As the COVID-19 pandemic continues to sweep across the world, leaving economic devastation in its wake, leaders throughout Africa have taken decisive action to keep businesses afloat and workers in employment.
What are the key measures that are being implemented on the continent?
- Allowing companies to defer tax liabilities
What does this mean? Deferring your tax liabilities essentially means postponing the tax payments that companies need to make. Instead of asking companies to pay their taxes during this period of financial strain caused by the COVID-19 pandemic, governments across Africa are essentially giving them a grace period.
In Botswana, for instance, businesses that have been adversely affected by COVID-19 are allowed to defer 75% of any two self-assessment tax payments that are due between March and September 2020, and to pay them from March 2021 onwards, instead. South Africa’s Small, Medium and Micro-sized Enterprises (SMMEs) can temporarily defer 20% of their employees’ Pay As You Earn (PAYE) tax, and settle these payments in instalments over six months, with the first payment due on 7 September 2020.
Why is this important? The purpose of a tax deferment is to help companies boost their cash reserves. Instead of parting with money that a company owes in taxes during this unprecedented period of economic inactivity, they can use it to help their business stay afloat by maintaining healthier cash flow levels for paying staff, suppliers, and other fixed costs. Reducing strains on cash flow also allows companies to buy equipment ahead of time, for instance essential machinery required to sustain mining operations that may not be able to cross borders because of lockdowns in neighbouring countries.
- Removing penalties for non-compliance with tax deadlines
What does this mean? In the context of tax, “non-compliance” simply means missing the deadline when taxes are due to be filed — and, in this case, being permitted to miss deadlines without the risk of paying a penalty.
Why is this important? Companies’ tax filings and submissions take up a large portion of administrative staff’s time. COVID-19 prevention measures have forced the vast majority of office staff around the continent to work from home — in less-than-ideal business environments, often with unusable Internet connections — which makes staying on top of tax obligations more challenging and time-consuming than ever. Instead, many governments have opted not to penalise companies when their tax filings and submissions are behind schedule. The financial savings can assist with cash flow challenges, and the time savings allow company staff to prioritise essential activities that may help their business survive post-COVID.
- Expediting Value Added Tax (VAT) repayments
What does this mean? Companies that are VAT-registered regularly submit VAT Returns, in order to claim back any Output VAT that they paid to the national revenue authority that was in excess of their Input VAT. Zambia, South Africa and Kenya are three countries that follow this system. As VAT is automatically added to products and services, the payment of VAT by companies necessarily occurs before the amount of VAT owed by a government is refunded to companies. Although the system relies on regular repayments of VAT that is due, governments may delay repayments due to administrative challenges, or other reasons. In Zambia, for instance, the mining industry alone is owed approximately $1.2 billion in VAT repayments. Delays in repaying VAT negatively affects companies’ cash flow and prevents them from creating accurate financial forecasts.
“The time savings allow company staff to prioritise essential activities that may help their business survive post-COVID.”
Why is this important? Expediting VAT repayments alleviates cash flow challenges, which is why it has been a widespread response to financial strain resulting from COVID-19, with Kenya, South Africa and Botswana’s governments among those that have adopted this measure.
- Approaching multi-laterals for emergency funding
What does this mean? Multi-laterals such as the International Monetary Fund (IMF) and the World Bank announced in late March that they would be offering member countries financial support to assist with debt servicing, and to provide funds for countries to ensure their public health sectors’ preparedness for the peak of the health crisis. By 4 April, 85 countries had approached the IMF for short-term emergency assistance and, on 13 April, the IMF’s Executive Board approved immediate debt service relief to 25 member countries. The Democratic Republic of Congo (DRC), Mozambique and Malawi are the Southern African countries (among 18 on the continent) that will benefit from financial assistance.
Why is this important? The debt service relief that these multilaterals are providing frees up much-needed money that countries can allocate to epidemic preparedness and prevention. With countries around the world watching as factors including economic inactivity and volatile commodity prices deplete their foreign exchange reserves, and reduce their Gross Domestic Product (GDP), debt is the last thing that anyone can afford to allocate money to. Approximately half of the world’s emerging economies are already in “debt distress”, or are at very high risk of entering a state where servicing all their debts within the agreed time-frames becomes impossible.
Keeping economies alive post-COVID
The four measures above are proven ways of mitigating the economic havoc that the COVID-19 pandemic is wreaking across the globe, and form part of guidance issued by the Organisation for Economic Cooperation and Development (OECD), and the African Tax Administration Forum. Zambia has not yet followed the same well-trodden path towards surviving this crisis, with only very limited offers of support to business when compared to its peers and neighbours.
This may now change with the announcement today (30 April) of K2.7 billion in financial support to Zambia from the World Bank, African Development Bank, and the US and UK governments, which will give the Zambian government some much needed fiscal firepower. The key now is to secure a reasonable temporary respite from bondholders, and China, on Zambia’s debt obligations. Debt repayments swallow up an increasingly large proportion of government revenue, which must now be put towards ensuring the nation’s survival through this crisis period. This is in our creditors’ long-term interest, as well as our own. Besides, the governments of the US and UK will not want to see their taxpayers’ money going to pay Chinese creditors, instead of the fight against COVID-19.
What will Zambia’s government do next?