Following a five-decade civil war in Sudan ended by a peace agreement and new constitution in 2005, the Republic of South Sudan (South Sudan) became the world’s 196th country on 9 July 2011.
Although South Sudan is new, it has all-too-familiar needs. The majority of its population is extremely poor, it has high child mortality, erratic and inadequate electricity supplies, paucity of clean water and roads, inadequate health and schooling resources, and a continuing need for food aid. Yet its untapped natural resources are vast and impressive. While oil is being exploited (South Sudan’s oil reserves are estimated to be as much as 1/40th of the reserves of Saudi Arabia) gold, copper and iron ore are generally not.1 Agriculture has great potential: the soil is invitingly fertile, but wide-scale commercial farming is so far rare.
With South Sudan poised to grow and develop economically, it must adopt a tax system that is conducive to its needs and goals, one which raises sufficient revenue without discouraging vital domestic entrepreneurship and inward investment. To be successful, it must avoid the problems often encountered by developing countries when they design and implement their tax systems. A variety of factors can conspire to result in high headline rates of tax, complex tax rate bands, too many exemptions and deductions and too much power in the hands of relatively junior officials.
The IMF staff has identified four reasons developing countries often face difficulties in establishing efficient tax systems:
- Most workers are typically employed in agriculture or in small, informal enterprises, making the tax base difficult to measure.
- The absence of a well-educated, well-trained and well-resourced staff makes tax administration problematic, especially when taxpayers have limited ability to keep accounts.
- Reliable statistics are hard to obtain due to the informal structure of the economy and the government’s financial limitations.
- Income tends to be unevenly distributed.2
Further, South Sudan effectively had to build a new tax system. Southern Sudan has historically relied on revenues from oil production, with oil generating 98 per cent of Southern Sudan’s revenue over the past five years.3 Further, more than 60 per cent of Southern Sudan’s revenues have been collected at checkpoints, which will no longer be feasible as South Sudan progresses economically.
With these challenges in mind, the former Government of Southern Sudan (as the territory was then called, enacted the Taxation Act in 2009 (the Act), using powers it had obtained from its interim Constitution of 2005. The Act is generally well written and constructed, with a system that is detailed where it needs to be and straightforward where it does not. The details are generally sensible, and the rates generally low.
Under the Act, the former Government of Southern Sudan obtained authority over personal income tax, excise on luxury goods and business profits tax on small and medium-sized enterprises, leaving other taxation rights with the former Government of National Unity. The Act does not provide for large business taxation, VAT or goods and services tax, nor stamp duty, land tax or inheritance tax.
However, the Ministry of Finance and Economic Planning hopes to extend this Act to a general sales tax and to introduce a business profit tax to large businesses.
The Act sets out the administrative machinery necessary to implement the new tax system:
- Functions and duties of the Directorate of Taxation
- The power to investigate any person
- The appointment of Revenue Officers
- Registration of taxpayers
- Filing returns
- Tax assessments
- Time limits for assessments; collection of tax
- The procedure for appeals
- Judicial review on a tax assessment
The rules for recordkeeping, interest and penalties, tax collection and statute of limitations are generally reasonable, although they will need to be fleshed out administratively.
Income tax rates for individuals are fairly flat and low by international norms: 0 per cent for the first 300 Sudanese Pounds (SDG), 10 per cent for SDG 301-5,000 and 15 per cent for SDG 5,001 and above. At the time this article was written, one US dollar equaled approximately three SDG.
Business profit tax rates are set at 10 per cent for small businesses and 15 per cent for medium-sized businesses. Expenses are generally deductible provided that they are wholly and exclusively incurred for the purpose of the business.
Expenses on capital assets can be recovered via depreciation deductions. The depreciation schedule is refreshingly simple, with only three categories: buildings and other structures (10 years), vehicles, office equipment and computers (three years); and all other property (four years). Expenses on intellectual property are deductible over the useful life of the property.
Business losses can be carried forward up to five years and are available as a deduction against any income.
There is no separate capital gains tax: instead capital gains are treated as business incomes and capital losses as business losses.
