Doing Business in Africa · • 2017 inflation target 9% 17 Doing Business in Zambia November 2016...

Doing Business in Africa

Focus on Zambia

November 2016

www.pwc.com

PwC 2November 2016Doing Business in Zambia

Nigeria

Seminars so far

Angola

Botswana

Ethiopia

Kenya

Mozambique

Namibia

Rwanda

South Africa

Tanzania

Zambia

Mauritius

Seychelles

Doing business inZambia

PwC

Fun fact about Zambia

4November 2016Doing Business in Zambia

• Zambia is completelylandlocked.

• In order to see the ocean, youwould have to travel over 1,000kilometres.

• Despite this, some ofthe largest and most beautifulrivers and lakes in the worldare in Zambia, includingLake Tanganyika and Kariba.

• Lake Tanganyika is the secondlargest and deepest freshwaterlake in the world.

• Lake Kariba is so huge that incertain parts, unknowingvisitors mistake it for theocean.

Agenda

Country context

Business vehicles

Legal framework

Labour framework

Tax framework

Key issues

Structuring

PwC 6November 2016Doing Business in Zambia

Country context

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Country context

1.1 General

1.2 Living and working inZambia

1.3 Political

1.4 Socio-economic

1.5 Risk factors


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Country contextGeneral

• Zambia is located in the Southern part ofAfrica and shares its borders with 8 othercountries. The eight countries are Zimbabwe,Botswana, Namibia, Tanzania, DemocraticRepublic of Congo, Angola and Malawi.

• Zambia shares the Victoria Falls (one of theseven wonders of the World ) with Zimbabweand this is a popular tourist attraction for thecountry.

• Zambia is home to about 72 tribes, however,the main languages spoken include English(official business language), Nyanja, Bemba,Lozi and Tonga.


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Country contextHistory

• Zambia is a former British colony and is a member of theCommonwealth.

• Zambia became an independent country in 1964 and has had apeaceful track record following independence.

• Zambia is a constitutional republic, holding elections every 5 years.The last elections were held in August this year.

• Edgar Chagwa Lungu was elected president (was sitting Presidentprior to elections). He is the 6th president since independence.

• There are 10 provinces in Zambia, with the capital city being Lusaka,located in Lusaka province.


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Country context

1.1 General


1.3 Political

1.4 Socio-economical

1.5 Risk factors


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Country contextLiving and working in Zambia

• Zambia has a total area of approximately752,614 km², and a population of almost 15million people.

• The key commercial centres / cities are Lusaka,Kitwe, Ndola, Solwezi and Livingstone. Lusakais the administrative capital and Livingstone isthe tourism capital – it is home to the mightyVictoria Falls or Mosi-o-Tunya

• Zambia has a tropical climate, with a rainyseason that runs from November to February,and a dry season from August to October.


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Country context

1.1 General


1.3 Political

1.4 Socio-economical

1.5 Risk factors


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Country contextPolitical

• Presidential system

• Last general elections were in August 2016 which was won bythe Patriotic Front - in power since 2011 - and currentpresident Edgar Chagwa Lungu

• Other three parties represented in the Parliament -

• United Party for National Development (UPND);

• Movement for Multi Party Democracy (MMD); and

• Forum for Democracy and Development (FDD).

• The UPND contested the last general election results throughthe constitutional court. However, the appeal wasunsuccessful and rejected.


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Country context

1.1 General

1.2 Living and working in Zambia

1.3 Political

1.4 Socio-economic

1.5 Risk factors


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Country contextSocio-economic

• GDP of USD 20.6 billion

• Has a well established mining sector. Key producer ofcopper (9th largest producer currently), cobalt, zinc,cement amongst others. Well know for quality ofgemstones

• Other key industries include agriculture and agri-business, tourism, banking, infrastructure/construction. Significant development of retailcomplexes over last 8 years despite relatively smallmarket;

• Key forex earner - copper and cobalt

• Key opportunities in energy, agriculture,manufacturing, tourism, Emphasis on local valueaddition, iron, steel and copper products,transportation

• President and latest budget puts emphasis ondiversifying economy into agricultural sector


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Country ContextSocio-economic

