Tanzania in International Tax Law: Should Tanzania embrace mandatory tax treaty arbitration?
“Better is a dinner of herbs where love is, than a stalled ox and hatred therewith.” Proverbs 15: 17. In Tanzania, the provisions of double taxation treaties (DTTs) which are, in the main, based on the OECD Model Tax Convention, override the provisions of the Tanzanian Income Tax Act, 2004 (ITA-2004).
In order to prevent double taxation, all Tanzania’s DTTs, except the one with Zambia, provide for a ‘mutual agreement procedure’ (MAP) stipulating how the Contracting States would resolve, at the instance of an aggrieved taxpayer, disputes that lead to “taxation not in accordance with the provisions of the [treaty].”
It’s not uncommon for MAP to be deployed in addition to the remedies provided by Tanzanian domestic law. Incidentally, the East African Community Double Taxation Agreement (EAC DTA) also allows for settlement of disputes through MAP.
However, on account of limitations in the operation of MAP under tax treaties such as, the absence of any right to the taxpayer to address the competent authority—which may be the revenue authority, or the Ministryof Finance, as the case may be—on the dispute or difficulty, the Organization for Economic Co-operation and Development (OECD) introduced a mandatory and binding arbitration provision under paragraph 5 of Article 25 of its Model Tax Convention.
The mandatory and binding arbitration provision, which is also included in the Base Erosion and Profit Shifting (BEPS) Action 15 Multilateral Instrument, applies where MAP fails to resolve a dispute within two years, with such dispute being referred to an independent third party for resolution through arbitration.
Furthermore, Tanzania’s bilateral treaty partner Canada has ratified a protocol with the United States of America which included the mandatory and binding arbitration provision in the Canada-US DTT. Currently, arbitration is not incorporated into Tanzania’s DTTs, including the one with Canada.
In view of these developments, one of the most hotly debated topics amongst tax lawyers in Tanzania is whether or not Tanzania should ratify protocols to its DTTs that introduce a mandatory and binding arbitration provision to the DTTs.
What are the odds Tanzania introduces such a provision? There is a general perception that the inclusion of the mandatory and binding arbitration provision will entail Tanzania ceding its fiscal sovereignty. Not only that, but also the provision will limit Tanzania’s ability to apply its ITA-2004 for taxing the income of non-resident persons with a source in Tanzania.
Indeed, two years after some of Tanzania’s bilateral treaty partners started committing to mandatory and binding arbitration in their DTTs with other countries in October 2015 when the OECD published its final report on BEPS Action 14: Making Dispute Resolution Mechanisms More Effective, Tanzania, enacted the Natural Wealth and Resources (Permanent Sovereignty) Act 2017 (“the Sovereignty Act”).The Sovereignty Act prohibits investors from resorting to international dispute resolution mechanisms, including arbitration.
I ask again, what is the probability of success that Tanzania will introduce a mandatory and binding arbitration provision in its DTTs?
In the context of MAP, taxpayers, particularly those with a Netherlands-Tanzania connection, seeking to address tax disputes as investment disputes under bilateral investment treaty (BITs) due to the intrinsic limitations of the MAP mechanism should be aware that Tanzania issued a notice of its intent to terminate its BIT with the Netherlands, which expired on 1 April 2019.
So, would it be too surprising when, going forward, Tanzania revisits its existing BITs to exclude taxation matters on the basis that taxation is a basic function of the sovereignty of the Tanzanian State? What is more, the probability of introducing a mandatory and binding arbitration provision in Tanzania’s DTTs would also be dampened when, on the backdrop to BEPS, Tanzania introduces new taxes that would apply outside the scope of its DTTs.
However, concerns about state sovereignty are, in my opinion, counterbalanced by the fact that although arbitration as provided underparagraph 5 of Article 25 of OECD Model Tax Convention is mandatory and binding, it is not automatic.
The provision on mandatory and binding arbitration is only triggered if countries fail to arrive at a MAP settlement within two years from the commencement date of MAP.
In addition, countries retain full control and involvement in the arbitration process in that they can jointly agree on the modalities of appointing arbitrators.
From the perspective of business and industry, introducingmandatory and binding arbitration is the best course of action to effectively resolving disputes or difficulties arising out of the interpretation of Tanzania’s DTTs through MAP.
Resolving such disputes or difficulties through mandatory and binding arbitration would also discourage Tanzania and its bilateral treaty partners from protracting the settlement of tax disputes under DTTs to arrive at a settlement under the MAP mechanism, and thereby instil investor confidence and trust.
Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst, and the chief executive of Isidora & Company.