Antananarivo GMT +3
EY
+261 20-22-217-96, +261 20-23-217-96 Immeuble EY-II K 61 Fax: +261 20-22-216-48
J Mahatony-Ivandry
Antananarivo 101 Madagascar
Business Tax Advisory
Yann Rasamoely
+261 20-22-217-96, +261 20-23-217-96 Mobile: +261 33-11-00-374 Email: yann.rasamoely@mu.ey.com
International Tax and Transaction Services – Transaction Tax Advisory
Ekow Eghan +27 (11) 772-3012 (resident in Johannesburg) Mobile: +27 83-600-1425 Email: ekow.eghan@za.ey.com
A. At a glance
Corporate Income Tax Rate (%) 10/20 (a)
Capital Gains Tax Rate (%) 20 (a)
Branch Tax Rate (%) 20 (a)
Withholding Tax (%)
Dividends 10 (b)
Interest 20 (c)
Royalties 10 (d)
Other Non-salary Payments 5/10 (e)
Net Operating Losses (Years)
Carryback 0
Carryforward 5
(a) The 10% rate applies to entities carrying out activities within the framework of health and/or education. The 20% rate applies to companies with turnover of MGA200 million (approximately USD50,000) or more. For companies with a lower amount of turnover, a special corporate income tax called Synthetic Tax is applied at a rate of 5%. For further details, see Sections B and C.
(b) Withholding tax on dividends applies to payments of dividends to foreign companies and/or individuals. A parent-subsidiary regime exists for local entities (see Section B).
(c) This withholding tax applies to resident and nonresident corporations and individuals. (d) This withholding tax applies to nonresident corporations. (e) The 5% withholding tax applies to residents, and the 10% withholding tax applies to nonresident corporations and individuals.
B. Taxes on corporate income and gains
Corporate income tax. Resident companies deriving taxable in come from activities carried out in Madagascar are subject to corporate income tax. Resident companies are companies incor porated in Madagascar, which include subsidiaries, permanent establishments and branches of foreign companies.
Tax rates. For companies with turnover of MGA200 million (approximately USD50,000) or more, as well as for companies that opt for the actual regime regardless of their turnover, the corporate income tax rate is 20%.
The minimum tax is MGA100,000 (approximately USD25) plus 0.5% of annual turnover (including capital gains) for companies carrying out the following activities:
Agricultural
Craft
Mining
Industrial
Tourism
Transport
This minimum tax equals 0.1% of annual turnover for fuel station filling companies. For inland carriers, the minimum tax will be revised by regulatory text. For companies engaged in other activities, the minimum tax is MGA320,000 (approximately USD80) plus 0.5% of annual turnover.
The minimum tax applies if the company incurs a loss or if the corporate income tax calculated using the 20% rate is less than the minimum tax to be paid as stated above.
The holders or beneficiaries of public procurement contracts and the first-level subcontractors, whether resident or nonresident or individuals or companies, that exclusively perform public pro curement contract activities are subject to one specific withholding tax at a rate of 8%, designated as the public procurement contracts tax (Impôt sur les Marchés Publics), and are exempt from minimum tax.
For holders or beneficiaries of some public procurement con tracts that are not subject to this public procurement contracts tax, a special installment at a rate of 0.5% of the amount of the contract should be paid on registration of the public procurement contract. This installment is a specific installment, which is totally independent from the standard corporate income tax and its corresponding standard installments.
For entities carrying out activities within the framework of the health and/or education framework, the applicable rate is 10%, and the minimum tax is MGA100,000 (approximately USD25) plus 0.1% of annual turnover.
For companies with turnover of less than MGA200 million (approximately USD50,000) or non-registered resident suppliers, a special corporate income tax called Synthetic Tax is applied at a rate of 5%.
Free zones’ companies. Free zones’ companies are exempt from corporate income tax for the following time periods.
• In general for free zones’ companies: the first 10 years of their activities in the free zone
• For free Industrial Processing Enterprises (Entreprises Industrielles de Transformation, or EITs) and Basic Intensive Production Enterprises (Entreprises de Production Intensive de Base, or EPIBs): the first 3 years of their activities
• For free Service Enterprises (Entreprises Service, or ESs): the first year of their activities
The above companies are subject to corporate income tax at a rate of 10% for subsequent years and to minimum tax at a rate of 0.5%.
