Taxman Ups Pension, Retirement, Edu Policy Deduction Cap

ALTHOUGH there are only two months before the 2023 tax year ends, individual taxpayers can now deduct up to N$150 000 pension and retirement fund contributions from their income before the application of the tax axe.

This is part of the amendments made to the Income Tax Act, which had an effective date of 1 January 2023.

The amendment to have sizeable pension, retirement, education policy and keyman insurance policy deductions upped from N$40 000 has been on the cards since the days of former finance minister Calle Schlettwein.

However, it took some 11 years for there to be an update on the deductible amount.

In 2019, when an amendment to the rule was announced, Schlettwein had said an update was necessary to improve savings and local investment.

The amendments also include an insertion that the commissioner can now issue assessments electronically. not only via mail.

Other sections to the Income Tax Act that were amended include the note that dealers in petroleum licences either by way of a sale, donation, expropriation, cession, grant or other alienation, or transfer of ownership of a petroleum licence, or right to mine petroleum in Namibia whether directly, or indirectly, or through the sale of shares in a company with such a licence, shall be deemed to be of the Namibian source and accordingly taxable in Namibia.

For long, Namibians have been crying about oil licences being sold overseas without the country raking in the necessary tax revenue, and now this would cause dealers in these licenses to pay tax on them whenever a sale or deal happens around them.

Other key amendments are that whenever a payment is made by a taxpayer in respect of tax, interest or penalty, it will first be applied to the tax liability, interest, and thereafter penalties.

THIN CAP LEGISLATED

Many Namibian companies with foreign origins are debt funded.

According to the Bank of Namibia 2021 annual report, external debt at the end of 2021 was at N$129 billion, and close to half of this (N$61 billion) occurred by way of direct investment enterprises through intercompany lending.

Sometimes, companies raise high interest rates on these loans, stripping away all profits through the deductibility of the interest expense for tax purposes. As a consequence, they pay less tax.

During 2021, debt servicing on the N$61 billion external debt stock for intercompany lending was recorded at N$10,8 billion.

To counter the abuse by companies where they over-deduct the interest expense, a practice note was adopted through the central bank that interest expense deductions would only be allowed if the stock of debt and the equity of such a company is a ratio of 1:3.

The new tax amendments now require that, where a resident company in which any non-resident company or person has an interest of not less than 25% of the dividends, profits or capital of the recipient of the financial assistance exceeds the ratio of 3:1 in relation to the fixed capital of the resident company at any time during a year of assessment, a deduction will be disallowed for any interest paid, and any realised currency exchange loss incurred during that period on the part of the financial assistance which exceeds the three-to-one ratio.

This is not, however, final as the amendments allow for taxpayers to approach the minister or the Namibia Revenue Agency commissioner to consider the circumstances and risks associated with the business of the taxpayer, and they could be granted the right to deduct the interest expense or the realised currency exchange loss.

These amendments were signed into law by the president on 29 December 2022, and are published under Government Gazette number 7992.

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