• The World Bank has classifiedZambia as a Lower Middle IncomeCountry

• In 2012, Forbes magazine placedZambia as amongst Africa’s 5 bestinvestment destinations

• Zambia successfully issued 3Eurobonds in 2012, 2014 and 2015

• As of April 2016, Zambia had a creditrating of B – from Fitch

• Zambia generally has a stablepolitical and social environment


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Country contextSocio-economic

• Good GDP growth from2004 to 2014 (5.5% - 7.4%)

• Declined to 3.2% in 2015,2016 forecast > 3%

• Key factors - slump incommodity prices (copper,cobalt), power crisis,inconsistent policy, highborrowing costs

• 2017 budget targeting GDPof 3.4%

• 2017 inflation target 9%


• Prior to 2014 inflation had beenbrought down to single digit

• 2015 kwacha devalued by over60% (US$: Kw 1:16) by July 2015and food inflation rose to 22.9%at its peak in Feb 2016.

• Stringent monetary policy hasbrought inflation down to 12.5%and exchange rate US$1:Kw9.7)

• This has come at a cost –crowded out private borrowing

• Current Bank of Zambia policyrate – 15.5%, commercial lendingrate 35%-40% now

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Country ContextSocio-economic

• Despite current challenges copper production expected to reach 750kmetric tonnes (2015 - 531k mt) and grow to 1.5m metric tonnes by 2017

• 2017 budget places emphasis on diversification in particular agriculture,followed by energy, infrastructure and manufacturing

• 2017 budget government expresses interest in development throughPPPs

• Significant potential for PPPs in energy (hydro, coal, solar); bridgesroad infrastructure, rail transport;

• PPP framework needs further work.

• Key projects that were started since 2012 include Link Zambia 8000and Pave Zambia, formula one, Kenneth Kaunda International airport,hydro and coal power stations

• 2017 complete these – but no new capital projects due to burgeoningdebt burden


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Country context

1.1 General

1.2 Living and working in Zambia

1.3 Political

1.4 Socio-economic

1.5 Risk factors


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Good opportunities, but what are the risk factors?Internal and external

Opportunities

• Energy – solar, coal, wind, hydro

• Agriculture, some infrastructureprogrammes

• Cu prices expected to pick up in mid 2017– mining value chain opportunities

Risks

• Economy still reliant on mining –vulnerable to external shocks – commodityprice, exchange rate

• High cost of doing business

• Power shortage for next 3 years

• Increased fuel and electricity prices

• Shortage of skilled work force


Business vehicles

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Business vehicles

2.1 Types of companies

2.2 Company vs Branch

2.3 Plc vs Ltd


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Business vehiclesTypes of entitiesBusiness may be conducted in a variety of forms in Zambia:

23November 2016Doing Business in Zambia March 2016Doing Business in Mozambique

23

Branch Public orprivatecompany

Soleproprietorship

Partnership

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Business vehicles

2.1 Types of entities


2.3 Plc vs Ltd


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Business VehiclesCompany vs. Branch

Item Distinction factors Subsidiary Branch

1 Legal personality Yes No

2 Tax personality Yes Yes

3 Liability Limited to theamount of thecompany’s sharecapital

Head office would beheld liable in casebranch defaults or is noncompliant

4 No. of shareholders Minimum of 2 and nomore than 50

Not applicable

5 Incorporation/Registration costs

Approx $2k-$3kdepends on filings

Approx $2k-3kdepends on filings

6 Stakeholder’s perception Long-term presence Short-term presence


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Business VehiclesCompany vs. Branch (cont.)

Item Distinction factors Company Branch

7 Audited accounts Mandatory Mandatory

8 Duration Unlimited Unlimited

9 Taxation of dividends 15% WHT on dividenddistribution

15% branch profit tax onrepatriation of profits

10 Eligibility forlicenses/concessions

Suitable for all Suitable for all

11 Liquidation/closure Complex and long Less complex


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Business vehicles

2.1 Types of companies


2.3 Plc vs Ltd


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Business vehiclesPublic Limited Company (Plc) vs. Private Limited Company (Ltd)

