When tax time rolls around, it’s important to remember that the long arm of the IRS reaches all the way to Africa. In this guest post, Samuel Guinen and the Ellsworth Law Group walk us through some tax implications of African investments.
Investing in African stock markets is a great choice for your long-term portfolio, especially if you can cover all risk and loss associated with the fluctuations in exchange rates. The rapid growth of the African marketplace has been wonderful for investors around the world, but incredibly confusing for those in the U.S. trying to understand their taxes.
Here are a few things to keep in mind.
1. Capital gains are measured when African investments are brought back home
If you are a US citizen investing in any foreign investment, the United States government will tax any gains from an investment when your profits are brought back ‘on shore,’ or deposited to a United States bank account. Depending on how the investment is structured will determine what capital gains rate will be applied to any profits. Foreign levies and taxes, repatriation expenses, and other fees are additional expenses to be considered with international investing.
2. Keep track of the taxes you pay to African governments
On top of paying U.S. tax on any and all income earned from foreign investments, you may also have to pay taxes to the country in which your investment is located. Luckily, African countries have lower taxes than most. This being taxed twice issue can usually be remedied through Foreign Tax Credits, but it’s good to know what you’re getting into up front.
Most African countries levy a minor dividend withholding tax. Any interest or dividends you receive will be taxed accordingly. The rates vary per country — South Africa is at 15%, Uganda is at 10%, and Ghana is all the way down at 8%. Some countries have a rate for non-residents that is higher than the percentage that residents have to pay. In Tanzania the dividend withholding tax rate is up to 20% for non-residents.
3. Consult a tax adviser to determine your eligibility for foreign tax credits
You should also check with a tax professional to see if you are eligible for a foreign tax credit or deduction. This will exempt you from having to pay out any of your hard earned cash.
All foreign investments have to be reported on a Form 1040 in U.S. dollars, but investors are allowed to file a Form 1116 to receive a credit or deduction. Though if you’ve paid under $300 in creditable foreign taxes, you can generally deduct the taxes paid on Line 51 of your Form 1040. To be eligible to apply, the tax:
- must have been imposed on you,
- you have to have paid or accrued the tax,
- it must be a legal and actual foreign tax liability,
- and it must be an income tax.
If you are not a U.S. citizen, other rules and restrictions may apply.
To reiterate, consult a tax professional
Again, once you decided to take advantage of all that Africa has to offer, to cover all your bases once you’ve made your investments, check with a tax professional or at least an investment advisor. They will help you apply for those foreign tax credits, or inform you of capital gains taxes, and generally make sure the government is happy with you.