Large mining investments. Mining companies making invest ments over approximately USD12 million can benefit from legal and tax incentives if they are eligible under a special law called Loi sur les Grands Investissments Miniers (LGIM). They are exempt from minimum tax for five years from the beginning of exploitation. The corporate income tax rates are 25% for owners of mining permits and 10% for the transformation entities.
Capital gains. Capital gains are included in taxable income and subject to corporate income tax. Income from the following is subject to capital gains tax at a rate of 20%:
• Possession of property or rights relating to that property
• The sale of shares in entities of which all or part of the value comes, directly or indirectly, from property located in Madagascar, or rights relating to this property
Administration. The standard tax year is the calendar year. However, companies may select a tax year running from 1 July to 30 June or another tax year.
Companies using the standard tax year must file financial state ments and the corporate income tax return with the Malagasy tax authority by 15 May of the year following the tax year. For companies choosing a tax year-end other than the standard tax yearend, the filing must be made by the 15th day of the fourth month following the year-end. Companies must make six installments of corporate income tax for each tax year. Each payment must equal one-sixth of the preceding year’s tax amount. The installments are payable by 15 February, 15 April, 15 June, 15 August, 15 October and 15 December. The financial statements should also be filed online.
For taxpayers engaged in import or export operations, a corporate income tax installment at the rate of 2% is applied on the customs value of the imported and/or exported goods for their first seven tax years. Taxpayers that benefit from a special or preferential tax regime in Madagascar and that import or export goods or that import raw materials and goods to be booked as fixed assets, subject to the presentation of a certificate approved by the tax authority, are excluded from the payment of this corporate in come tax installment. This tax installment is calculated and collected by the customs service before removal of imported goods and before shipment of goods intended for export.
Before engaging in activities in Madagascar, an entity must apply for tax registration by completing a specified form during the company creation procedure. The tax registration for wholesalers requires the filing of a specific declaration. A tax identification card is issued to a new taxpayer on the completion of registration.
The tax identification card must be renewed every year at the time of submission of the corporate income tax return.
Taxpayers that compute taxable income under the actual regime must open a bank account in their name.
Financial statements provided to private or public entities require the visa or certification of the tax administration.
Nonresident entities must file a declaration that details all goods and services purchased during a tax year (annual third-party dec laration).
Shareholders’ current-account transactions (loans granted by shareholders to the company) must be evidenced by registeredloan agreements and be regularly recorded.
Taxpayers that carry out one or more financial or commercial transactions involving tangible or intangible goods and services with a related company located outside Madagascar or with a company located in a jurisdiction with a privileged tax regime are required to file transfer-pricing documentation (Master File and Local File) at the same time as the corporate income tax return. Failure to comply with this obligation or a failure or delay in fil ing any element of the transfer-pricing documentation is sanc tioned by a fine of MGA10 million (approximately USD2,000).
During a tax audit, the tax authority may require complementary documents and information regarding the transfer-pricing docu mentations. The tax authority should indicate in the request any additional information that is relevant, and to the extent possible, specify the nature of activity or product, the country or territory concerned, the undertaking, company or group concerned and, when appropriate, the amounts involved. A failure to provide documents and information to the tax authority is subject to a fine of MGA10 million (approximately USD2,000), in addition to an automatic tax adjustment in the event of an unsuccessful reminder from the tax authority.
Industrialists and commercial enterprises under the value-added tax regime are required to have an analytical accounting and a stock card. A failure to comply with this obligation is subject to a fine of 1% of annual turnover. Analytical accounting is a system that is primarily intended to track expense and revenue accounts by categories in order to determine profit and loss for each activ ity. A stock card is a statement of goods kept regularly on hand for use or sale.
Tax litigation claims may be made only if prior payment of accepted tax is made. The relevant receipt must be attached to the claim.
Tax may be collected through various legal means, including the seizure of assets. However, sales of seized objects are subject to prior written authorization of the Head of Tax Office.
