Given the multiple challenges Madagascar faces, such as the construction of hospitals and schools, territorial development, and the uncertainty of Covid-19 (declared a pandemic by the WHO), the government has aimed to adjust fiscal measures to mitigate the negative effects on the economy. In this context, the 2020 Amended Finance Act (LFR 2020) focuses on:
- Securing tax revenues
- Optimizing VAT management
- Prioritizing the healthcare sector
- Combating tax fraud
Securing tax revenues
The LFR 2020 anticipates a decrease in tax revenues due to the Covid-19 pandemic. Specific measures have been adopted to reduce the pandemic’s impact on the private sector, notably by postponing tax payments. However, no tax exemptions or partial reductions are provided for in the LFR.
Payment of advance tax on imports
The effort to secure tax revenues is reflected in the expansion of the requirement to pay a provisional tax advance for all import and/or export operations conducted by companies. The rate is set at 2% of the customs value of the goods imported and/or exported.
Transfer pricing
Clarification of transfer pricing (TP) provisions is another key point of the 2020 Amended Finance Act. The DGI’s Decision No. 04 of January 24, 2014, had already defined the concepts and control of TP with methods for determining arm’s length prices. The determination of transfer pricing and the submission of related documentation are mandatory for the following two categories of contractors:
- Associated companies: direct or indirect participation in management, control, or capital (over 25% capital share if legal dependence, or actual commercial decision-making capacity if de facto dependence).
- Independent companies: those not associated but involved in commercial or financial transactions, where the entity located outside Madagascar benefits from a privileged tax regime (with a tax rate less than half of the local applicable tax).
Any foreign investor should be informed of these provisions related to transfer pricing when studying a business creation project in Madagascar.
Major change in VAT taxation
The most significant change in VAT relates to the revenue threshold for VAT liability. The new law states that companies with an annual turnover, excluding taxes, equal to or greater than 400,000,000 Ariary will be subject to VAT, compared to the 200,000,000 Ariary threshold established by the 2020 Initial Finance Law (LFI 2020).
Under the new provisions of the 2020 Amended Finance Act, a company may be liable for income tax without being subject to VAT. According to the tax administration, this new measure optimizes VAT management by significantly reducing the number of VAT credit refund requests.
Moreover, companies with an annual turnover below 400,000,000 Ariary can offer more affordable services to their clients since their invoices will be VAT-exempt.
Prioritization of the healthcare sector
Special attention has been given to the healthcare sector, as VAT exemption now extends beyond the importation of medicines to the import and sale of medical equipment and supplies. Several exemptions were already provided for in previous finance laws, and this new measure reinforces the efforts already undertaken.
Strengthening the fight against tax fraud
Fines and penalties have been increased to ensure an effective fight against tax fraud. Tax audits will continue to target “high-risk companies,” those that might take advantage of the current context to avoid complying with their tax obligations. For instance, refusing to provide financial documents during a tax audit now carries a fine of 10,000,000 Ariary, compared to 5,000,000 in the Initial Finance Law.
For more information on taxation in Madagascar or assistance with outsourcing the tax declarations of companies operating in Madagascar, feel free to contact us.