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African states losing revenue in double tax treaties - study

They are missing 15 per cent of revenues in tax avoidance compared to 12 per cent FDI inflows

In Summary
  • There has been a steady increase in DTAs signed by Sub-Saharan Africa countries such that as of 2020
  • The European Union in 2017 placed Mauritius on its top 30 tax blacklist nations
Mauritius International Trade minister Seetanah Lutchmeenaraidoo and President Uhuru Kenyatta during their meeting at State House in Nairobi, January 17, 2017
Mauritius International Trade minister Seetanah Lutchmeenaraidoo and President Uhuru Kenyatta during their meeting at State House in Nairobi, January 17, 2017
Image: PSCU

African countries are losing more revenue in a bid to attract foreign investors by providing tax incentives, especially by signing Double Tax Agreements (DTAs, latest study shows.

Conducted by the Tax Justice Network Africa, the survey found out that most of the DTAs in Africa are archaic and as such, they contain outdated provisions, which no longer reflect the prevailing economic conditions and heavily skew taxing rights towards the capital-exporting state.

DTAs primarily aim at minimising the extent to which a taxpayer will be subjected to taxation twice on a given income.

The main purposes of DTAs include: providing ways of uniformly settling problems in international juridical taxation, preventing tax evasion through the provisions of information exchange and assistance in tax debt collection owed to the treaty partner as well as protecting taxpayers from direct or indirect double taxation.

"Since DTAs involve countries sacrificing revenues, it would make economic sense if the revenue foregone would be compensated for by the positive economic effects from an increase in FDI,’’ the report reads in part.

In recent years, there has been a steady increase in DTAs signed by Sub-Saharan Africa countries such that as of 2020, there were over 400 DTAs in force in the region many of which were with capital-exporting developed countries.

According to IMF, there were over 3000 DTAs in the world many of which are between OECD and non-OECD countries hence highlighting the power struggle in the signing of DTAs.

The study, whose setting was in Rwanda, Burundi, Tanzania and Uganda, sought to measure the effectiveness of tax incentives on investment decisions.

Out of the 683 cases, over 92 per cent of them responded they were not motivated by tax and other fiscal incentives to invest in a jurisdiction. Unfortunately, the proliferation of tax and fiscal incentives still prevails. This happens at the expense of development finance, which would have otherwise been invested in critical sectors of the economies.

A recent study by the International Monetary Fund indicated that developing countries are missing 15 per cent of revenues in tax avoidance compared to 12 per cent FDI inflows as a result of double tax treaties, more than obliterating any benefits from the investment.

Kenya has signed such treaties with a number of countries in the world, with the most prominent one being Mauritius, against all odds.

On April 10, 2019, President Uhuru Kenyatta flew to Mauritius to sign a new Double Taxation Agreement (DTA) to replace the previous 2012 treaty, which had been invalidated by the Kenyan High Court the previous month as a result of a legal challenge brought by Tax Justice Network Africa.

The new DTA has not yet been published, so it is not known whether the disputed provisions have been included in the new treaty. It is one of six agreements, including an Investment Protection and Promotion Agreement, signed during Uhuru’s tour of the Indian Ocean nation.

Although the Indian Ocean country is Africa's leading foreign direct investor in Kenya, bringing $1.43 (Sh143bn) billion and $1.08 (Sh108bn) billion to the East African country in 2016 and 2017, according to the Kenya National Bureau of Statistics, the former is losing more in taxes.

For instance, Kenya lost $1.78 billion (Sh178bn) and $1.35 billion (Sh135bn) in tax revenues to Mauritius in 2017 and 2018 respectively, courtesy of the Double Tax Avoidance Agreement signed in 2012.

The European Union in 2017 placed Mauritius on its top 30 tax blacklist nations, while Oxfam listed it as one of the world’s worst tax havens in 2016.

According to KPMG, a Mauritian resident is taxed at a normal corporate rate of 15 per cent — but their eligibility to claim 80 per cent in foreign tax credit, therefore reducing that effective rate to a maximum of three per cent.

The study by TJNA concludes that DTAs do not lead to more Foreign Direct Investment (FDI) and negatively affect Domestic Revenue Mobilization (DRM) in Africa.

Furthermore, domestic revenue has generally been insufficient to meet financing needs, some African countries do not involve parliamentary approval to ratify a treaty and finally, the dangers of DTAs in financing development is exacerbated by the lack of technical skills in tax treaty negotiations.

From these findings and conclusions, the study insists that there is a need for a comprehensive review of DTAs to ensure that enough safeguards like the limitation of benefits rules are incorporated in, renegotiation of current ones especially those that are archaic and contain outdated provisions which no longer reflect the current economic dynamics and enhance the capacity of tax treaty negotiators of the African developing countries.

"This should simultaneously go along with enhancements in management information systems and data capturing related to DTAs so that developing countries are able to undertake a cost and benefit analyses of DTAs,’’ the report notes.

It also warns developing African countries to exercise extreme caution while signing or at best avoid signing DTAs with developed countries. Furthermore, the study beseeches African countries to promote transparency in treaty negotiations by including parliamentary approvals and engaging relevant stakeholders.