Headquarter (HQ) Company framework offers a special dispensation to companies using South Africa as the regional headquarters for their African subsidiaries.

“The incremental tax cost of coming to South Africa has been taken out of the system,” says Mazansky, referring to the concessions available to headquarter companies. Among other concessions, secondary tax on companies (STC) is switched off for these companies, meaning foreign dividends, and all other profits, can flow through South Africa and out without attracting tax. Headquarter companies are also exempt from thin capitalisation rules and from controlled foreign company (CFC) rules. And the sales of foreign shares by these companies, and the sales of shares of HQ companies themselves, are exempt from CGT.

To qualify, however, companies must meet the criteria set for their shareholding, income profile and asset base. Specifically, each shareholder must hold at least 20% of the HQ company and  80% of their income and asset base must be outside South Africa. If the HQ company wishes (it’s not a requirement for tax purposes) to be treated as a non-resident company for exchange control purposes, and thus outside of the exchange control net, then, in addition, at least 80% of its shareholders must be non-residents.

Some investment advisers say that the threshold for qualifying as a regional holding company is too high and the criteria too onerous. Mazansky says this is not necessarily so. “Remember, the HQ is not for every company that has a foreign investment. Its purpose is primarily to hold and manage foreign assets or subsidiaries. That is why the concessions only kick in when a company passes the shareholder, asset and income test.”

Commenting on whether the new framework will be enough to convince investors to make South Africa their first choice as a regional head office, Mazansky says:  “Tax and absence of exchange controls are elements that make you attractive as a gateway but they are only part of the picture. When based in South Africa, you are trading in a mainstream, international economy that has a large capital base and large, highly sophisticated banking, accounting and legal systems. There are several flights a day to the major capitals of Europe, America, the Far East and Africa, as well as education and health systems of sufficient quality to attract expatriates.  Doing business in South Africa, particularly from Johannesburg, has traditionally been and still is easier and more commercially effective than anywhere else in the region.”

Still, “the proof of the pudding is in the eating”, Mazansky says, and time will tell which of the gateway countries will offer investors the greatest competitive edge.