For enforcement, the Act relies heavily on withholding and advance payment of taxes. There is an import duty, styled as an advance payment of tax, on all goods brought into South Sudan of 2 per cent on all processed foods, 4 per cent on other goods and 6 per cent on all vehicles. The importer can credit this tax against its personal income tax or business profits tax liability. However, if the amount of import tax exceeds the importer’s income tax liability or the importer otherwise is not subject to tax, the “advance payment” is treated as a non-refundable, “final” payment of tax. Withholding tax at a rate of 10 per cent is applied to employment wages, payment of dividends, payment of interest and royalties. Payments subject to this withholding tax are exempt from the personal income tax and the business profits tax. The tax withheld on dividends and interest is a final tax and cannot be refunded or credited against other taxes.
The Act also allows a credit for foreign taxes imposed on foreign source income, provided that the foreign country gives reciprocal relief for South Sudan taxpayers. Thus, a South Sudan resident who makes a profit from outside South Sudan and pays a tax on that profit, will be allowed a tax credit if a tax treaty applies or the other country provides a similar foreign tax credit.
Very helpfully, the Act specifically provides for a system of written rulings for taxpayers in respect of transactions. These rulings can apparently apply prospectively or retrospectively. Unusually, if the taxpayer has made full and true disclosure of the transaction, the ruling is binding on both the Directorate of Taxation and the taxpayer. This is not typical of a ruling system, and introduces risks in applying for a ruling. If a taxpayer is adversely affected by a ruling, the taxpayer can request reconsideration by the Appeals Board.
Turning briefly to international taxation, the former Government of Sudan itself has a number of double tax treaties. It is not clear whether South Sudan will seek analogous treaty terms with those same treaty partners. Whilst outside the scope of this article, there may be an advantage to South Sudan entering into new double tax treaties to encourage foreign investment by creating clarity and avoiding double taxation. Given the number of funds investing in Africa, including infrastructure, which are domiciled in Mauritius, a treaty with that tax-favoured jurisdiction may be an immediate priority.
From the point of view of Western tax lawyers, used to tens of thousands of pages of domestic tax code, the 55-page Taxation Act of 2009 is a welcome departure. For example, the expression “Business Day” is used but not defined in the Act but, in the authors’ view, that is refreshing given the unnecessary definitions one often sees in legislation or agreements.
Still, there will be many tax issues for investors into South Sudan. Some points stand out.
- Care will need to be taken on residence. Helpfully, there is a definition. An individual is resident in South Sudan if he is physically present for 183 days or more or is domiciled there. If domicile takes its usual meaning, it appears that a person born in Juba to a Sudanese father may, in certain circumstances, be treated as resident in South Sudan for tax purposes even if he or she does not visit South Sudan at any stage during one or more tax years. A company will be resident in South Sudan if it is incorporated there, or effectively managed there.
- Section 25 of the Act provides that “any transaction which is recorded in or effected in a foreign currency shall be converted into Sudanese Pounds (SDG) at the prevailing market rate”. Presumably this means the market rate prevailing “at the date at which the transaction takes place” but it could conceivably include the date on which payment is received, the date on which the tax return is filed, or the date on which the tax is payable. Similarly, “Wages” defined broadly as “compensation for personal services rendered”. This is a broader definition than what typically might be considered “wages”. It would appear to catch services supplied by an individual through an offshore services company, which is a reasonably common and apparently effective arrangement in some other African countries. It is unclear whether this was intentional or not. Gross income also includes the catch-all category of “any other source that increases the taxpayer’s net worth”.
- Administrative guidance will be necessary, either to create the regulatory exceptions and requirements set forth in the statute or to clarify complex topics that are simply addressed by the statutory language. Taxpayers will need to know the “required manner and form” for documentation, what constitutes “work done within the territory of Southern Sudan”, the de minimis threshold for employer-provided in-kind benefits, and how the South Sudan foreign tax credit will take into account other countries’ exemption regimes.
Ultimately, much will depend on how the South Sudanese courts, or the “Appeals Board”, with its unusual membership, approach statutory interpretation. Will they apply a literal meaning to the words in the Act or interpret purposively, the so-called Ramsay principle? Investors will need robust tax advice from experienced tax lawyers.
In conclusion, from a tax point of view, South Sudan should be an attractive jurisdiction for inward investment. SNR Denton, through its 60 offices (including associate offices) worldwide, including 22 in Africa, is looking forward to continuing to work with existing and new clients in structuring their operations in the region.
1 The Economist, 3 February 2011
2 Tax Policy for Developing Countries, Vito Tanzi, Howell Zee, IMF Economic Issues No 27
This article was written in the summer of 2011