Is it time for the taxman to consider the residency rule in Namibia?

Last week, I was lucky to be on a call with an older friend who became family and I happened to get a chance to say hello to their kids as well. I first spoke to their daughter, who is in the seventh grade and, typical of me, I asked her what she wanted to become after completing high school. She confidently responded that she wanted to be a pilot. I was fascinated!

After I ended my short conversation with the future El Capitano of an airline yet to be known, I instructed her to pass on the phone to her nine-year-old brother. Without wasting seconds, I duplicated the ‘future plan’ question to the little boy and, with confidence, he expressed to me that he wants to be an ‘executive in the Namibia Revenue Agency' (NamRa).

For a second, I thought I did not properly hear, and as a consequence, I questioned him again. He responded the same. Again, I was spellbound, this time by this nine-year-old boy talking about his interest in taxation, especially at his age. This incident with the 'El Capitano’ and the ‘Tax Executive’ just made me realise that ever since the investiture of the semi-autonomous revenue authority known as NamRA on 7 April 2021, taxation in Namibia is attracting attention like never before - be it in the boardrooms, in the streets, in the ‘nine- year-old minds’, literally everywhere.

One can even say that this modicum’s attraction is more than the previous and existing hot topics such as politics, land issues, corruption, the never-ending debate topics of who’s the best artist in the Namibian music industry, not even to mention the electronic voting machine (EVM) fracases for electronic voting in the 2019 national elections.

The attention is not only on the tax reliefs that the minister of finance Ipumbu Shiimi announced in his latest appeasing budget speech that caused a lot of beaming faces all over the country, but it goes as far as wishing to add more to the 'to-do list' of NamRA, consequential to the swift effective leadership by the commissioner of the agency, Sam Shivute.

One can factually opine that Shivute gave the Namibian tax system teeth to bite and miraculously transformed what was construed to be an invertebrate tax system into a vertebrate one. Henceforward, with this pragmatic quality leadership, one is then enticed to question if it’s ‘now or never’ for the taxman to revise, amend and simplify the income tax legislation from the source- based to residency-based tax system and thus to potentially increase the revenue collection base to effectively service the ‘social impact’.



Fundamental

Ultimately, taxation affects almost everyone, so although it is maybe not an exciting topic to many people, it is a significant one. The concepts of residence and source are fundamental to any country’s tax system worldwide.

One of the most powerful theorems in the literature on international taxation and capital allocation is that residence-based taxation is superior to source-based taxation. For the source-based tax system (which Namibia uses), importance is placed on the source (country) from which income is generated, regardless of the residency of the person earning the income.

In other words, income is taxed in the country where the originating cause of that income lies, regardless of the physical or legal residence of the recipient of the income. The residence-based taxation instructs that a country can tax taxpayers if they are residents or domiciled in that country, regardless of the source of the income.

In other words, the principle of residence-based taxation envisages the taxation of a person’s ‘global income’. In most cases, citizenship is not what is considered, but it is rather where a person views their permanent home to be. In certain countries, residence of an individual depends upon the number of days that they physically stay in that country in a redefined period. For example, in some countries, a simple rule is that if a person has been present in a country for 183 days or more during the year of a particular assessment, then they will be a ‘resident’ for tax purposes.

However, the requirements differ from country to country. In the case of companies, the place of incorporation or registration of the company or the place where its place of ‘effective management’ is located is usually its place of residence.

One can clearly now understand that with the residence-based system, Namibia will automatically have to revise and amend its current tax legislation. If and when residence-based tax is implemented, it will still need to recognise that, like with all residence-based systems, non-residents will still be taxed on income sourced within the jurisdiction as pure residence taxation is unrealistic. In other words, nowhere in the world are either of these systems applied with any degree of purity.

Worldwide, experts, other than tax experts, tend to favour residence systems, since determining the source of income can be challenging to pin down as income often has more than one source. Findings also reveal that residence jurisdictions tend to promote economic efficiency, as the decision where to invest should be unaffected by the tax rate.



Tax treaties

In most cases, citizens tend to use the state resources from a young age.

Some emigrate at a labour stage when they have made no contributions to the tax pot. With the residence-based system, a citizen/tax resident can be anywhere in the world and still be subjected to income tax on their worldwide/global income in their country of tax residence as well as the country where they are generating income. Usually, tax treaties come to the rescue. A tax treaty, also called double tax agreement (DTA) or double tax avoidance agreement (DTAA), is an agreement between two countries to avoid or mitigate double taxation of taxpayers.

At the moment, Namibia has 11 DTAs, but countries like South Africa (residence-based tax system) have many more (around 80). Under the tax treaties, and in many instances under the national regimes of residence-based countries, income generated in the other contracting state is exempted or a credit for the tax imposed in the source state is provided against the residence country tax.

Implementing a residence-based system will require a number of highly sophisticated tax amendments that will require careful analysis by experienced tax law experts to avoid the Income Tax Act lacking clarity and avoid what was once a stable and uncomplicated tax environment becoming complex and futile.

A significant lift in the skill level of the staff at the revenue authority will thus be required. The world around us has changed dramatically, with so many new ways of living, working and the emergence of previously unseen types of businesses. Thus the question remains: Is it time for the taxman to consider the residency rule in Namibia?



*Primus Shaapopi is a chartered accountant with an interest in taxation. He writes in his personal capacity.