VAT in Africa, public/private partnerships

Spring Tax Universities Oujda - May 16, 2012

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NOTION OF PUBLIC-PRIVATE PARTNERSHIP

A public-private partnership (PPP) can be defined as a project-based collaboration between the state or its agencies on the one hand, and private companies on the other.

Essentially, these are arrangements in which companies enable the state to perform its functions and carry out its projects more efficiently.

PPPs are essentially implemented by means of contractual instruments and generally aim to ensure the financing, construction, renovation, management or maintenance of an infrastructure or the provision of a service.

PPP mechanisms are developing all over the world, their role in improving the development and rational management of infrastructures and public services in the interests of sustainable social and economic development having been highlighted by the World Bank1 and the United Nations Commission.

In countries with a French-speaking administrative tradition, a distinction can be made between the following:

Public procurement contracts, which are not strictly speaking PPPs in that they do not involve a project but simply the delivery of goods or services to the State or a public entity; These are not the subject of this study.
PPPs, set up to carry out a project, which can be divided into two main categories:

"Private-payment concessions", involving the delegation of public services - the most frequently used in French-speaking Africa.

Main features: the public authority's private partner pays itself, directly, from the users of the service or facility (revenue, user fees, royalties, etc.);

In terms of financial flows, the private partner bills users directly, not the public partner. Where appropriate, it may receive subsidies from the public partner (e.g. investment or operating subsidies).

"Public payment concessions".

Main features: the private partner is remunerated directly by the public authority, for example by means of an infrastructure management fee.

In terms of financial flows, the private partner invoices the public partner directly.

SOURCES OF TAX LAW

Of course, the taxation of PPPs results from the application of the ordinary law principles of the General Tax Code and has not, for the most part, been the subject of specific legislation, with the notable exception of Cameroon, which adopted Law No. 2008/009 of 16 July 2008 laying down the tax, financial and accounting regime applicable to partnership contracts, which supplements Law No. 2006/012 of 29 December 2006 laying down the general regime for partnership contracts in Cameroon.

Senegal, for its part, had already adopted a law of 13 February 2004 relating to contracts for the construction, operation and transfer of infrastructure (known as the CET law), which did not itself contain any tax provisions but referred on this point to the content of the contract to be negotiated, providing that "CET contracts determine the rights and obligations of the parties, in particular [...] the administrative, financial or tax advantages enjoyed by the project operator".

It has to be said that, following the example of the CET law in Senegal, the tax advantages of PPPs are essentially granted by means of contractual provisions, which can sometimes cause difficulties, particularly with regard to the principle of constitutional principle (shared by most French-speaking African countries) that taxation is a matter for the law.

VAT ISSUES

Depending on the type of PPP chosen, in which numerous sub-variants can be imagined as a result of the considerable contractual freedom that characterises them, two main VAT issues arise:

(i) The invoicing of VAT by the private partner (the issue of "collected" VAT):

Does the public partner pay VAT and how?
Does it deduct VAT at source?
Is there a specific exemption mechanism?

These issues mainly concern "public-payment concessions", where the private partner invoices the public partner. More marginally, they may concern "private payment concessions", where the private partner receives a subsidy from the public partner that must be included in its VAT taxable base.

(ii) Recovery of VAT borne by the private partner ("deductible" VAT):

Is there an effective mechanism for refunding the VAT credit generated?
Is there an exemption mechanism for this input VAT?
Does the public partner pay this input VAT?

This problem is particularly acute during the construction phase, during which the construction company incurs significant amounts of VAT that it cannot reclaim because it does not collect any..

VAT INVOICED BY THE PRIVATE PARTNER

In the context of "public payment concessions

Working hypothesis: Construction by a private partner of a facility financed by international donors (for the benefit of the public authority, which becomes the owner of the facility), followed by a three-year management contract for the facility by the private partner.

Infrastructure construction phase

In accordance with the principles laid down by international donors (ADB, WB, etc.), the financing agreements signed with governments (or their subdivisions) only cover the duty-free and tax-free part of the planned operations.

That said, VAT, which applies to construction operations in accordance with the principles of ordinary law, must nevertheless be invoiced by the private partner to the public partner, who will therefore bear it without being able to finance it with funds from international donors.

Various specific mechanisms may apply to these transactions:

Issuance by the government of a "treasury cheque" in settlement of the VAT due on construction.

Eg: Burkina Faso has set up an imprest account with the Treasury and Public Accounting Department, responsible for :

receive the tax statements issued by the tax authorities, showing the amount of VAT owed by the public partner;
issue a "treasury cheque" to the tax collector to settle the tax bill. The account opened with the imprest account is debited by crediting the account of the tax collector (Order no. 157/MEF/SG/DGTCP/DELF of 23 June 1998).

In terms of declarations, the private partner must, in principle, declare the VAT collected under the conditions of ordinary law and pay it by means of a treasury cheque, which presupposes that the cheques are issued on the right date and that there is a well-oiled "administrative circuit".

Withholding of VAT by the State
Eg : Cameroon has introduced a system of withholding tax for suppliers to the State, decentralised local authorities, public administrative establishments and partially or wholly publicly owned companies, as well as certain private sector companies, the list of which is set by regulation.
VAT is deducted at source when invoices are paid and remitted to the tax office or, failing that, to the accounting office with territorial jurisdiction, under the same conditions and within the same timeframe as for other transactions. (Article 149 of the Cameroon CGI).

In terms of declarations, the private partner declares the VAT collected under the conditions of ordinary law and deducts it accordingly, on presentation of the documents justifying the deduction made.

