What to expect from the 2020/21 Budget

Johan Nel, Chantell Husselmann, Riana Esterhuyse and Ansie Rossouw - It is expected that the newly appointed minister of finance, Iipumbu Shiimi, will render the 2020/21 Annual Budget Speech in parliament on 19 May.

This document covers possible tax announcements, including contributing factors to the fiscal policy.

With reference to the mid-year budget speech of 2019/20 delivered in October 2019, the previous finance minister, Calle Schlettwein, indicated that the domestic economy had been in a mild recession for the past three years. In the same breath, positive growth was projected for 2020/21.

However, with the outbreak of Covid-19, this projection will be adversely affected.

From a total expenditure perspective, it is estimated that there will be a notable increase from that of the prior year.

This is attributable to ongoing projects such as the implementation of the integrated tax administration system (ITAS) and the Namibia Revenue Authority (NAMRA), the announced economic stimulus package towards Covid-19, inflationary considerations, as well as increased interest payments on debt financing. Increased borrowing based on the economic outlook is expected, with a firm rise in debt stock for 2020/21.

Expected income tax amendments

We would be surprised if taxpayers are burdened with increased taxes during this time.

We do however expect clarity on the following income tax amendments during the tabling of the 2020/21 Budget Speech, which was mentioned by the former minister of finance in previous years:

• The introduction of a withholding tax on dividends received by or accrued to a non-resident;

• The abolishment of the conduit principle which will result in trusts possibly being taxed;

• The taxing of commercial activities by certain charitable institutions;

• An amendment to the “gross income” definition to widen the tax base of residents (i.e. taxing of foreign income) with possible claiming of tax credits; and

• An increase in the aggregate allowable deduction on pension, provident, educational, (key man) insurance and retirement annuities.

We are eager to see how these proposed amendments will be incorporated into the current Income Tax Act of Namibia (No. 24 of 1981), following initial consultations with relevant stakeholders.

Through the newly appointed minister's speech, we look forward to further consultations with stakeholders before the tabling of the bill for these proposals.

An amendment bill has already been issued for the proposed enactment on the removal of manufacturing incentives and the repealing of certain sections in the Export Processing Zones Act, No. 9 of 1995.

Furthermore, we do not expect increased individual income tax rates. It is estimated that old age pension grants may increase by a range of between N$50 to N$100 per month.

Expected VAT amendments

We expect the following VAT amendments, as previously mentioned by the former minister of finance during the 2019/2020 Budget Speech to be clarified during the 2020/21 Budget Speech.

• Introduce VAT on the income of listed asset managers; and

• Introduce VAT on the proceeds from a sale of shares or membership in a company owning commercial immovable property.

The clarification with regards to the above is based on the fact that the amendments refer to taxing the income, as opposed to the transaction itself, which is contrary to the VAT principles.

• Remove the zero rating on sugar.

The clarification with regards to the above is on the intention of the tax.

In Namibia, sugar is considered a basic food item which would become more expensive should the VAT be introduced which is unlikely to be the intention of the amendment.

It should be noted that globally, tackling obesity is the driving force behind the introduction of the tax which aims to curb the consumption of sugar sweetened beverages and to encourage manufacturers to reformulate their products to use more natural alternatives.

Further to the Income Tax Amendment Bill that has already been issued for the proposed enactment on the removal of manufacturing incentives and the repealing of certain sections in the EPZ Act; we predict that the minister of finance will announce a similar course of action on repealing the VAT incentives.

Customs and excise

As usual each year, the minister of finance will confirm the excise duty increases on “sin taxes” as announced during the recent South African budget tax proposal in terms of the Southern African Customs Union (SACU) Agreement which is expected to flow through to Namibia.

A new tariff subheading and excise category in respect of heated tobacco products (so-called “vaping products”) is created. We understand that the tax will be based on the equivalent of cigarette excise duties.

The former minister of finance previously proposed the introduction of an additional duty on importation of tobacco products two years ago. This has not been enacted to date and it is uncertain whether the newly appointed minister will reintroduce this with his annual Budget Speech.

Following studies by the Namibia Environmental Fund (NEF) and the drive towards creating an eco-friendlier environment, we foresee further announcements by the minister on the taxing of goods which are harmful to the environment.

SACU share

With the prior year’s annual budget speech, Namibia’s 2020/21 share from the SACU revenue pool was forecasted at N$19.3 billion.

However, due to the recent outbreak of the Covid-19 pandemic and the fluctuation in oil prices, global trade will be negatively impacted. As this will affect the SACU revenue pool, a direct impact is expected on Namibia’s share for the immediate future.

Brexit

The United Kingdom is an important trading partner for Namibia and its recent exit from the European Union (EU) means that preferential customs duties in terms of the Economic Partnership Agreement (EPA) will not apply anymore.

Tariff concessions should accordingly be re-negotiated between Namibia and the UK to avoid imports by both countries being subject to the general higher duties applicable to trade with countries not benefitting from a preferential trade regime.

Although this might not currently be high on the agenda of the Namibian government, it is possible that the minister of finance will remark on this in his economic overview of the Budget Statement for 2020/21.

Covid-19 impact on economy

With Namibia having had a window of opportunity budgeting for the Covid-19 impact on the economy (such as the economic stimulus package), it is expected that additional financial assistance or further tax reliefs may come into force.

To date, financial assistance towards SMEs and owner-managed businesses includes a tax-back loan scheme for non-mining corporates. For individual taxpayers, we are eager to see whether any relief on individual income tax rates will come into effect.

We anticipate that tax collections will decrease as the majority of taxpayers would experience a decline in profits and thus less taxes to be generated.

We have seen that taxpayers are facing significant cash flow pressures and as a result, payment plans may need to be put in place for taxpayers to pay their dues to Inland Revenue. This would result in revenue being collected later than expected.