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Chemical Technology • November 2015
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the taxable income is fair and equitable. Documentation is
critical in ensuring that your accounting systems can sup-
port an audit. Failure to adequately support transfer pricing
arrangements can lead to penalties and interest payments,
which often may exceed the actual tax value.
Tax authorities look carefully into these arrangements,
as South Africa wants to ensure that it receives its fair
share of income tax, otherwise all profits could be left in
the US and South African tax authorities get very little. Tax
authorities have the right to review these arrangements and
if they rule that the transactions between related parties
are not ‘arm’s length’ they may levy taxes on what they view
to be the taxable income of the company. So if they rule
that your income should have been R50-m instead of the
R6-m you declared, you will need to pay income tax on the
R50-m and fight the battle in court.
‘Double Taxation Agreements’ (DTA) need to be thor-
oughly understood otherwise the income generated by the
organisation could be taxed in the hands of both tax authori-
ties. In countries where there are no DTAs, the multinational
organisation needs to be aware of the tax implications.
In addition, dealing with tax authorities may be chal-
lenging if the language of business is different from that of
the organisation, eg, English versus Portuguese. In South
Africa there is a dispute between the South African Tax
authorities and the Mozambique Tax authorities over the
interpretation of the Double Tax Agreement. On the RSA
side, the agreement is in English but on the Mozambique
side, it is in Portuguese. Both should say the same, but the
interpretation of the clause is read differently in English to
that of Portuguese. This has resulted in some companies
being subject to tax both in South Africa and Mozambique
for the same income, ie, they have been taxed twice.
An organisation needs to make sure that if it creates
a permanent establishment within the foreign country, it
registers for tax and understands the various taxes specific
to that country. Failure to attend to tax matters can lead to
hefty penalties and interest. Legal arguments can last for
long periods and are costly.
The lesson here, in order to avoid the pitfalls, is that an
organisation needs to have a thorough understanding of
the tax laws prior to signing any contracts or starting any
work. Obtain tax advice and preferably make use of two or
three tax experts to investigate the specific country’s tax
laws because they do not all specialise in everything and
have different interpretations of the laws.
Overcoming the language barrier
Whenever work is done by foreign nationals who do not
speak the language of the native country or where there
is not a common language of understanding, there will be
difficulties in communicating. History has shown that of
the projects that fail or have difficulties, it has been found
that in about 60 % of the cases, poor communication has
been a major factor, even when parties are speaking, and
supposedly understanding the same language.
It is therefore very important on projects, especially
during construction, that everyone working on site has a
means of understanding what is being communicated. It
should be a requirement that everyone fully understands
HSE terminology and the requirements. It is not always easy
to recruit employees who speak a common language and
therefore to avoid the risk of miscommunication, it is always
advisable to make extensive use of interpreters/translators
who understand the technical jargon. On larger projects
where the project duration is a few years and if there is a
common local language eg, English, French, Swahili, etc,
then it would be beneficial to get all employees to learn it
formally. You may also consider Fanagalo as a common site
language if the project is in the southern regions of Africa,
because Fanagalo has a simple grammar and its vocabulary
is 65 % based on Zulu and Xhosa, which are Inguni-based
languages. There are languages in South Africa, Swaziland,
Malawi, Tanzania, Zambia and Zimbabwe, which are based
on the Nguni group of Bantu languages and therefore the
people of these regions will learn Fanagalo very quickly.
When communicating with the locals in a foreign country,
even if they can speak your language, beware of cultural
sensitivities, courtesies, hand gestures and other man-
nerisms because they may be interpreted differently from
what you understand them to be and could set the trend
for adversarial relationships. It is always wise to investigate
the culture of the people before embarking on a foreign
project assignment.
What bureaucracy and red tape is
involved?
Work and residence permits are generally a problem to
secure. The Government wants to ensure jobs for their
citizens versus the contractors wanting to use as many of
their experienced personnel as possible. The government’s
labour department generally requires good justification for
why the work, including that of managers, cannot be done
by the locals. There are many countries in Africa that have
people qualified in engineering, finances, land surveying,
quantity surveying, contract administration, etc, but who
generally have not had the opportunity to gain experience
in construction and its related disciplines, such as cost
control, scheduling, warehouse management, document
control, etc. in order to fill these positions.
Some countries insist on the employment of a high per-
centage of local citizens and make it difficult to obtain work
permits for expatriates. High percentages can be achieved
amongst some of the construction contractors due to the
higher numbers of skilled and semi-skilled workers versus
supervision and management. On the other hand, where
there is a separate construction management contractor,
which is composed mainly of experienced management,
engineering and supervisory personnel, it is not possible
to achieve the numbers. In order to obtain work permits,
it is advisable to make use of a local citizen or local com-
pany, which has the correct experience, has government
department contacts, knows the culture and speaks the
local language.
The requirement to award contracts to local contractors
can also be a challenge and a risk. Generally the lack of
productivity will have an impact on cost and schedule. There
will also be a lack of knowledge in the areas of HSE and
quality. In order to meet the client’s requirement, it is thus
best, in many cases, to award three or four main contracts,