Managing family businesses is complex at the best of times due to the many dynamics at play – not just family relationships, but governance structures and ever-changing compliance requirements all create tensions and can disrupt operations.
While governance and succession planning are key to the continued existence of family businesses, sticking to regulatory and tax obligations is an ongoing and vital concern. To reduce the complexity, especially in companies with multiple generations of leaders, many businesses are implementing alternative governance structures, such as holding companies and family trusts, to assure the long-term survival of the business.
Consider that tax privileges in a particular jurisdiction may not be available in the long term
Lifetime consequences
When forming these structures, tax is an important consideration. Any exploration of the tax consequences should cover not just the implications of moving the business into a new structure, but also the tax consequences during the lifetime of the structure and the likely tax implications should the structure be dissolved.
Although many family businesses opt to base their business holding structures in low-tax jurisdictions to take advantage of the lower tax regimes, the tax landscape is changing and the fine line between tax evasion and tax planning is increasingly blurred. As a result, many low-tax jurisdictions and tax planning structures have come under increased scrutiny from revenue authorities. Businesses should consider that some of the tax privileges that inform a decision to move into a particular jurisdiction may not be available in the long term.
Documentation and disclosure
With countries in East Africa adopting the Common Reporting Standard (CRS), revenue authorities from member countries are now required to exchange or share information on companies and their ownership to ascertain sources of income as well as the taxation of such income. As the burden of proof remains on the taxpayer, businesses must ensure they maintain adequate and comprehensive supporting documentation to prove that tax has been paid on income to avoid a double taxation scenario.
Furthermore, with tax laws in most East African countries changing annually, keeping abreast of the numerous developments has been a pain point for family businesses. There are punitive sanctions for non-compliance, which can paralyse business operations.
E-invoicing means businesses have to ensure their suppliers are tax-compliant too
Digital challenge
In a more recent development, businesses now have to comply with new e-invoicing requirements across the region, aimed at expanding the tax base by bringing informal businesses into the net. Rwanda, Tanzania and Uganda are well down the e-invoice path, with Kenya the final country in East Africa to implement the new system. Along with Rwanda, Kenya has enshrined e-invoicing within its tax laws: to be tax-deductible, any expense incurred by a business must be supported by an electronic invoice for it.
This has been a major challenge for family businesses that source materials from the informal sector or from time to time employ the services of blue-collar workers (plumbers, electricians, etc) for minor works. Not only do they have to meet their own compliance obligations but they are now required to ensure their suppliers are tax-compliant too.
In an increasingly complex and unpredictable tax environment, some family business clients have started to adopt mitigations such as outsourcing the management of the tax function or recruiting staff specifically to manage tax and provide related input into the business’s strategy and operations.
Continuous changes in tax legislation, coupled with the time required to change systems to meet new or updated compliance requirements, are onerous for many family businesses. If governments within the region were to adopt a national tax policy, this would stabilise the tax landscape and provide businesses with some peace of mind.
