On 11 June, 2020, Tanzania’s Finance Minister Dr Philip Mpango presented the National Budget for FY 2020/21, stating that specific legislative amendments would be introduced in the Income Tax Act, 2004 with an eye toward fulfilling the requirements for the country’s membership in the Global Forum on Transparency and Exchange of Information for Tax Purposes (“the Global Forum”).
The amendments, which come hot on the heels of the Global Forum’s rigorous assessment of compliance with the internationally agreed standard on transparency and exchange of tax information, relate to new definitions of certain terms e.g. “beneficial owner”. Introduced through the new Finance Act, 2020, the amendments seek to further bolster the case for tackling international tax avoidance and evasion, money laundering, and other harmful tax practices.
Doubtless the move shows that the Tanzanian Government is eager to heed the call for dialoguing with other countries on global tax cooperation by addressing weaknesses in its tax legislation.
Membership in the Global Forum signifies Tanzania’s commitment to implementing the standard on transparency and exchange of tax information. The standard is circumscribed in the model tax conventions of the United Nations (UN) and the Organisation for Economic Cooperation and Development (OECD), not forgetting the Multilateral Convention on Mutual Assistance in Tax Matters (“the Multilateral Convention”).
Some impetus was given to transparency and exchange of tax information between countries by international tax avoidance and evasion, money laundering and other harmful tax practices, and by domestic bank-secrecy laws crafted to clog down the sharing of information. According to the OECD, these forces have a large impact on government revenues needed for public services in both developing and developed nations.
Established in 2000, the Global Forum’s cooperation frameworks with the IFC/World Bank and the United Nations Department of Economic and Social Affairs (UNDESA) have enabled it to reach new members in the developing world. As its membership has expanded, the Global Forum currently has 161 members, including Ghana, Kenya, Nigeria, Rwanda, South Africa, and Uganda.
Tanzania’s membership in the Global Forum will pave the way for the country to sign the Multilateral Convention in a further step to curb harmful tax practices. In essence the Convention would help facilitate international cooperation that contributes to improving the operation of Tanzanian tax laws.
In that context, the Finance Act, 2020 has amended section 3 of the Income Tax Act, 2004 by establishing, among others, beneficial ownership rules that aim to unmask the beneficial owners of corporations and other legal arrangements. It is hoped that this will help to increase transparency and information sharing between tax administrations and to combat harmful tax practices.
But who’s a beneficial owner? Section 25 (c) of the Finance Act, 2020 defines a beneficial owner (“BO”) as a natural person who directly or indirectly owns or exercises substantial control over an entity or arrangement. The Act also defines “an agent of a non-resident person or of a [BO]” and this includes any Tanzanian subsidiary of a non-resident company. These definitions have serious ramifications for Tanzanian subsidiaries of multinational corporations.
Income tax will now be chargeable to, and payable by, the agent of a BO or non-resident receiving Tanzania source income—whether directly or indirectly—from or through such agent. Moreover, scrutiny by the Tanzania Revenue Authority over corporate arrangements or transactions that are devoid of economic and commercial justification is expected to heighten, with an amplified risk of taxing Tanzanian subsidiaries for offshore dividend pay-outs made to offshore shareholders if the “BO test” is met.
Consistent with the Global Forum’s mandate to implement the international standard on transparency and exchange of tax information, protagonists argue that increased disclosure of tax information as a result of such legislative bolstering of the tax system would incentivise taxpayers to reduce their own taxes, thus impairing the system’s equitable nature—seen as an indicator of the rule of law.
On the other hand, proponents contend that disclosure of tax information would have a negligible effect on taxpayer compliance costs for multinational corporations; however, this is questionable given that corporations are expected to deal with conflicting and contradictory demands from different tax administrations.
Those are some of the biggest issues shaping the tax transparency debate. Will taxpayer compliance costs outweigh the benefits of the quest for more knowledge about the affairs of multinational corporations? Is the call for increased transparency and effective exchange of tax information underpinned by a desire to improve the current international tax regime? And will the IFC/World Bank also walk the talk on tax transparency given that a 2015 report by Oxfam indicated that 25 percent of IFC investment projects were agreed with companies in tax havens?
Paul Kibuuka ([email protected]), a tax and corporate lawyer and tax policy analyst, is the CEO of Isidora & Company and the Executive Director of the Taxation and Development Research Bureau.