Item Distinction factors Plc Ltd

1 Number of shareholders At least two At least two

2 Limit of liability Up to the value of theshares subscribed by eachmember

Up to the value of fullypaid shares or nominalvalue whichever is greater

3 Share capital Represented by shares Represented by shares

4 Minimum value pershare/quotas

K1 K1

5 Corporate bodies Board of Directors/ AuditCommittee/CompanySecretary

Board ofDirectors/CompanySecretary


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Legal framework

3.1 Legal system at a glance

3.2 Exchange control


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Legal frameworkLegal system at a glanceOverview

• Inherited from the British legal system as a

member of the Commonwealth

• Separation of powers is warranted by the

Constitution of the Republic

• Judiciary comprises the Constitutional Court,

Supreme Court, Court of Appeal, High Court,

Industrial Relations Courts, Subordinate

Courts, Small Claims Courts and local courts.

• There are also specialised courts, such as the

Tax Appeals Tribunal and Lands appeal

tribunal.


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Legal frameworkLegal system at a glance

Land Rights

• Land in Zambia is vested in thePresident of the Republic;

• There are two forms in which landmaybe held, i.e. leasehold orcustomary;

• The most secure form of landownership is a 99 year leaseholdfrom the president. CustomaryLand is less secure but may beconverted to leasehold land;

• Only Zambian residents areallowed to own land (with theexception of investors who have aZambia Development AgencyInvestment Licence)


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Legal framework

3.1 Legal system at a glance

3.2 Exchange control


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Legal frameworkExchange control regulations

• There are currently no foreign exchange control regulations inZambia. Abolished in 1994

• However, in 2012 and 2013 PF government introduced SI 33 – Bankof Zambia currency regulations and SI55 - BOZ monitoring ofbalance of payments regulations, respectively

• All repealed in March 2014


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Labour framework

4.1 Labour overview

4.2 Immigration


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Labour overview

• High unemployment rate

• Shortage of skilled labour

• Minimum wages regulation – applicable to general workers, domesticworkers and shop-keepers – i.e. non contract employees

• From 2015 illegal for any employer to engage an employee on a casualbasis for any job that was of a permanent nature

• Social security contributions mandatory for both local and expatriateemployees


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Labour overview

Notable provisions of minimum wagesregulations:

Annual leave – 2 days per month plus publicholidays

Maternity leave – 120 days if member of staffhas completed 2 years of service

Sick leave granted at full pay for first 3 months,then half pay for next 3 months, thereafter cancease payments at recommendation ofregistered medical practitioner

Employee who has attained age of 55 and has servedas employee for 10 years is entitled to 3 months basispay for each completed year of service

November 2016Doing Business in Zambia36

Minimum wages legislation

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Labour overviewSocial security

• Compulsory social security costs include retirement benefits, social insurance(NAPSA), workers compensation, maternity leave, sick leave and death benefits.

• 2017 budget – skills and development levy of 0.5% on total emoluments introduced

• 2017 budget - Pension reforms to be introduced

• Expatriates are required to join the pension scheme according to guidance providedby the National Pensions Scheme Authority.

• Monthly contributions are due at 5% for the employee and employer respectivelywith a cap of K844 per month (approx. $80)

5% on grossremuneration by

employer

5% on grossremuneration by

employee


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Labour framework

4.1 Labour overview

4.2 Immigration


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Immigration

• All foreigners undertaking employment inZambia need to obtain a work permit priorto entering the country.

• Business visas can be obtained for a periodof up to 30 days in any year.

• Temporary visas –available for 90 days,can renew once for another 90 days

• only visitors from “qualifying” countrieswill be issued with business permits at theport of entry.

• In all other cases the visitor will need toobtain the business permit from theZambian Embassy/ Mission abroad beforetravelling to Zambia.


