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Tax considerations of credit ratings

On 3 April 2017, South Africa, one of Africa’s largest economies had their credit rating downgraded to “junk” status by S&P Global Ratings. Being Namibia’s biggest trading partner, economists have been scrutinising the potential impacts from the shared currency arrangement and more specifically the direct impact on our debt and the related interest we have to pay as a result of having our debt priced off the South African debt.

Government’s biggest source of income which supports our ability to service the debt is tax revenue. We highlight a few impacts and considerations on, i.e import tax revenues together with customs revenues, interest impact, corporate tax revenues and employees’ tax revenues.

Import tax revenue is generated on the import VAT which is calculated on the consideration of goods imported into Namibia. In addition, customs duties are also levied at prescribed rates on the said imported goods and it can therefore be said that the importation of luxury goods would result in increased import tax revenues for our Government. The weakening of the South African Rand is expected to increase South African inflation, which in turn increases the cost of their goods, as well as foreign goods imported into Namibia, which will result in a decrease in the importation of luxury goods and therefore a decrease in the related tax revenues may occur.

South Africa has been reported as Namibia’s major import partner accounting for 66% of our total imports. Although it would be impractical to reduce the import of basic supplies such as food products, the ripple effect is that, corporates will pass these increases on to consumers, resulting in further pressure on disposable income which could force the Government to look into producing these goods locally resulting in a further reduced import tax revenue and potentially an outflow of income towards becoming more self-sustainable which could mean that Government will seek to increase their tax revenues from the other sources, one being our corporates.

As referenced by economists, local commercial banks may come under pressure and increase interest rates on funding provided, resulting in an increase in interest charges and consequently lower profits on which corporate taxation is paid. Corporate profits may further be lowered by the shared currency as corporates are allowed a deduction on realised forex losses as a result of the weakening currency against countries outside the Common Monetary Area.

Interest on withholding taxes that corporates withhold from foreign loan funding may also be impacted if investors no longer consider Namibia as a viable investment hub in terms of returns and the government would need to consider the potential loss of tax revenues from both local and foreign corporates.

The other source in our consideration is employees’ tax which is directly linked to the performance of our corporates. Should the government consider an increase in employees’ taxes to supplement loss of other tax revenues, these would only be viable if corporates are able to maintain their workforce. Increases in employees’ tax however has other consequences for the country, as it will reduce disposable income of the consumer.

Although we are grateful for no tax rate increases or the introduction of new taxes in the 2017 Budget Speech, we may face a different reality in the upcoming years which further emphasises the need for government consultation with the various stakeholders.

Memory MbaiMemory Mbai
Tax Manager, KPMG Namibia
E: mmbai@kpmg.com
T: +26461387500

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