Effect of the Minimum Alternate Tax on Businesses in Sierra Leone

The government of Sierra Leone recently passed into law a bill called the Finance Act 2023, which among other new taxes, imposed a Minimum Alternate Tax of 3% of turnover on all companies, provided it is not less than the corporate income tax which is 25% of profits.

In layman’s terms, regardless of whether a company makes a profit or loss, it will be taxed.

The following example calculation is based on a company doing Le 1,000,000 (one million old Leones in turnover).

It uses different margins to work out the effect of this new tax.

It uses the 3% Minimum Alternate Tax.

It also uses the 25% tax on corporate margins.

How to read the table

Let’s take a company — KK Enterprises with a turnover of Le1,000,000 and a margin of 20%. (The first column).

MAT is 3% of 1,000,000 = (3/100)*1,000,000 = Le 30,000.

Profit is 20% of 1,000,000 = (20/100)*1,000,000 = Le 200,000

Corporate income tax is 25% of profit or (25/100)*200,000 = Le 50,000.

Because this is higher than the MAT of Le 30,000, KK Enterprises will pay the Le 50,000 tax.

Nothing changes for KK Enterprise.

At the other extreme, is Tonkolili Services with margin of 2% and the same turnover of Le1,000,000 (last column)

MAT is 3% of 1,000,000 = (3/100)*1,000,000 = Le 30,000.

Profit is 2% of 1,000,000 = (2/100)*1,000,000 = Le 20,000

Corporate income tax is 25% of profit or (25/100)*20,000 = Le 5,000.

Because this is lower than the MAT of Le 30,000, Tonkolili will pay the MAT tax, which is Le 30,000.

But look at what happens to Tonkolili:

If you subtract 30,000 from its profit of 20,000, it slides into a loss of Le 10,000.

This is bad for Tonkolili’s future and it may have to cut costs or improve its margins or it will not survive.

The other two columns give examples with 10% and 5% margins. But in all these cases, this new MAT leads to a squeeze on their profits.

Again, they may have to take measures to correct this.

What is the link between margin and the new MAT?

The graph below shows the effects of the margin on the new tax. Almost every company with margins less than 20% will end up paying more tax. Low margin or loss making businesses will be the most affected.

Wilfred Wright is fond of learning and Freetown and is not an economist or tax expert.