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Immigration

Work permit requirements

Formal contract of employment

Certified copies of professional and academicqualifications

Practising certificate from professional localbody – e.g. ZICA, EIZ , medical council ofZambia, etc

Police clearance

Evidence of transfer of skills policy

Evidence that local work force does not haveappropriate skills


Tax framework

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Tax framework

5.1 Tax overview

5.2 Fiscal incentives

5.3 Double taxation agreements


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Tax regimeComparing total tax rate – Paying Taxes Guide

Source: PwC Paying Taxes 2016


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Tax regimeTime to comply – Paying Taxes Guide



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Tax regimeNumber of payments – Paying Taxes Guide



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Tax regimeGeneral

• Zambia operates a sourcebased system of taxation

• Zambian residents are alsosubject to income tax ondividends and interest froma source outside Zambia

• Fiscal year = calendar year,however exceptions arepossible


• Resident for tax purposes if:- The individual comes to

Zambia with the view orintention of establishingresidence or who has residedin Zambia for a period equalto 183 days;

- A company is incorporatedunder laws of Zambia;

- Company’s place of effectivemanagement is Zambia.

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Permanent Establishment Rules

PE created if there is a –

• Place of mgt, office, branch,factory, workshop, mine, oil &gaswell, quarry, place of extraction/exploitation of natural resource;

• Building site, assembly orinstallation project or supervisoryactivity for > 183 days inconnection with these

• Services including consultancyservices for >90days

No PE if –

• Use of facility solely for storage,display or delivery of goods;

• Maintenance of stock of goods ormerchandise solely for storage,display, delivery;

• Maintenance of stock of goods ormerchandise solely forprocessing…..;

• Maintaining a fixed place ofbusiness for collecting information,purchasing goods or for otheractivity of a preparatory andauxiliary nature


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Tax frameworkTax overview

Tax Rate

Corporate Income Tax

35% (exception: telecommunications35%-40%, farming 10%, non-traditional exports 15%, specialregime for mining)

Dividends & Interest 15% WHT

Management Fees & Royalties15% for Residents/20% Non-Residents

Individual Income Tax25% - 35% final tax (2017 marginalrate 37.5%)

Value-Added Tax (VAT) 16%

Custom and Excise DutiesVariable in accordance with HScodes (0% to 30%)

Property Transfer Tax 5% / 10%

Social Security (NAPSA) 5% (employer) | 5% (employee)


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Tax framework

5.1 Tax overview




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Tax frameworkFiscal incentives – Zambia Development Agency

• Need to obtain investment licence under Zambia Development AgencyAct

• Scope of incentives vary depending on type of activity and project location

• To qualify, must invest a minimum of USD 500,000 in a priority sector orproduct in a multi-facility zone, an industrial park or rural areas;

• Incentives, include:

- Customs duties and VAT exemptions on import of goods/machinery tobe used specifically on the project;

- No corporate income tax on business profits for a five year period fromthe date of commencement of business operations;

- Withholding tax on dividends charged at 0% for a five year period fromthe date of commencement of the business operations;

- 100% improvement allowance for tax purposes on capital expenditurefor improvement and upgrading of infrastructure.


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Tax frameworkFiscal incentives – Mining, Agriculture & Power Generation

• In addition to the incentives granted by the ZDA, some tax incentives are

granted to business operating in the Agricultural and Mining Sectors.

• Capital Allowance deduction of 50% for each charge year on Implements,

Plant and Machinery used for farming, manufacturing, tourism, leasing or

electricity power generation;

• Farm improvement/farm work allowance of 100%; and

• Power generation and mining companies can carry forward tax losses for a

period of up to 10 years.


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Tax framework

5.1 Tax overview




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Tax frameworkTax structuring - Double tax treaties

Recipient Dividends (%) Interest (%) Royalties (%)

Standard rate (domestic law) 15 15Residents: 10

Non-residents: 20

Canada 15 15 15

China 5 10 5

Denmark 15 10 15

Finland 5*/15 15 5*/15

France The 1950 France – United Kingdom DTT is accepted to apply*****

Germany 5*/15 10 10

India 5*/15 10 10

Ireland 7.5 10 8/10

Italy 5*/15 10 10

Japan 0 10 10

Kenya 0 0 0

Mauritius 5*/15 10 5

* The non-resident recipient must own at least 25% of the share capital of the Zambian company.** These old treaties do not follow the OECD model, and, accordingly, their application to particular circumstances must be confirmed.


