Tanzania in International Tax Law: Pitfalls and issues in corporate tax residence (1)

Saturday May 30 2020



PAUL KIBUUKA

tax@paulkibuuka.com

PAUL KIBUUKA tax@paulkibuuka.com 

By PAUL KIBUUKA

In a refresh of the general legal position on corporate taxation in Tanzania, a resident corporation is taxed on its worldwide income, irrespective of where the income was earned. By contrast, a non-resident corporation is taxed on its income from a Tanzanian source. Because tax regimes are different across countries, double taxation is not a far-fetched risk this risk is often attenuated by tax relief under Tanzania’s double taxation agreements (DTAs).
This serialised article considers issues around the determination of corporate tax residence in Tanzania and, in light of the case of African Barrick Gold Plc v. Commissioner General, Tax Appeal No. 16 of 2015 (“the African Barrick Gold case”), how one can avoid the pitfalls by ensuring that a corporation remains resident outside Tanzania for tax purposes. The potential impact of the COVID-19 pandemic and the resultant travel bans on Tanzanian corporate tax residence will also be captured.
Section 66(4) of the Tanzanian Income Tax Act, 2004 (“ITA-2004”) treats a corporation as a Tanzanian tax resident if it is incorporated or formed under the laws of Tanzania (the “incorporation or formation test”) or, despite being non-Tanzania incorporated or formed, if the affairs of the corporation are managed and controlled  in Tanzania (the “management and control test”).
It is important to determine corporate residence because the resident country can tax the corporation on its worldwide income, and not just income within its territory. From an investor’s perspective, the potential to enjoy certain tax benefits and the ability to rely on Tanzania’s DTA network are among the reasons why a non-Tanzania incorporated investor corporation would want to be Tanzania tax resident.
However, applying these tests can lead to abuse. Let’s suppose a tax haven country that has only adopted the incorporation or formation test and then provides a zero or low tax environment (such as, the Bahamas, the Cayman Islands, and Cyprus).
This tax policy structure can erode the tax base of Tanzanian corporations, which is why Tanzania has combined the incorporation or formation test and the control and management test in the ITA-2004. Indeed, a recent study, “The Missing Profits of Nations” by Wier et al (NBER working paper 24701, revised September 2019), estimates that 40 percent of multinational profits are shifted to tax havens.
The above supposition has precipitated the enactment of specific anti-abuse rules (SAARs) and the general anti-avoidance rule (GAAR) in Tanzanian tax legislation, to help circumvent stripping the country of its taxable income.
While the test of incorporation or formation is a legal test that is easily determinable, the ITA-2004 does not give or provide the meaning of “incorporated or formed” and “management and control”. Nonetheless, the Tax Revenue Appeals Tribunal (“the TRAT”) had occasion in 2016 to scrutinise these concepts based on the specific circumstances of the African Barrick Gold case that was brought before it, in the context of a tax evasion scheme.
On whether a corporation is incorporated or formed under the laws of Tanzania, the TRAT, in applying the purposive approach in constructing tax statutes, had this to say: “…we think it is quite in order that the word “formed” in section 66 (4) (a) of the Income Tax Act, 2004 can be construed to include the registration of the [Companies Act, 2002]. That means the issuance of the Certificate of Compliance under section 453 of the Companies Act, would also be included.
Hence, even though it does not amount to the incorporation (or re-incorporation, for that matter) of the company in Tanzania, it is correct to conclude that that registration amounted to the company’s formation in Tanzania as a foreign company.”
The African Barrick Gold case also confirmed that determining the place of management and control is predominantly a question of fact when the TRAT said: “…exercising management and control means supervision of the company’s operations and the making of management decisions on a continual basis.”
In endorsing the position supported by the OECD and UN Model Tax Conventions, the TRAT further stated that: “when examining where the management of a company is exercised, one should look at the place of effective management, namely, the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.”
Although Tanzania combines the two tests, the general postulation is that the control and management test is the most effective and beneficial test for determining whether a corporation is resident in Tanzania for tax purposes or not. And the reason why it is so postulated is that investors are best served by tax policy that reflects the economic reality of the modern business corporation.
This article continues next week.  
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Paul Kibuuka (tax@paulkibuuka.com), 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.