Tanzania in International Tax Law: Tax certainty for global investors crucial to growth, jobs
Issues associated with Tanzania’s current double taxation agreements (or double taxation treaties, in short: DTTs) and their ramifications on tax certainty cannot be ignored by multinational companies (MNCs) and other global investors that operate in Tanzania.
The Tanzanian tax treaty system comprises two important facets, namely, the OECD Model Tax Convention on which Tanzania’s DTTs are based, and the specific DTTs entered into by Tanzania with other countries.
At either facet, it is not defensible to aggrandise a tax treaty regime that limits Tanzania’s right to tax at source in a manner that could be viewed as being immoderate.
In its 2015 report titled “Addressing Base Erosion and Profit Shifting”, the Organization for Economic Cooperation and Development (OECD) issued an action plan of 15 measures to curb base erosion and profit shifting (BEPS).
The BEPS measures aim to close gaps in international tax rules that allow MNCs to legally but artificially move profits to low or no-tax jurisdictions.
The measures impact the OECD transfer pricing guidelines (on which Tanzania’s new Tax Administration (Transfer Pricing) Regulations, 2018 are based); the provisions of the Income Tax Act, 2004 and the Tax Administration Act, 2015; and the modifications needed to bring Tanzania’s current DTTs up to date.
Suffice it to say that tax treaty rules typically restrict the taxing rights of source countries in favour of the taxing rights of residence countries residence, which mainly comprise capital-exporting countries—some of which have signed DTTs with Tanzania (e.g. Canada, Norway, Denmark, and Italy). As I mentioned earlier, Tanzanian DTTs are based on the OECD Model Tax Convention, which leans towards favouring capital-exporting countries over capital-importing countries.
On the contrary, the UN Model Double Tax Convention between Developed and Developing Countries (‘UN Model Convention’) reserves more powers with the capital-importing countries and it is recommendable that Tanzania’s DTT base on the UN Model Convention.
Moreover, in view of the extant old-fashioned Tanzanian DTTs, the government of Tanzania may wish to consider the ATAF Model Tax Agreement that was developed by the African Tax Administration Forum (ATAF) to serve as a guideline for African countries. The ATAF Model Tax Agreement is a combination of the provisions of the OECD/UN Model Tax Conventions, adapted to the African context.
A key issue with the OECD BEPS measures is that Tanzania had little or no involvement in their development.
The same holds true for the ‘Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting’ (the Multilateral Instrument/MLI).
Although many countries have opted out of the MLI (see, Oguttu, A. W. ‘Should Developing Countries Sign the OECD Multilateral Instrument to Address Treaty Related Base Erosion and Profit Shifting Measures?’ Centre for Global Development 2018), I believe that the MLI, which is open for signing by all countries, is conceivably useful for Tanzania to wrestle treaty abuse, and in particular treaty shopping. But Tanzania is not a signatory to the MLI, even when its tax treaty network members (such as, South Africa and India) are already signatories.
The feeling that international tax rules (including those encompassed in Tanzania’s DTTs) are designed in preference to residence based taxation is captured by Martin Hearson in his article ‘When do developing countries negotiate away their corporate tax base?’ (UNU-WIDER. Journal of International Development. 30, 233-255. March 2018). You might ask, “How can the probity of the international tax system—of which Tanzania is a part—be maintained? This question is especially relevant given that civil society groups in developing countries are questioning the wisdom of tax breaks derived from DTTs and domestic tax legislation that have tended to narrow the tax base. The answer lies in capital-exporting countries that have a preference for residence-based taxation agreeing to be more flexible when designing multilateral tax conventions.
Let me now address, albeit briefly, a key issue associated with the second facet of the Tanzanian tax treaty system: the current DTTs.
A closer scrutiny of the Tanzania’s DTTs reveals that the DTTs, entered into with some of Tanzania’s largest sources of foreign direct investment in the years between 1968 and 2005, are more residence-based than source-based.
These outmoded DTTs bring uncertainty for MNCs and other global investors in Tanzania. This is primarily due to the expansive modern definitions of “permanent establishment”, “investment asset”, “royalty”, and “service” under the Tanzanian Income Tax Act, 2004. A coherent and stable Tanzanian international tax system is extremely important for investors. Just how long should Tanzania wait before negotiating with its DTT partners a rebalance between source and residence taxation? This rebalancing will be crucial to promoting tax certainty, which is crucial to stimulating economic growth and job creation in Tanzania.
Paul Kibuuka ([email protected]) is a tax and corporate lawyer, tax policy analyst and the chief executive of Isidora & Company.
