Tanzania in International Tax Law: Pitfalls and issues in corporate tax residence (2)

This is the second part of the article on corporate tax residence.
As we learned in the first part, the tax residence of a corporation dictates where the corporation will be taxed on its worldwide income, irrespective of source (but subject to any available exemptions). A corporation is a Tanzania tax resident if it is incorporated or formed in Tanzania or, where it is non-Tanzania incorporated or formed, if the management and control of the corporation’s affairs are exercised in Tanzania. 
Ironically, applying the “management and control” test to determine whether a corporation is tax resident in Tanzania just seems to be in sync with the general trend by the country’s Tanzanian tax adjudication to emphasise substance rather than form (see, Kibuuka, Paul. “Wrestling the substance over form doctrine”. The Citizen. 19 April 2019).
Tanzania has not adopted an incorporation/formation-only test when determining corporate residence for tax purposes; instead, in response to, inter alia, the corporate inversion problem, Tanzania uses both the incorporation/formation test and the management and control test (see, section 66(4)(a) and (b) of the Income Tax Act, 2004 (“ITA-2004”).
For clarity’s sake, a corporate inversion occurs when, say, a Tanzania domestic parent corporation with foreign subsidiaries, technically called controlled foreign corporations/CFCs, mergers with a CFC and then sets up its residence in the CFC country with lower tax rates.
As a non-Tanzania resident, the hitherto Tanzanian domestic parent corporation may sometimes hugely reduce its tax burden without changing the location of its resultant Tanzania subsidiary business activities.
Thus, a corporate inversion is generally only possible with the incorporation/formation test. Quite frankly, it is more challenging to initiate a corporate inversion with the management and control test. This reinforces why Tanzania adopted both tests in the ITA-2004.      
Tanzania has also developed a raft of anti-avoidance provisions in the ITA-2004 as a buffer against the corporate inversion problem and other BEPS base erosion and profit shifting (BEPS) strategies used by multinational firms to reduce their tax bills in Tanzania. However, multinational firms with practical, business-savvy tax lawyers have continued to ingeniously recognize new manoeuvres around these provisions.
Two examples of such provisions are highlighted below. First, the CFC provisions (sections 73-76) with a provision treating the CFC as distributing its unallocated income to its members.
Second, the ‘change in control’ provision (section 56(1)) with a provision treating an entity as realising its assets and liabilities (on the date of change in control) if the underlying ownership changes by more than 50 percent as compared with that ownership at any time during the previous three years.
Tanzania uses these and other anti-avoidance provisions to limit the potential of manipulating its incorporation/formation tax residency rule for corporations through corporate inversions and to act against domestic BEPS and tax evasion.
But these issues are of serious significance to Tanzania as a developing country owing to its greater reliance on corporate income tax, which is why Tanzania does not use solely the incorporation/formation test for corporate residence. As earlier noted, in addition to this test, the country applies the management and control test.
Now, with both tests, treaty shopping by multinational firms through conduit companies established in global tax havens (such as, Mauritius, the Cook Islands, and the Netherlands) can produce a variation in where the tax base is assessed. Nevertheless, Tanzania has introduced a ‘Limitation on Benefits’ clause in the ITA-2004 to prevent abuse by conduit companies in tax havens, which have zero- or low-income taxes.
In response to this, a multinational firm could devise and deploy a business structure that would utilise tax haven banks due to their opacity of financial information, leaving the Tanzania Revenue Authority and/or the Tanzania Financial Intelligence Unit to examine the locale of the operations of the beneficial owners and if they have nexus in Tanzania. 
Instructively, a recent CEPII working paper, “Banks Defy Gravity in Tax Havens” (by a trio of authors Bouvatier et al), found that “tax havens attract extra banking activity”.
Strenuous protagonists of the incorporation/formation-only test for determining corporate tax residence argue that the test would ensure consistency, predictability and fairness since it is clear and straight that the residence of a corporation is always discerned from the certificate of incorporation, or the certificate of compliance, as the case may be.
Further, they contend, an incorporation/formation-only test would eclipse the complications emanating from the fuzzy concept of management and control, which according to the case of African Barrick Gold case, is examined by looking at the place of effective management. 
This article will continue to its third and final part.
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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.