TAX NEWS - JUNE 2010

Africa Tax: EAC now in need of more tax treaties

The East African Common Market Protocol was signed by the respective East African countries Heads of State in Arusha on 14 November 2009.

The protocol has since been ratified by all members; Burundi, Kenya, Tanzania, Rwanda, and Uganda. This is a great milestone in the integration process as it opens the door for the coming into effect of the East African common market on 1 July 2010. The deal provides for free movement of goods, services, persons, labour and capital.

With an estimated population of 127 million and a gross domestic product (GDP) of $73 billion, the common market provides a huge potential for economic growth and development for the bloc.

Investors, both national and international, are keenly watching the integration process with a view to tapping this huge potential.

To create wealth, economic growth and development through enhanced trade among member countries and to attract foreign direct investments as envisaged by the protocol, there are certain issues that beg to be addressed. Key among them include taxation and specifically double tax treaties.

Tax treaties are bilateral or multilateral agreements between countries that generally determine the amount of income tax, including capital gains tax that each country to the treaty can apply to a taxpayer's income and wealth. They do not cover other forms of taxation, such as Value Added Tax (VAT) and Excise Duty.

Countries enter into such treaties to prevent the double taxation (two different countries imposing a similar tax on the same taxable income of the same taxpayer) of various forms of income and economic gain. Double taxation is seen as undesirable because of its negative impact on international trade and investment.


Reduced tax rate

Under tax treaties, residents of countries can be taxed at a reduced rate or exempted on certain items of income they receive from sources within the treaty country in which such income is derived.

If there is no tax treaty between a source of income country and the resident's home country, residents must pay it on the income in the usual way and at the same rates applicable in both the source and the home country.

In this situation, residents might be able to reduce, but not completely eliminate, their double taxation by utilising foreign tax credits, if available.

Another benefit of tax treaties is that they provide certainty to investors as they require that tax laws are to be applied in a non-discriminatory manner to entities being taxed.

To achieve this, treaties provide for mutual agreement procedures to resolve disputes in particular cases or reach bilateral agreement on issues of interpretation or application.


Benefit payers

Notwithstanding the fact that tax treaties are designed to benefit taxpayers, most of them contain a "saving clause" which prevents a citizen or resident of a treaty country from using the provisions of a tax treaty in order to avoid taxation on home country source income.

It is quite disheartening to note that EAC member countries do not have tax treaties amongst themselves despite the fact that they have pacts with other nations outside the community.

For example Tanzania has nine tax treaties with Canada, Denmark, Finland, India, Italy, Norway, Sweden, Zambia and South Africa. Kenya has eight treaties with Germany, United Kingdom, Sweden, Zambia, Denmark, Norway, India and Canada.

Uganda has 10 tax treaties with United Kingdom, Zambia, Denmark, Norway, South Africa, India, Italy, Netherlands, Mauritius and Belgium. Rwanda has two treaties with South Africa and Mauritius while Burundi does not have any tax treaty.

Some of the above tax treaties that the members have are dormant to the extent that they are with countries for which little, if any trading activities is currently taking place.

It is a fact that Africa can only get out of poverty trap through fair trading practices and increased wider market access and not through donor hand-outs.