Tanzania in International Tax Law: A case for caution in exchange of tax information

The Organisation for Economic Co-operation and Development’s (OECD)’s Base Erosion and Profit Shifting (BEPS) project, which seeks to ensure all companies pay taxes in countries where they operate by addressing, among others, transfer pricing issues, has led to unprecedented tax law changes worldwide.

This, indeed, is not surprising, when one considers that, in November 2018, the government of Tanzania issued the new Tax Administration (Transfer Pricing) Regulations, 2018. As a result, tax and finance executives in Tanzania should get ready for the impending wave of tax controversy and disputes.

Besides the unprecedented tax law changes, the OECD’s BEPS project has led to a heightened focus by tax authorities on the taxation of cross-border transactions.

In simple terms, cross-border transactions are transactions in which goods and/or services cross national boundaries and such transactions normally have international tax consequences.

A key element of the heightened focus on such transactions is international tax cooperation in tax matters, encompassing exchange of information between the Tanzania Revenue Authority (TRA) and other tax authorities with respect to the exchange of specific taxpayer information, and assistance in recovery of taxes.

It is important to think through the following questions: Does the TRA have power to require a person outside Tanzania to provide information? Are exchange of information requests subject to the international law territoriality principle? Although there is no clear judicial decision in Tanzania on these questions, the High Court (England and Wales) in its recent decision in Jimenez, R (on the application of) v. The First Tier Tribunal (Tax Chamber) [2017] EWHC 2585 (Admin) ruled that the Her Majesty’s Revenue and Customs (HMRC) has no power to require a person outside the UK to provide information.

The High Court also underscored the need for exchange of information requests to be authorized by treaty. Incidentally, almost all of Tanzania’s double taxation treaties contain a provision on exchange of information.

So, what is the standard for authorising exchange of information under Tanzania’s double tax treaties with Canada, Denmark, India, South Africa and other countries? The language of the treaties authorizes the exchange information as is “necessary” for the purposes of the treaty or of the domestic laws of the Contracting State concerning taxes covered by the treaty. However, the OECD Model Tax Convention on which Tanzania’s double tax treaties are largely based was significantly amended in 2005 by introducing the change from “necessary” to “foreseeably relevant”.

This term is very important and significant, yet it is not included in the provision on exchange of information provision appearing in the double taxation treaties that Tanzania has entered into.

The purpose of the term “foreseeably relevant” is, according to the OECD Commentary on thereon, which has been adopted by the Court of Justice of the European Union in the case of Berlioz Investment Fund SA v Director of the Direct Taxation Administration, Luxembourg (Case C-682/15) [2017] BTC 15, to provide for exchange of information in tax matters to the broadest extent possible but without tax authorities going on a “fishing expedition” or providing information that is unlikely to be relevant to particular taxpayer’s affairs.

Let’s suppose Tanzania signs protocols to its double taxation treaties to include this new standard; how would it assess the foreseeable relevancy of an exchange of information request by another state? First, it useful to note that the “foreseeably relevant” standard is an objective one; it is not the subjective opinion of a tax authority.

Second, Article 26 of the Vienna Convention on the Law of Treaties (VCLT), to which Tanzania became a party by accession on 12 April 1976, makes the good faith of a state a requirement in international treaty relations.

The implication of this is that, there would be no reason for Tanzania to doubt the correctness of the request by another state for exchange of information.

But then again, would the principle of good faith support a request initiated on information that was illegally obtained by a tax authority? I don’t think so.

Why? It is because any attempt to meet such a request would bring the request itself in conflict with the principle of good faith laid down in Article 26 of the VCLT.

There is no denying that the exchange of information between the TRA and other tax authorities is an effective way for Tanzania to maintain fiscal sovereignty and to ensure the correct allocation of taxing rights with its double taxation treaty partners.

However, there is a need for Tanzania to strike a balance between protecting the privacy and confidentiality rights of taxpayers, and ensuring transparency.

Failing to take a cautionary approach to, or overzealously complying with, exchange of information requests may lead to Tanzania being viewed as driving investors away.

Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst, and the chief executive of Isidora & Company.