Tanzania, like other sovereign states, may apparently impose upon any individual or entity domiciled in its territory a tax.
The charging statute of income tax in Tanzania is the Income Tax Act, 2004. However, the phenomenon of double taxation occurs frequently when two or more states impose tax on the same asset, income or transaction and for identical periods.
Usually, a state will tax its residents on worldwide income—irrespective of source—and its non-residents on their income from a source in that state.
In an effort to avoid double taxation arising from cross-border activities, Tanzania has, to date, signed double tax agreements (also known as, double tax treaties) with nine countries, namely Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden, and Zambia—bilaterally agreeing to curb taxes on international business.
Tanzania has also statutorily recognized double tax treaties (‘DTTs’) under section 128(6) of its Income Tax Act, 2004 (‘ITA-2004’). A DTT is an international agreement with a foreign government that has come into force in Tanzania providing for the relief of international double taxation and the prevention of fiscal evasion.
Tanzanian DTTs do not impose tax; rather they limit the taxes imposed by the state parties.
This position is fortified by, for example, Article 22(3) of the South Africa—Tanzania DTT which, in the main, establishes that a foreign enterprise will not be subjected to more burdensome taxation than a local enterprise undertaking the same activities.
Put simply, where the provisions of the DTT and of the ITA-2004 both apply to an enterprise, the enterprise is entitled to the more favourable result.
This rule is also recognized in other Tanzanian DTTs. Despite this, tax adjudication bodies have not yet exhaustively interpreted or applied the rule; moreover, the Tanzania Revenue Authority has not issued any practice notes in relation to its meaning.
The nexus between Tanzanian DTTs and the ITA-2004 is far more complex than it might at first seem. Section 128(1) of the ITA-2004 gives the DTT priority over any inconsistent Tanzanian law: “To the extent that the terms of an international agreement to which [Tanzania] is a party are inconsistent with the provisions of the [ITA-2004]…the terms of the agreement prevail over the provisions of the [ITA-2004]”.
Come to think of it, without this rule, conflicts between the DTT and the ITA-2004 would be settled by giving priority to the ITA-2004.
In consequence, other countries might have no interest in entering into DTTs with Tanzania.
That the DTT takes priority over the ITA-2004 (‘priority rule’) shows that Tanzania, being a net capital importer with scant outbound investments by its residents, wants to attract foreign direct investment flows and inbound transfer of knowledge and technology to Tanzanian domestic persons as well as reinforcing trade and economic relations.
Nevertheless, the priority rule is not absolute for three reasons. First, it applies where a DTT “provides that Tanzania shall exempt income or a payment or subject income or a payment to reduced tax” (section 128(4)).
Second, a specific anti-abuse rule, the ‘Limitation-on-Benefits’ (LoB) rule, limits the availability of DTT benefits to an individual or entity that meets certain conditions (section 128(5)).
Third, as Article 64(1) of the Constitution of the United Republic of Tanzania, 1977, read together with item 10 of the First Schedule to the Constitution, vests legislative power over income tax in Parliament subject to the basic rights and duties of every citizen, Parliament can enact legislation that overrides the provisions of a DTT.
But such overriding legislation should be explicit given that states parties are enjoined to perform treaties in good faith as laid down in Article 26 of the Vienna Convention on the Law of Treaties, 1969, to which Tanzania is a party by accession.
However, it must be acknowledged that the priority rule under section 128(1) of the ITA-2004 epitomises Tanzania’s quest for international harmonization of the interpretation of its DTTs.
In a nutshell, Tanzanian DTTs prevail over the ITA-2004 to the extent of any inconsistence, subject to the limitations discussed above.
Also, where the DTT and the ITA-2004 both apply to an enterprise, the enterprise is entitled to the more favourable result. But are these two principles contradictory? Is there any apparent pecking order between them?
Let me know what you think. Besides these two principles, a specific rule in the DTTs, which governs the nexus between the DTTs and the ITA-2004, requires any undefined term in the DTT to have the meaning that it has under the domestic tax law of the contracting state applying the rule unless the context otherwise requires.
This rule helps to clarify the wording of the provisions of the DTTs.
Paul Kibuuka (email@example.com) is a tax and corporate lawyer, tax policy analyst and the chief executive of Isidora & Company.