Sector exemptions

Eg: Uganda has introduced a sectoral VAT exemption scheme for "the supply of specialised vehicles, plant and machinery, feasibility studies, engineering, consultancy services and works relating to hydro-electric power, bridge and road construction, public works for water services, agriculture, education and health". (Paragraph 1 (aa) of the second schedule to the VAT ACT)

Nota: such an exemption is not without its difficulties since it affects the deductibility of input VAT incurred on local or imported purchases, which will have to be the subject of another derogation measure (see below our comments on the VAT incurred by the private partner), unless it increases the cost of the partnership for the public partner

Infrastructure management phase

The provision of infrastructure management services to the public partner is usually subject to withholding of VAT by the State, in accordance with the principles generally defined in the General Tax Code. This withholding tax varies from country to country.

For exemple:

Cameroon stipulates that the deduction is made at 100%: Article 149 of the General Tax Code states that "for suppliers to the State, decentralised local authorities, public administrative establishments and companies that are partially or wholly publicly owned, and certain private sector companies, the list of which is set by regulation, value added tax is deducted at source when invoices are paid and paid to the tax office or, failing that, to the territorially competent accounting office".

In order to mitigate the negative effects that a 100% withholding tax could have on companies' cash flow, Cameroon's CGI provides for two corrective mechanisms : (i) an accelerated refund of the VAT credit in this case (within three months); (ii) the possibility of a waiver by the Minister of Finance for certain businesses potentially in a situation of structural VAT credit.

Gabon levies a withholding tax at a rate of 60%, allowing input VAT to be charged on the 40% actually collected;
Burkina-Faso, which had introduced a withholding tax of 80%, gradually reduced it to 20% and then recently abandoned it.

IN THE CONTEXT OF “PRIVATE PAYMENT CONCESSIONS”

Working hypothesis: Construction of a facility financed by the concessionaire (the private partner operating the facility), which also receives an investment subsidy from the public partner.

Operating income is subject to the ordinary VAT regime, which is payable by the users of the delegated public service.
Where a subsidy (operating, investment, etc.) is received by the operator and is included in its income normally subject to VAT, it may be provided as an incentive that this subsidy will be exempt from VAT.

It is therefore important to ensure that this exemption does not have a corresponding impact on the dealer's deductible proportion.

It is not uncommon for derogations to be provided for on this particular point when investment subsidies are granted as part of a PPP.

RECOVERY OF VAT BORNE BY THE PRIVATE PARTNER

VAT incurred on the construction of the work

The builder of the work, usually an ad hoc company, incurs significant VAT on imports and local purchases:

which it will only be able to deduct at a later date, when the facility begins to generate taxable revenue that is invoiced to users (the classic case of a "private payment concession");
which it will never be able to deduct, unless it collects VAT on its own invoicing to the public partner, because of an exemption or the introduction of a specific tax regime linked to invoicing to the public partner (e.g., "treasury cheque", withholding tax, see above).

However, it would appear that it is often difficult to obtain a refund of the VAT credit generated in this way, in particular because of the limited definition given by the General Tax Code of the cases in which a refund can actually be obtained.

As this situation would result in a significant increase in investment costs (which would be passed on to the public partner), various specific mechanisms could be put in place to mitigate the impact of the VAT borne by the private partner and avoid claims for VAT credit, which are often difficult and time-consuming in practice:

Prior visa exemption (Senegal, Burkina Faso)

This prior approval exemption involves submitting invoices relating to the construction of the work to the tax authorities for approval, who then give their prior approval as proof of tax-free payment.

This procedure is used in particular for infrastructure contracts in Senegal and Burkina Faso.

The granting of prior approval is generally reserved for invoices directly linked to construction, and sometimes limited to goods directly incorporated into the work.

In practice, however, this "a priori control" procedure is restrictive, as it requires invoice-by-invoice control.

Covered by the public partner's budget (Cameroon, Gabon).

The specific regime put in place in Cameroon by Law No. 2008/009 of 16 July 2008 (F.C.F. supra) provides that “in the design and implementation phase, the tax benefits are the assumption by the contracting public person’s budget of the value-added tax (VAT) relating to local imports and purchases of materials”.

As a practical matter, a request is sent to the Cameroonian Tax Authorities, which issue a certificate of exemption from payment of VAT, to be submitted to the suppliers.

A similar tax regime is in place for most infrastructure contracts in Gabon, where a PPP law has not yet been adopted. This procedure, if necessary subject to an administrative control "a posteriori" is very effective in practice and allows:

avoid generating problems of pro-rata deduction among suppliers, whose transactions are not considered exempt
not to slow down infrastructure work.

VAT PAID ON THE USE OF THE WORK

When the work is used, the VAT borne by the private partner is in principle deductible under ordinary law.

“Private payment concessions”

In «private payment concessions», the effective deduction of the VAT borne does not pose any difficulty since the private partner collects VAT in its billing to the users of the service.

Nota 1 : when operating subsidies are paid by the public partner and exempt from VAT, the proportion of VAT deduction may be affected (except for contractual arrangements).

Nota 2 : to our knowledge, no legislation has to date adopted a procedure for transferring to the concessionaire the deductible rights borne by the licensor, when the latter finances the infrastructure (see Article 210 I of Annex II to the French CGI).

« Public payment concessions »

In «public payment concessions», the effective deduction of VAT runs up against the withholding tax made by the public partner in accordance with the principles established by the CGI.

However, various specific “corrective” mechanisms can be put in place as a result:

accelerated reimbursement of VAT credits resulting from withholding taxes (Cameroon, c.f. supra);
limitation de la retenue à la source à un pourcentage de la facture (60 % au Gabon).

François NOUVION
Partner