MASERU —The textile industry wants a special privilege to be allowed to transfer part of expatriate workers’ salaries outside Lesotho without paying tax.
The request is in a letter that the Lesotho Textile Exporters Association (LTEA) wrote to the Minister of Finance, Timothy Thahane, on March 7.
If their request is granted it means expatriate staff in the textile sector will only pay tax on the local component of their salaries.
Their foreign component will not be subjected to pay-as-you-earn tax.
Apparently this has been the standard practice in the sector even though it’s patently illegal.
The letter seems to have been triggered by an investigation the Lesotho Revenue Authority (LRA) launched into China Garments Manufacturers (CGM) earlier this year.
The LRA’s investigation is centred on allegations that for the past 20 years or so CGM has been evading tax by paying part of expatriate salaries into their foreign accounts.
In the letter the president of LTEA, Lin Chin Yi, tells Thahane that paying part of the expatriates’ salaries overseas was one of the conditions to invest in Lesotho.
The letter, copied to trade minister Leketekete Ketso, says the textile industry all over the world pays its foreign staff part of their salaries in their own countries so that they will not be taxed in host countries.
Lin says it is “done in order to motivate the expatriate staff to come and stay in a country which by distance is far from their country”.
“Generally expatriates are not willing to leave their home country and work in a country new to them, leaving families and dear ones behind without adequate motivation,” Lin said.
He said textile exporters in Lesotho follow different modules to pay part of the salaries overseas.
Expatriates’ overseas salaries are meant to be their retirement benefits such as pension fund, provident fund, medical scheme and others, Lin said.
He added that taxing salaries paid overseas would make it difficult for Lesotho to maintain the viability of the textile industry because expatriates would leave the country.
Lin argues that there is urgent need to keep expatriate workers in local firms as September 30 — the day when AGOA’s third country fabric provision — approaches.
The AGOA third country provision is a special dispensation that gives least developed countries like Lesotho an additional preference in the form of duty-free access for apparel made from fabric originating anywhere in the world.
The provision allows sub-Saharan Africa’s least developed countries (LDCs) like Lesotho to export apparel made with non-US fabric and yarn duty-free and quota-free.
Under this provision 91 percent of Lesotho’s textile exports are destined to the United States, according to the Central Bank of Lesotho’s Economy Review.
When that provision expires, Lesotho-based textile companies will have to source fabric from the United States or sub-Saharan African countries.
The problem is that US fabric prices are more than double those in Asia from where Lesotho-based factories have been buying all along.
Sourcing from sub-Saharan Africa is equally challenging because the fabric is either not available or is too expensive.
This means that apparel produced in Lesotho will be repulsively expensive and United States buyers will shift to Asian suppliers who produce at a lower cost and make their own fabric.
Orders to Lesotho’s textile firms will dry up and the firms will have to shut down.
“It becomes difficult for Lesotho exporters to compete with Asian exporters,” Lin said.
Lin said ever since 2009 when Duty Credit Certificates were discontinued Lesotho has not had any export incentive to the manufacturers.
He also said the appreciating of the loti has not worked in favour of exporters “as they tend to loose (sic) heavily due to these fluctuations”.
Lin said Lesotho has to keep its textile emigrant staff because unlike Kenya, it does not have adequate incentives for exporters. He said Kenya provides zero tax ratings for all foreign employees because it felt that the expatriates teach the local employees by way of training and development.
He also argued that Kenya provides compulsory citizenship after 10 years of continuous stay in their country.
“This is the reason why Kenya has overtaken Lesotho in the last couple of years.”
“In Lesotho all the exporters are currently engaging in paying some portion of salaries overseas in order to retain the expatriates in difficult times as explained above,” Lin said.