Double Taxation Agreements with Tanzania: Practical Issues and Insights
ONE of the most immediate and obvious consequences of globalization is the impact of domestic tax policies in other countries on the economy of Tanzania. This has necessitated the continuous evaluation of the tax regime in Tanzania and brought about crucial fiscal and economic reforms in the country. Hence, the effect of taxation is one of the key considerations for foreign investors and multinational companies when launching investment activities in Tanzania.
Fiscal jurisdiction is time and again insistently safeguarded by the government of Tanzania through the Ministry of Finance and Economic Affairs; and in particular, the Tanzania Revenue Authority (TRA). Yet, even though globalization has created a borderless world in which people’s lives are more deeply, more intensely, and more immediately linked, double taxation is still a serious hurdle to the growth of international trade and investment.
Tanzania has negotiated with other sovereign countries, within their profoundly protected fiscal jurisdiction, double taxation agreements, also known as double tax treaties, in an effort to reduce the barriers to international trade and investment.
Consider, for example, a company resident in Tanzania but whose source of income is in another country: This leads to potential double taxation. In effect, Tanzania and the other country, acting under the residence and source principles respectively, will have the power to impose tax. If both principles are applied concurrently to a company and it is taxed in both countries, the costs to operate globally, that is, setting up and running subsidiaries and branches of foreign companies in Tanzania, would turn out to be excessive and discourage globalization.
It is from the above viewpoint that double taxation agreements have become vitally important in helping improve Tanzania’s overall investment climate.
But what are double taxation agreements? Simply defined, double taxation agreements are international, bilateral treaties between two countries (there are some multilateral tax treaties, such as, the Nordic Convention), and usually relate to income tax on dividends, interest earned and royalty payments. Many governments all over the world are using double taxation agreements as fiscal policy instruments in the global tax policy milieu to ensure that international investments are not doubly taxed.
Tanzania has a network of 9 double taxation agreements with Sweden, Canada, Denmark, Finland, India, Italy, Norway, South Africa, and Kenya; and is also reported to be in the process of negotiating more agreements with Britain and other countries. A key characteristic feature of double taxation agreements signed by Tanzania is that they cover only residents of Tanzania and of the other contracting country. A person who is a non-resident either of Tanzania or of the other contracting country cannot claim any benefit under the double taxation agreement.
It is useful to bear in mind that some of the double taxation agreements that Tanzania has signed are so quiescent insofar as they are with countries with which there are limited trade and investment activities presently taking place. For this reason, Japan, China, the U.S., the UAE, Brazil, Nigeria, Ghana and other African countries are obvious partners for double taxation agreements with Tanzania, given the current level of trade and investment activities between each of these countries and Tanzania.
The chief raison d’être of Tanzania signing these agreements is the avoidance of double taxation and the deterrence of fiscal evasion. As noted above, the joint operation of the residence and source principles is one of the most frequent ways through which double taxation arises. Double taxation agreements with Tanzania resolve this conflict, for instance, by either requiring Tanzania to allow a tax credit on the income from the source country (often, a developed country), or to exempt the income from tax.
In addition, the non-discrimination provisions of double taxation agreements provide relief from unjustified discrimination of residents of a contracting country who may be subjected to considerably arduous taxation than that applicable to its own residents.
Tanzania, like many other countries, sees double taxation agreements as beneficial since they are vital instruments for promoting and encouraging trade flows, capital formation and foreign investment by providing investors with a level of certainty as to how their investment portfolio will be taxed. Equally, as stated above, the non-discrimination provision in double taxation agreements gives investors an assurance against discriminatory tax treatment.
Apparently, the signing of double taxation agreements by Tanzania is a strong signal that the country is ready to respect the established international tax norms. As Tanzania uses tax holidays to attract foreign direct investment, because of double taxation agreements, more developed countries may not collect the tax that Tanzania gives up through the holidays by agreeing to the tax-sparing relief in the double taxation agreements. As well, the provisions on administrative assistance in these agreements offer better enforcement and collection powers to the TRA.
All of the above are valid reasons for Tanzania to expand its network of double taxation agreements. But, the government should be cautious about selecting more countries to sign agreements with, because the negotiation process is lengthy and requires considerable resources, given that Tanzania’s negotiation team has to study and familiarize itself with the tax laws of other countries.
Most of Tanzania’s current double taxation agreements are based on the Organization for Economic Cooperation and Development (OECD) Model Tax Convention. Although not bound by OECD developments on international tax issues, the TRA, in practice, is predisposed to construe Tanzania’s double taxation agreements in line with those developments. However, the TRA should consider the OECD developments for ‘best practices’ uses, while taking into account their flaws, deficiencies and appropriateness for today’s changing Tanzania.
Incidentally, with the exception of Kenya, Tanzania has not signed double taxation agreements with its East African Community (EAC) partners; namely, Uganda, Rwanda and Burundi notwithstanding that these countries (save for Burundi) have signed agreements for the avoidance of double taxation with countries outside the EAC. There’s a need to adopt an EAC model of double taxation agreements from the perspective of EAC countries.
Accordingly, it could be possible to rethink the EAC Double Taxation Agreement, which has been long-awaited by the business community to lower taxes and increase cross-border trade and investment. Regional trade and investment should be promoted at the EAC level, accompanied by intra-EAC tax rules that should reduce economic asymmetries between EAC-member countries through promoting fair-trade relations and sustainable development.
With respect to the relationship between double taxation agreements and Tanzania’s domestic tax law, the Income Tax Act 2004 (the Act), the agreements are given legal effect vide Section 142 (3) of the Act, which provides that “any international agreement made by the government of Tanzania that is effective at the time the Act comes into effect shall continue to have effect under the Act.”
But, as this position is not enshrined in the Constitution of the United Republic of Tanzania, the principle of parliamentary sovereignty means that double taxation agreements with Tanzania can always be overruled by a subsequent law passed by the Parliament of Tanzania, but only if that law specifically provides for such overruling. Otherwise, in the absence of such overrule, investors can be sure that double taxation agreements with Tanzania will continue to have effect under the Act.
As a matter of practical experience, the TRA requires those who claim a benefit under double taxation agreements to produce a certificate of residence from the competent authority in their country. The TRA is considered supportive and, in many cases, is keen to grant the certificate of residence for Tanzanian taxpayers with operations in foreign countries, and a certificate of tax paid in Tanzania by non-residents.
Like other revenue bodies elsewhere, the TRA seeks to prevent the abuse of double taxation agreements, and its position is that it is right in rejecting abusive use of the agreements on the basis of tax treaty law and domestic Tanzanian law, by disregarding bogus transactions intended only to evade taxes.
In that regard, Tanzania needs to put in place a system that can effectively establish the fiscal costs and effects of its double taxation agreements, as a prerequisite for their evaluation, which should help to address the existing difficulties, insufficiencies, and weaknesses.
It is also critical for Tanzania to continually take steps towards greater openness and transparency by bolstering the exchange of information and other administrative cooperation provisions set out in its double taxation agreements.