Dividends. Dividends paid to foreign companies and/or individuals are subject to withholding tax.
A special local parent-subsidiary regime exists. Under this re gime, only 5% of the dividends received by parent companies from their subsidiaries is subject to corporate income tax. To benefit from this regime, the company receiving the dividends must satisfy the following requirements:
• It must submit an application for the parent-subsidiary regime to the tax authority before the end of the tax year.
• It must be resident in Madagascar.
• It must hold at least 75% of the share capital of the subsidiary.
• It must be a public limited company or a private limited com pany.
• It must be subject to corporate income tax.
• It must have a consolidated annual turnover of more than MGA200 million (approximately USD50,000).
• It must not have subsidiaries and branches located in jurisdic tions that have lower tax rates than Madagascar.
• It must not be subject to another preferential regime.
Withholding income tax. All payments made to nonresident service suppliers are subject to withholding income tax at a rate of 10%, regardless of whether the service is rendered inside or outside Madagascar. This is a final tax. The tax is withheld and paid by the recipient of the service to the competent tax authority before the 15th of the month following the month of the withholding.
Unregistered resident individuals and companies that import and export goods and/or provide services and goods to registered in dividuals and companies are subject to income tax at a rate of 5%. This income tax is withheld by the following:
• Custom agents for imported and exported goods
• Purchasers for resident suppliers of goods and services
For specifically defined activities whose sales or service prices are regulated, a mechanism of withholding income tax imposed on a “real taxpayer” is instituted. The “legal taxpayer” is respon sible for the “repayment of the withheld income tax.” A regula tory text will provide guidance for the application of this provision.
The following are definitions pertaining to the above paragraph:
• The “real taxpayer” is the person who bears the tax burden and in whose name the tax debt is legally established (that is, the person who is liable to the tax).
• The “legal taxpayer” is the person authorized or designated by the General Tax Code to collect or withhold the tax from the real taxpayer and to report and repay it to the tax authority.
• “Repayment of the withheld income tax” is when the legal taxpayer pays back to the tax authority the tax collected or with held from the real taxpayer.
C. Determination of trading income
General. For companies with turnover of MGA200 million (approximately USD50,000) or more and for companies that opt for actual regime regardless of their turnover, taxable income is based on financial statements prepared according to the Chart of Account or the Plan Comptable Géneral (PCG 2005), which conforms to the International Financial Reporting Standards (IFRS’ 2003 version) and International Accounting Standards (IAS).
Business operating expenses are generally deductible unless specifically excluded by law. The following expenses are not deductible:
• Interest paid on shareholder loans in excess of the interest rate determined for the interest applicant by the central bank plus two percentage points on an amount not exceeding two times the authorized capital equity. None of the interest on shareholder loans is deductible if the capital is not fully paid up.
• Certain specified charges and subsidies.
• Taxes, penalties and most liberalities (payments that do not produce a compensatory benefit to the company).
• Interest, arrears, income from bonds, loans, deposits, royalties on operating licenses, patents, trademarks, manufacturing
processes or formulas, or other similar rights and remuneration for services paid by residents to nonresident individuals or companies, unless it is established that these payments are in line with the resident’s business, regularly evidenced and not exaggerated.
• Forty percent of the amount of the difference between the total fringe benefits and the value of the fringe benefits included in the tax base for the Payroll Tax (Impôts sur les Revenus Salariaux et Assimilés, or IRSA; IRSA applies to any remuneration and fringe benefits earned by resident or nonresident employees sourced from their assignment or employment in Madagascar).
• The “per diem” employee benefits to cover living expenses exceeding the threshold provided by regulatory text.
• Capital losses on title transfers.
• Losses related to public procurement contracts incurred by a company performing simultaneously public procurement con tracts activities and other activities.
• Salaries or parts of salaries that have not been duly declared to the National Social Security Fund (Caisse Nationale de la Prévoyance Sociale, or CNaPS) and/or similar bodies and that have not given rise to the payment of payroll tax if they are not exempt.
• Medical expenses that have not been declared in a third-party declaration, which is a filing requirement for every local tax payer. A third-party declaration is a declaration to the tax authority before 1 May of each year of the amounts that the taxpayer has invoiced and accounted for during the preceding calendar year, regardless of the closing date of its accounting period.
