The galloping internationalization of enterprises brings the tax administration to re-enforce the control of intercompany transactions in order to efficiently fight against international tax fraud and evasion. That is why our article of last month was on the obligation to declare the beneficial owner and relative sanctions to the non-compliance of this obligation. Furthermore, the tax administrations are increasingly scrutinizing when the tax strategy of multinationals includes entities located in tax havens. This is because, in most cases, the aim of these international companies is to avoid tax either by reducing income or increasing expenses. In this logic of controlling the business relations among related companies, it seems appropriate to carry out an analysis on the impact that the coexistence of the concepts “beneficial owner” and “tax haven” could have on the activity of multinationals from the angle of the Cameroonian tax law. The hypothesis envisaged here is the one where the beneficial owner is located in a tax haven. According to the provisions of Section 8(b) paragraph 3 of the Cameroonian General Tax Code (GTC), a tax haven refers to a State or territory whose income tax rate (corporate tax and personal income tax) is less than one third of the rate applied in Cameroon, or which is considered as not cooperative in terms of information exchange for tax purposes. Whenever the beneficial owner is established in a tax haven, the sanctions provided by the GTC will apply to the transactions not only between the Cameroonian entity and such a beneficial owner, but also between the Cameroonian entity and the other companies of the group not located in a tax haven, but owned or controlled by the said beneficial owner. Thus, the following legal question should be asked: What are the tax sanctions involved? They are the non-deductibility of expenses (l) and the taxation of income from stock and shares at a high rate (II).
- The non-deductibility of intercompany expenses incurred by the entity established in Cameroon
Where the beneficial owner is located in a tax haven, the intercompany expenses incurred by the Cameroonian entity are added to the assessable profit for the determination of corporate tax. There are two main sanctions. The said expenses are non-deductible on the one hand, and considered as distribution of dividends on the other. With regard to non-deductibility, Section 8(b) paragraph 1 of the GTC sets out the principle that costs and remunerations of all types incurred by a Cameroon-based entity and linked to transactions with companies established in a tax haven shall not be deductible to determining the income tax in Cameroon. However, deductibility is only admitted for goods which have been subject to custom duties. The non-deductible expenses will be reintegrated and subject to corporate income tax. As for the presumption of distribution of dividends, it is provided in Section 36 of the GTC, according to which all non-allowed expenses shall be considered as distributed income. Consequently, expenses resulting from the transaction between the Cameroonian company and the beneficial owner located in the tax haven will be subject to Distribution tax (IRCM). It is important to note that, a simultaneous and careful analysis of the notion of beneficial owner and tax haven does not limit the above sanctions to transactions between Cameroon and the tax haven. On the contrary, they should be extended to all entities in the group not located in the tax haven but owned or controlled directly or indirectly by one or more beneficial owner(s) located in the tax haven. In this context, the remuneration paid to an entity of the group not located in a tax haven will be taxed at CIT and distribution tax under the conditions described above, as long as there are links between them and their owner located in a tax haven. The rate of CIT will be 27.5% or 33% depending on the turnover. The rate of distribution tax will not be 16,5% but 33% as per Section 70 of the GTC. The latter rate would also apply to all other incomes from stocks and shares to be paid to companies in the group.
- High taxation of income from stocks and shares and similar incomes
The high tax of income from stocks and shares and assimilated incomes also appears to be a sanction applicable to the Cameroonian entity that is a member of a group in which the beneficial owner is located in a tax haven. In order to better understand this taxation, it is necessary to consider the details of the targeted income to which the high tax rate applies, while mentioning a possible exception to this rule. Regarding the rate, it is fixed at 33% from the 2023 Finance law. It applies to income listed in Sections 35 et 36 of the GTC. This includes dividends, interests from bonds, capital gain from transfers of shares, interests from debts, shareholder loans, cash deposits, certain reimbursements of shares by means of reduction of capital, sums made available to partners and not resulting from profits, reimbursements of shareholder loans made in cash, remunerations allocated to members of the Board of Directors, the profit made by branches, remunerations and hidden benefits. The income listed above will be subject to distribution tax at a rate of 33%. As mentioned in the first part concerning non-deductible expenses and presumption of dividend distribution, the analysis of the taxation of income from stocks and shares and similar incomes must also be extended to all entities of the group including those located in territories not considered as tax havens. As for the exception, this is the case where the tax havens, the residence country of the beneficial owner has signed a tax treaty with Cameroon. In such circumstances, there will be a conflict of laws between Cameroonian law (GTC) and the tax treaty (international convention). Given that the international tax treaty takes precedence over national law, the rate of distribution tax will be the one provided in the treaty and not the 33% rate.
From a joint analysis of the notions of beneficial owner and tax haven in the context of related companies, it appears that transactions between the latter are govern by set of sanctions provided by the Cameroonian tax law. Firstly, these include the non-deductibility of expenses of the Cameroonian entity, which are taxed to corporate income tax with a maximum rate of 33%, the assimilation of these expenses to distributed income and their taxation to distribution tax at a rate of 33%. Secondly, there is also distribution tax on income from stocks and shares and assimilated income at a rate of 33% subject to international tax conventions. This gives an overall rate of 99%. These coercive measures appear as a real sword of Damocles handling over the head of Multinationals. Hence, there is the need for them to approach professionals in order to define better tax strategies.
Author: Yannick Ndoum, Tax & Legal Consultant; Supervisor: Albert Désiré Zang, Managing Partner