Senegal: Tax measures, incentives for hydrocarbon and digital sectors
Senegal: Incentives for hydrocarbon, digital sectors
Amendments to tax provisions in the Finance Bill for 2019 mostly concern the hydrocarbon sector. The Finance Bill for 2020 introduced tax incentives for small and medium-sized enterprises (SMEs) in the digital sector. In addition, there are tax implications for onshore/offshore contract split tax issues.
Amendments to Finance Bill for 2019
Significant changes to the Finance Bill for 2019 concern the following items.
- Corporate income tax: Legislation from 2014 relating to commercial companies introduced a new form of company—société par actions simplifies. Amendments to the finance bill removed the sociétés anonymes term and replaced it with sociétés par actions, so that formally, sociétés par actions simplifies are included in the scope of companies subject to the Senegalese corporate income tax. Separately, companies holding participating interests (mining) in a production sharing contract may need to calculate their tax profit on a separate basis for each prospecting, exploration or exploitation area and no longer on all activities as a whole.
- Capital gains tax on indirect sale of shares: Capital gains deriving from the transfer of shares issued by a company located abroad and dealing, directly or indirectly, with a participating interest in a Senegalese production sharing contract are subject to the Senegalese corporate income tax. If a capital gain is realized by a company located abroad, the payment of the capital gains tax must be remitted, within a one-month period, by the tax representative. However, if the payment of the capital gains tax has not been completed within a one-month period, there is joint liability for the capital gain tax—by the company located in Senegal and the holding participating interest in the related production sharing contract.
- Tax compliance: Companies holding participating interests in a production sharing contract must provide by 30 April of each year: (1) the list of their subcontractors; (2) their addresses; and (3) the amount and nature of the operations carried out with each subcontractor during the previous calendar year. Any failure to comply could trigger a penalty ranging from FCFA 200,000 to FCFA 1 million.
- Local taxes: With respect to contributions related to the rental value of business premises, certain extraction and liquefaction units, wells, offshore installations, and equipment used for the joint development and exploitation of hydrocarbon fields governed by an agreement between Senegal and another country will not be taken into account for the assessment of the taxable rental value of oil and gas (O&G) companies. O&G companies are subject to a contribution of 0.02% of their annual turnover resulting from the joint exploitation of hydrocarbon fields governed by an agreement between Senegal and another country. This contribution will apply in lieu of the contribution on value added. Also, the temporary exemption from the land contribution on built properties is extended to mining and oil companies also holding a prospection or an exploration license.
- Registration duties: The transfer of shares held in companies established either in Senegal or abroad and holding, directly or indirectly, a participating interest in a Senegalese production sharing contract is subject to registration duties within a one-month period from the date of the transfer. The transfer of a company’s shares relating to the participating interest in a production sharing contract are subject to registration duties in the same conditions as the transfer of the participating interest in the production sharing contract.
- Tax fraud: The definition of “fraud” has been expanded to include: (1) the production of false documents or fraudulent practices in order to benefit from a tax refund; and (2) fraudulently arranging or aggravating an insolvability in order to avoid paying tax.
- Investment tax credit: Mining and oil operations are no longer eligible for the investment tax credit.
Finance Bill for 2020
To support start-ups in the digital sector, tax incentives for small and medium-sized enterprises (SMEs) were introduced in the Finance Bill for 2020.
- Flat minimum tax (impôt forfaitaire minimum): An exemption of the flat minimum tax will be granted during a three-year period from the creation date for new companies that are outside of the scope of the tax administration’s department in charge of large companies. In principle, a flat minimum tax is levied on the annual turnover (excluding taxes) realized during the previous tax year at a rate of 0.5%. The flat minimum tax may not be less than FCFA 500,000 or exceed FCFA 5 million. However, the Finance Bill for 2020 removed the FCFA 500,000 threshold due to the detrimental effect for SMEs in a deficit situation.
- Payroll tax (contribution forfaitaire à la charge des employeurs): The methods for calculating the unique global contribution have been simplified. Finance Bill for 2020 removed the progressive tax. The amount of unique global contribution was fixed to 5% for suppliers of services and 2% for traders and producers. The Finance Bill for 2019 provided a temporary exemption from the payroll tax to mining and oil companies in the exploration phase and holding a prospection or an exploration license.
- Tax compliance and calculating unique global contribution: The Finance Bill for 2020 introduced a tax compliance levy on imports (prélèvement de conformité fiscale) and amended the methods for calculating the unique global contribution (contribution globale unique).
Onshore/offshore contract splits
EPC (engineering, procurement, construction) contracts used for infrastructure development projects are often split between onshore and offshore activities:
- Activities of the offshore entity—one entity of the contracting group, outside the country of operation/project, performs activities such as engineering, design, and commercial services (intellectual/commercial service activities).
- Another entity of the group performs the onshore activities that are more physical such as construction and operation and control activities.
However, entities (i.e., state, local bodies or national companies) often requested that the contractor’s entity having the greatest financial profile take responsibility for the overall project (so as not to have to deal with two different entities with different sets of responsibilities). There are two reasons for the split of EPC contracts: (1) the resources relating to the services are usually located abroad in the state of the offshore entity; and (2) the offshore entity wishes to repatriate the contract’s revenues tying to its functions through a direct payment from the client in foreign currency (euros or U.S. dollars).
In some cases (such as joint liability or when the activities carried out are not distinct enough under the contract(s)), the local tax administration has tried to assert that part (or all) of the offshore profits are within the taxable onshore entity’s profits. When faced with this situation and the related risk of double taxation, different parameters can be appropriately combined, depending on the tax rules of the project’s country and of the contractor’s country, such as:
- Contracts defining clearly and with enough details the nature and value of services as well as each party’s responsibility
- Generally implementing a subsidiary rather than a branch
- Using available income tax treaties
- Make a robust transfer pricing analysis and have available the related documentation
- Contractual and corporate structuring must be analyzed by the contractor’s tax department before starting the contract negotiation
Read a January 2020 report [PDF 116 KB] prepared by the KPMG member firm in Senegal
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