For taxpayers who perform public procurement contracts activi ties and other activities, the turnover and the exclusive charges and the share of common charges relating to public procurement contracts are not included in the corporate income tax base, and losses incurred in public procurement contracts activities are not deductible.
For taxpayers with both taxable and nontaxable income, exclu sive charges, and share of common charges relating to activities whose income is exempt from corporate income tax are not deductible from the corporate income tax base.
Deficits generated by other activities generating the overall income are also not deductible from the taxable profits from property and income from the liberal professions. In addition, taxpayers that generate income from land, transport, the liberal professions, health, education and other professional activities are required to produce a separate statement of such income at the end of each tax year.
Expenses incurred on transactions with unregistered individuals or companies that have been subject to withholding tax of 5% are deductible if the correct tax has been paid to the tax authority, and the payment of the transaction is evidenced by a document prepared either by the registered company (the client) or by the unregistered vendor or supplier, which is used as an invoice. This document should contain the following mandatory provisions:
• The date of the operation
• The name and exact address of both the registered company and the unregistered vendor or supplier
• The identity card or passport number of the unregistered vendor or supplier
• The online tax registration number of the registered company
• The nature and quantity of the goods and/or services concerned
• The unit and the total price in number and in word
The above statements must be certified as accurate by the sup plier on the document itself if provided by the unregistered party.
All indemnities allocated to pensioners, whatever they may be called, including the amount exceeding one year’s salary per retired employee giving rise to the payment of payroll tax, are deductible from taxable income.
Expenses related to any form of social contribution paid by employers for the benefit of all employees are deductible up to a limit of 5% of the total payroll.
Value-added tax (VAT) credits recorded as expense at the end of the tax year because they have not been discharged at the end of the tax year, the status of taxable person for VAT purposes has been withdrawn, the right to reimbursement is subject to foreclo sure or the reimbursement has been rejected, are deductible to the taxable income, provided that expenses giving rise to the VAT credit are incurred in the acquisition or retention of income, necessary for the normal operation of the business and subject to a regular invoice.
For entities with turnover of less than MGA200 million (approx imately USD50,000), taxable income is based on the turnover for the tax year.
Inventories. Inventory is normally valued at the lower of cost or market value. For goods that are not identifiable, cost must be determined through the use of the weighted average cost-price method or the first-in, first-out method.
Provisions. Provisions are generally deductible for tax purposes if they are established for clearly specified losses or expenses that are probably going to occur and if they appear in the financial statements and in a specific statement in the tax return.
Depreciation. Land is not depreciable for tax purposes. Other fixed assets may be depreciated using the straight-line method at rates generally used in the industry. The following are some of the applicable straight-line rates.
Asset Rate (%)
Commercial and industrial buildings 5 Office equipment 10 Motor vehicles 20 or 25 Plant and machinery 10
In certain circumstances, plant and machinery and other assets may be depreciated using the declining-balance method or an accelerated method.
Tax credit. Entities engaged in renewable energy production and distribution activities may benefit from a tax credit equal to the tax corresponding to 50% of the invested amount. This incentive also applies to other specified investments by entities in the tour ism, industrial or construction sectors. The credit is annually capped to 50% of the amount of corporate income tax. The excess amount may be carried forward without time limitation, subject to the above limit of 50%.
Entities subject to Synthetic Tax receive a tax reduction of 2% of the amount of purchased goods and equipment supported by regular invoices. However, the tax to be paid cannot be less than 3% of turnover. The same reduction applies to personnel ex penses that are regularly declared to the CNaPS and/or similar body, and that have given rise to payroll tax payments.
For companies carrying out multiple activities, this tax reduction does not apply to purchases of goods and services made, as well as to personnel costs in the context of public procurement contracts subject to the specific public procurement contract tax.
For basic producers, such as farmers, stockbreeders, fisherpersons, miners and foresters, the reduction of 1% is applied to the amount of sales covered by regular invoices or by documents instead of invoices justifying their sales that include the name, exact address and online tax registration number of the supplier, the nature of the goods and services, and the unit prices and the total price. These statements must be certified as accurate by the supplier on the document itself.
