Tanzania in International Tax Law: Pitfalls and issues in corporate tax residence (3)

Saturday June 27 2020



PAUL KIBUUKA

tax@paulkibuuka.com

PAUL KIBUUKA tax@paulkibuuka.com 

By PAUL KIBUUKA

In this third and final part of the article on corporate tax residence, I highlight two important lessons from the case of African Barrick Gold Plc v. Commissioner General, Tax Appeal No. 16 of 2015 (‘the African Barrick Gold case’) that I think investors should walk away with in relation to the twin tests for determining the tax residence of a corporation under the Income Tax Act, 2004 (‘ITA-2004’).
Apropos cross-border tax planning by multinational firms, experience in the Tanzanian tax landscape shows that most tax residence audits conducted by the Tanzania Revenue Authority (TRA) are triggered by trivial but nevertheless costly mistakes on the part of these firms. Therefore, I consider some ways to steer clear of pitfalls of tax residence issues, or in any case mistakes that can prompt a TRA residence audit.
In addition, I provide a high-level overview of the implications of coronavirus disease 2019 (COVID-19) on the tests under section 66(4) of the ITA-2004 for determining corporate tax residence.
The one major lesson that investors can take from the African Barrick Gold case is that much careful cross-border tax planning done in the financial capitals of the world (such as, Amsterdam, London, and Toronto) can be undone in the port city of Dar es Salaam if multinational investors with Tanzanian operations don’t far-sightedly monitor the corporate tax residence position.
The case also serves as a sober reminder that offshore parent corporations may not escape from being treated as Tanzania tax residents by merely having the resident directors of their Tanzania subsidiaries provide mostly administrative duties for the corporations.
This is predominantly germane in the context of tax evasion schemes as well as the adoption by Tanzanian tax adjudication bodies of a more purposive approach to interpreting the ITA-2004 and other tax statutes.
It is important for non-Tanzania incorporated/formed corporations to take necessary precautions to avoid the pitfalls of establishing the inadvertent Tanzania corporate residence.
Such precautions include protecting the autonomy of the boards of directors of offshore parent corporations, and ensuring that the management and control as well as the business strategy and activities of the corporations are exercised outside Tanzania. As noted in part two of this article series, management and control is examined by looking at the place of effective management.  
Similarly, Tanzanian domestic corporations with offshore subsidiaries need to cautiously ponder on the risk of global taxation of their subsidiaries owing to the fact that the place of effective management is in Tanzania.
In my view, this stands in stark contrast to globalisation, in which, according to Karl Marx and Friedrich Engels (in the Communist Manifesto), “the need of a constantly expanding market for its products chases the bourgeoise all over the globe…[nestling] everywhere, [settling] everywhere, and [establishing] connections everywhere”.
What’s more, the risk of global taxation of offshore subsidiaries of Tanzanian domestic corporations heightens the costs of managing the subsidiaries or holding entities and fetters international competitiveness. To get closer to the frontiers of competitiveness, Tanzania needs to craft tax policies that promote entrepreneurship.
The outbreak of the COVID-19 public health crisis in the world may instigate complications for the management and control test for determining whether a corporation is resident in Tanzania for tax purposes if the directors are non-Tanzania resident and cannot be physically present in Tanzania to attend board meetings.
The complications could further play out when non-Tanzania incorporated/formed corporations which are treated as Tanzania tax residents under the management and control test are deemed to be tax residents of other countries under double taxation agreements, eventually losing their Tanzania tax residence status.
Statistics indicate that, globally, the COVID-19 pandemic is getting worse. As of Thursday, 25 June 2020 (2:25pm CEST), the global death toll due to coronavirus was 9,296,202, according to the World Health Organisation. The agency’s director general, Tedros Adhanom Ghebreyesus, expects the number of infections to reach 10 million next week.
Amid this gloom, the hope is that the COVID-19 public health crisis will come to an end soon. However, due to the prevalent containment measures, including international air travel restrictions imposed by many countries, it is prudent for non-Tanzania incorporated/formed corporations which are treated as Tanzania tax residents under the management and control test to take cautionary moves.
One such move entails considering whether and how the powers of the offshore corporation’s board of directors could be delegated to Tanzania resident individuals with the aim of ensuring that management and control continues to be exercised in Tanzania for the duration of the worldwide pandemic that has precluded the normal conduct of global business.  
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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.