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Tax frameworkTax structuring - Double tax treaties

Recipient Dividends (%) Interest (%) Royalties (%)

Standard rate (domestic law) 15 15Residents: 10

Non-residents: 20

Netherlands 5**/15 10 7.5**/10

Norway 5*/15 10 10***/15

Romania**** 10 10 15

Seychelles 5*/10 5 10

South Africa The 1953 Rhodesia & Nyasaland – South Africa DTT is accepted to apply *****

Sweden 5*/15 10 10

Switzerland The 1954 Switzerland – United Kingdom DTT is accepted to apply*****

Tanzania 0 0 0

Uganda 0 0 0

United Kingdom 5/15 10 5

*The non-resident recipient must own at least 25% of the share capital of the Zambian company.**The revised Netherlands treaty was signed in July 2015, the status of which is still pending.***The lower rate applies to the treaty that was signed between the two states in December 2015, the status of which is still pending.****This treaty is currently being disputed by regulatory authorities in Zambia.***** These old treaties do not follow the OECD model, and, accordingly, their application to particular circumstances must be confirmed.


Key issues

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Key issues


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Key issues2017 National Budget Changes

The Zambia national budget was presented by the Minister of Finance onFriday 11 November 2016. Highlights from the speech include:

Increment on Advanced Income Tax on goods being imported intoZambia from 6% to 15%;

Increment on the top band of Pay As You Earn (PAYE) from 35% to37.5%;

Increment in the capital allowances rate on plant, equipment andmachinery used in farming and agro processing from 50% to 100%;

Introduction of Skills Development Levy, which is charged at 0.5% oftotal emoluments paid to employees. This cost will be borne byemployers;

Removal of input VAT claims incurred before registration, input taxincurred prior to registration is non-claimable for VAT;


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Key issues2017 National Budget Changes cont.

Introduction of export duty on maize exports at the rate of 10%;

Abolishment of Group VAT registration scheme;

Removal of input VAT claims on petrol. Petrol is non-claimable for VAT;

Restriction of input VAT claims on diesel to 90%. Input VAT may now onlybe claimed on 90% of the cost;

Removal of input VAT claims on refrigeration equipment, mobile phones,motor vehicle parts, digital satellites, television sets, decoders, videoplayers, curtains and construction of dwelling houses for staff;

Extension of input VAT claim period for a person carrying on explorationfrom 7 years to 10 years; and

Increment on customs duty on spare parts for various machinery andequipment i.e from 5% to 15%.

Filing deadlines for various taxes changed.


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Key issues

Main takeaways

Legislation is not consolidated.

Ensure tax compliance as the ZRA have been set with very high collection targetsand have adopted an aggressive stance.

Transfer pricing considerations (transactions between related parties to be at arm’slength, local documentation should be maintained).

Permanent establishment rules (90 days for consultancy, 183 days otherwise)

Tax treaty reduced rates not automatic

VAT reverse charge applies on import of services


Legislation is not consolidated.

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Structuring


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StructuringStructuring considerations

Repatriation ofFunds (incl.

forex)

ExitStrategy

Where tolocate your

holdingcompany


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Structuring considerationsZambia

Application of double tax treaties

Exit strategy via foreign intermediary holding company

Tax incentives available locally

Tax efficient financing


Branch vs subsidiary – not much difference

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Contacts


PwC

ContactsZambia

Jyoti Mistry

Partner/Director

T: +260 977 740641

E: [email protected]

George Chitwa

Senior Tax Manager

T: +260 211 334000 Ext. 4033



PwC

ContactsAfrica Desk - Cape Town


Charl du Toit

T: +27 21 529 2367


Asif Joosub

T: +27 21 529 2305


PwC

ContactsAfrica Desk - Johannesburg


Alan Seccombe

T: +27 11 797 4110


Fabio Henriquez

T: +27 11 797 5900


Ibikunle Olatunji

T: +27 11 797 5317


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Q & A


PwC

We are here to help you prosper inAfrica!

Thank you!Zikomo!Natotela!

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice.You should not act upon the information contained in this publication without obtaining specific professional advice. Norepresentation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in thispublication, and, to the extent permitted by law, PwC, its members, employees and agents do not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication or for any decision based on it.

© 2016 PricewaterhouseCoopers (“PwC”), the Zambian firm. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers Limited in Zambia, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL),each member firm of which is a separate legal entity and does not act as an agent of PwCIL.


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