Last week, South Africa’s President, Jacob Zuma, paid a state visit to Tanzania. Three agreements were signed during the visit which now make a total of sixteen bilateral agreements and memoranda of understanding between Tanzania and South Africa.
In 2005, the two countries also signed a bilateral treaty for “the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income”.
In this article, I will highlight (from Tanzania’s perspective) some of the key features of thisdouble tax treaty (“Treaty”). The Treaty has 29 Articles in total which apply to residents of Tanzania and South Africa and in respect of taxes on income.
The Treaty defines what constitutes a permanent establishment (PE), what business profits are and how they will be taxed. Business profitis narrowly defined to meanincome derived by an enterprise from carrying on business. It does not include income in the form of rent, royalties, interests, dividends, capital gains or income from the operation of ships and aircrafts, as these incomes are defined separately. Only business profits from a PE or attributable to a PE in Tanzania can be taxed in Tanzania.
Under the Treaty, interest can be taxed at a maximum rate of 10 per cent, dividend at the maximum general rate of 20 per cent but if the company receiving the dividend has a15 per cent beneficial ownership the tax rate is capped at 10 per cent. Royalties can also be taxed at a maximum rate of 10 percent. These set rates mean that the Tanzania cannot easily revise its tax rates without renegotiating with South Africa.Whilst the Treaty allows either party tomake amendments at any time, such amendments require a mutual consent in writing through the diplomatic channel.
The Treaty provides the rules for elimination of double taxation in Tanzania and South Africa by way of tax credits. It also hasrules aimed at tackling transfer pricing problems for transactions between associated enterprises.
TheTreatyrequires a mutual agreement procedurefor settlement of disputes. In case a Tanzanian entity considers that actions by either countryare in contravention of the Treaty, it can seek assistance from the competent authority (Minister of Finance) in Tanzania which will in turn communicate with the competent authority in South Africa.
The Treaty also requires a non-discriminatory approach to taxation. A South Africanshall not be subjected to a more burdensome taxation in Tanzaniathan a Tanzanian in the same circumstance. The same holds true for a Tanzanian in South Africa.
Tanzania and South Africa can exchange such information necessary for Treatyenforcement and also in respect of the domestic tax laws. The two countries can also assist each other in recovery of taxes.The Treaty is set to remain in force until termination by either Tanzania or South Africa.
Apart from South Africa, Tanzania has tax treaties with Zambia, Italy, Sweden, Denmark, Norway, Finland, India and Canada. Tax treaties with the Netherlands, Mauritius, UK, United Arab Emirates, Kuwait, Iran, China, Oman, and Vietnam are at various stages of negotiations. Domestic tax laws give international agreements, including tax treaties, a superior status. Tax treaties, therefore, have significant influence on how our domestic tax laws are crafted, exercised and interpreted.
Despite the positive side of double tax treaties in general, bilateral tax treatiesmay also provide avenues for harmful tax practices such astreaty shoppingin which a resident of a third state may artificially acquire residence in one or both of the contracting states just to take advantage of the favorable tax treaties.