Relief for losses. Losses may be carried forward for five years. Losses attributable to depreciation may be carried forward indefinitely. Losses may not be carried back.
Groups of companies. Malagasy law does not provide for consoli dated tax filings.
D. Other significant taxes
The following table summarizes other significant taxes.
Nature of tax Rate (%)
Value-added tax (VAT); on goods sold and services rendered in Madagascar; also imposed on public and private companies engaged in telecommunications activities, redistribution of broadcasting and television programs or the providing of services electronically; entities that have annual turnover of less than MGA400 million (approximately USD100,000) are not liable to VAT; materials and equipment for the production of renewable energy are exempt from VAT; cash payments made between entities liable to VAT are forbidden; only payments by bank check, wire transfer, credit card, non-endorsed bill of exchange and mobile banking are allowed General rate
Nature of tax Rate (%)
Special Tax on Public Procurement
Contracts (Impôt sur les Marchés Publics, or IMP); discharges entities from corporate income tax, Synthetic Tax and VAT; for public procurement contracts paid by the public accountant; the tax is withheld by the public accountant, and the related tax return should be filed by the taxpayer at the latest on the 15th of the month following the withholding, enclosing the supporting document certifying the withholding and the list of its suppliers and its purchases of goods and services, in accordance with a model provided by the tax authority; for public procurement contracts paid by financial backers, the tax return and payment should be made by the holder of the contract at the latest on the 15th of the month following collection of down payments or advances, price, or remuneration of the public procurement contract; for subcontractors, the tax is withheld by the holder of the public procurement contract (the person who signed the contract with the public entity or state); the subcontractor should file the related tax return no later than the 15th day of the month following the month in which the price, advances or down payments were collected, enclosing the supporting document attesting to the withholding and copies of the initial and subcontracting contracts; the tax base is the amount of the transaction; the operator must file the financial statements or summary statement of revenue and expenditure for the year before 1 May of the following year with the competent tax authority 8 Urban tax; annual tax on the rental value of property that is part of business assets
Various Registration duties on transfers of real property, businesses or movable property, donations from parents to children outside inheritance and free inter vivos transfers (other than donations from parents to children) 5 (The occupying or use of movable or immovable property must be supported by a lease agreement. This implies that registration fees at a rate of 2% are imposed on the total amount of rent plus charges during the lease agreement period.)
Social security contributions
For family allowances; on gross monthly remuneration; amount of remuneration subject to contributions is limited based on the minimum salary provided by decree Employer 13
Employee 1
For illness and pregnancy; on gross monthly remuneration, which is not limited; payable by
Employer
E. Miscellaneous matters
Foreign-exchange controls. The currency in Madagascar is the ariary (MGA).
Exchange-control regulations exist in Madagascar. For foreignexchange control purposes, the two kinds of operations are cur rent operations and capital operations.
Current operations include transfers abroad of profits after pay ments of taxes, dividends, earned income, expatriate allowances and savings. Current operations require only a transfer declaration to a local bank.
Capital operations include operations relating to stock transfers, shares of liquidation bonuses, sales of businesses or assets and compensation for expropriations. Capital operations involving transfers abroad require an authorization from the Ministry of Finance.
Madagascar is a member of the South African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA).
Transfer pricing. The arm’s-length principle for cross-border pay ments made between affiliated entities (including cross-border payments related to a permanent establishment located in Madagascar), and payments made to entities located in a country with a privileged tax regime applies in Madagascar. Taxpayers subject to corporate income tax should electronically file transfer-pricing documentation (Master File and Local File in French or Malagasy languages) at the same time as the corporate income tax return. Taxpayers should also readjust the taxable profits when filing the corporate income tax return if the transfer prices charged on cross-border transactions do not comply with the arm’s-length principle.
F. Treaty withholding tax rates
The table below provides the withholding tax rates under the Canada, France, Mauritius and Morocco treaties. The domestic rates apply if they are lower than the treaty rates.
Dividends Interest Royalties
Canada (b)
5/10
5
10 Non-treaty jurisdictions
(b)
This withholding tax applies
The treaties are still awaiting
10 (a)