Namibia has conceded to the European Union’s (EU) demand that it reforms its taxation system, with Finance Minister, Calle Schlettwein,
announcing a raft of reforms in his Wednesday budget statement, which are likely to appease the trade block.
The move comes as Namibia, along with 16 other nations, was last year blacklisted as a tax haven by the EU, citing its failure to ratify the Organisation for Economic Cooperation and Development’s convention and abolish harmful preferential tax regimes.
Namibia and the EU have been locked in a war of words over the blacklisting of the country, with government labeling it “unjust, prejudiced, partisan, discriminatory and biased.”
According to Schlettwein, Namibia will repeal the Export Processing Zone Act and introduce the Special Economic Zones, with a sunset clause for current operators with the EPZ status, one of key concerns raised by the EU.
The decision is contrary to a 2014 position by Schlettwein, then trade minister, when he wanted to broaden the EPZ regime by establishing economic and industrial zones that would benefit both the domestic and international markets.
Although the move might go a long way in helping repair Namibia’s relationship with the EU, repealing of the Export Processing Zone Act could also impact on the country’s ability to attract foreign direct investment (FDI).
“Over and above what you mentioned regarding the EU concerns, government wants to also broaden its tax base, although this might also impede attracting some FDI, especially from those hunting for Export Processing Zones and tax breaks,” Ngoni Bopoto, an Analyst with Namibia Equity Brokers said.
Cameron Kotze, a Tax Services Partner with Ernst & Young Namibia, said the planned repealing of the EPZ Act will have a significant impact on businesses with EPZ status.
“It’s going to have a significant impact on businesses with that status and there are two very big businesses that I know, the smelter in Tsumeb and the Zinc mine, down in the south. Effectively the government is not getting any tax from their operations in Namibia and now it will be able to, but from what I understand, it’s going to be a phased approach,” he said. “Hopefully their returns on investment will keep them in Namibia.”
Rowland Brown from Cirrus Capital, however, said the impact of repealing the EPZ Act on FDI will be determined on what would replace the regulations.
“Repealing the Act has been on the cards for a long time and it’s unlikely that FDI will be affected, depending on what will be put in its place,” he said.
Regarding the EPZ Act and EU blacklisting, he said, “It has not been completely successful. The government is working on trying to address the EU issue, but it’s not linked.”
Established in 1996, the EPZ policy was mainly targeted at companies that mostly produced goods for export as government hoped the policy would increase the share the manufacturing (industrial) sector contributed to job creation, the country’s gross domestic product (GDP) and exports of manufactured goods; and thereby enhance the diversification of the local economy.
The EPZ regime was instituted to serve as a tax haven for export-oriented manufacturing companies in exchange for job creation, development of skills, transfer of technology and inflow of capital.
Schlettwein noted in an interview with the Windhoek Observer in 2014 that this had not entirely been the case as the majority of companies that enjoyed EPZ status were in the extractive industries, which effectively represented a highly mechanised and not labour intensive sector.
“The initial target for the EPZ was that companies would create employment in lieu of tax payments. We engaged a consultant to see if that ambition was realised through the EPZ, and the outcome was we did not achieve what we set out to do, and the economic gain was not what we expected.
“The main goal – to create employment – did not materialise. A few companies did well in meeting the agreement but the majority did not,” Schlettwein said then.
The regime also allows enterprises to export 30 percent of their production to the SACU market – provided they have operated for at least a year.
The policy’s key features included a tax-free regime that exempted EPZ enterprises from corporate income tax, duties and value-added tax on machinery, equipment and raw materials imported into Namibia for manufacturing purposes.
The only taxes payable are personal income tax on employees’ income as well as the 10 percent withholding tax (non-resident shareholders) on declared dividends.
In addition, EPZ enterprises were allowed to hold foreign currency accounts at commercial banks as well as to repatriate their capital and profits.