by Johan Nel, Director, AJM
Introduction: Namibia and the EU Blacklist
There was a time when Namibia was blacklisted by the European Union (“EU”) for what it considered “harmful tax practices”. When blacklisted, jurisdictions should commit to implementing the OECD anti-BEPS minimum standards, which concern harmful tax measures, treaty shopping, country-by-country reporting, and dispute resolution. This is why Namibia joined the Base Erosion and Profit Shifting (BEPS) Inclusive Framework on 9 August 2019. By joining the BEPS inclusive framework, Namibia has committed to comply with the BEPS minimum standards going forward.
Namibia also signed up to the multilateral convention to implement tax treaty-related measures (“MLI”) on 30 September 2021. This initiative enables countries to apply a single ratification procedure in parliament to modify all of Namibia’s tax treaty networks rather than seeking to ratify or amend each bilateral tax treaty separately. Namibia has, however, only signed up but not ratified these decisions, and therefore, it is not in force yet.
As a result of the above actions, Namibia has been removed from the blacklist for harmful tax practices.
I believe it is essential, though, to understand the impact of such a blacklisting on Namibia, and how we can ensure that it does not happen again.
Understanding the EU’s Concerns
When the EU examines why a country like Namibia is blacklisted, it considers, among others, tax transparency, fair taxation, and measures against base erosion and profit shifting (“BEPS”). There is also global sensitivity regarding the fact that jurisdictions should not facilitate offshore structures or arrangements that seek to attract profits without any real economic activity.
Tax Incentives in Developing Economies
Is it fair for the EU and other developed countries to impose such a blacklisting on developing countries that have a high unemployment rate and are desperately trying to create an environment that is conducive to creating employment?
Tax incentives are one way of attracting investment and creating the much-needed employment, as well as setting up industries in developing countries that will grow the economy and make developing countries more self-sustainable.
The purpose of this article is not to initiate a political debate on the subject. Still, as Namibians, we should be informed about the impact certain policy decisions have on our country. Very often, conversations centre around negativity towards tax policy decisions made, without understanding the details behind the reasons for them. I am not defending the tax policy decisions made over the last few years in a blanket manner, but I do understand now why some of these measures were necessary.
The Global Minimum Tax and Effective Tax Rate (ETR)
Pillar Two (“Pillar 2) is part of the OECD/G20’s global tax reform initiative. It’s designed to ensure that large multinational enterprises (MNEs) pay a minimum level of tax, no matter where they operate.
Very often, however, global pressures on tax policy (such as the Pillar 2 initiative) primarily affect a limited number of companies worldwide. Research conducted by a respected leader in tax policy in Africa indicates that out of 60,000 multinationals in the scope of Pillar 2, roughly 10,000 have a presence in Africa. The figure in Namibia would be significantly lower, as you can imagine. Therefore, the question arises: is the effort of complying with these global initiatives worth the potential tax benefits to be gained, or can we focus our efforts better on implementing a simplified tax system and easing tax collection?
Implications of Being Blacklisted
Being on the blacklist can have numerous adverse consequences for Namibia.
- Withholding taxes on payments such as interest, royalties, service fees, or remuneration may be due at a higher rate when made to Namibian businesses.
- Denial of tax deductions for costs and payments directed to entities in Namibia, that otherwise would be deductible for the taxpayer.
- Increased reporting obligations for EU businesses operating in Namibia.
- Restrictions on EU funding: Namibian entities may be barred from receiving EU development aid or financial support.
How the ETR is Calculated
Concern has been raised that, as a country, we cannot introduce incentives that will reduce our effective tax rate (“ETR”) below 15%. This is not entirely accurate, as there are several ways to mitigate this potential risk. The ETR of 15% is not a straightforward calculation by simply dividing the corporate tax by the profit before tax, as is widely used for reporting purposes from an accounting perspective.
Incentives like tax holidays or reduced corporate tax rates directly lower the ETR. Still, incentives relating to the cost of labour and indirect tax incentives do not impact this calculation of ETR.
The calculation of the effective tax rate is crucial when discussing the global minimum tax of 15% proposed under Pillar 2 of the OECD BEPS project. The calculation has a number of complex areas, but for purposes of this article, I have tried to simplify it.
Effective tax rate (ETR) is calculated with a formula. ETR =
- Globe income, in simple terms, will be your taxable income in Namibia.
Adjusted covered taxes used for calculating the Pillar Two GloBE (Global Anti-Base Erosion) ETR are effectively the current tax expense PLUS the total Deferred Tax Adjustment Amount.
A simple example of this is set out below:
| Item | Amount (N$) |
| Accounting Profit Before Tax | 1,000,000 |
| Current Tax Expense | 120,000 |
| Deferred Tax Expense | 30,000 |
| Net Income (After Tax) | 850,000 |
First, we determine the GloBE Income.
Net income (after tax), then add back covered taxes:
- Net income: 850,000
- Add back current tax: 120,000
- Add back deferred tax: 30,000
GloBE Income = 850,000 + 120,000 + 30,000 = 1,000,000
Next, we calculate Adjusted Covered Taxes
- Current tax expense: 120,000
- Deferred tax expense: 30,000
Adjusted Covered Taxes = 150,000
Calculate the ETR = Adjusted Covered Taxes / GloBE Income
ETR = 150,000 / 1,000,000 = 15%
Acceptable Incentives under Pillar Two
Additionally, incentives that support the Substance-Based Income Exclusion (“SBIE”) principle under Pillar 2 provide added benefits when calculating the potential top-up tax. The Global Anti-Base Erosion (“GloBE”) rules permit a substance-based exclusion for payroll costs (5% of the costs) and tangible assets (5% of their carrying value). Thus, if a company has real operations in Namibia (i.e., factories, employees, equipment, etc) it reduces the tax base on which the top-up tax is levied. This enables governments to offer tax-reducing incentives on investments in these activities without triggering GloBE top-up tax or at least mitigating their impact on any top-up tax liability.
What can we do?
Offering incentives that allow for deduction of capital expenditure, therefore, cannot be said to have a negative impact on the ETR for purposes of the global minimum tax conversation. This is because the capital allowances that reduce the current tax expense would, in turn, create a tax liability for deferred tax purposes.
Some other incentives that would be acceptable and allowable under Pillar 2 may include accelerated depreciation for capital investments, tax credits for infrastructure development or renewable energy projects, research and development tax deductions or super deductions for innovation, and providing, for example, a 150% deduction for expenses related to training Namibian workers or upskilling in key industries.
Therefore, not all incentives negatively impact your ETR, and policymakers should not use the discussion of the global minimum tax rate as an excuse for why incentives cannot be provided.
Conclusion: Building Sustainable Tax Policy for Namibia
Several key aspects should be considered when evaluating strategies to attract additional investment. Tax incentives, if designed correctly, should not result in Namibia being flagged as non-compliant with EU or global standards. Structuring incentives and designing tax policies that support investment and are transparent, fair, and substance-based could lead to benefits not only for investment in Namibia but also aid in collecting more revenue.
After all, offering incentives that attract investment and also result in employment opportunities have rippling effects throughout the economy, which ultimately lead to increased tax collection on multiple fronts. This is, in my view, better than not offering any incentives, which leads to limited or no growth and less taxes overall.
Namibia has the opportunity to collaborate with leading authorities, such as the IBFD, on this matter to ensure that the incentives we provide are designed in a manner that ticks all the necessary boxes.