Uganda's Tax Treaties: A Legal and Historical Analysis
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Uganda's Tax Treaties: A Legal and Historical Analysis Presentation made at the ICTD Annual Centre Meeting Arusha, 2014
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Uganda's Tax Treaties: A Legal and Historical Analysis
- 1. and historical analysis Martin Hearson, London School of Economics Jalia Kangave, East African School of Taxation International Centre for Tax and Development annual meeting Arusha, December 2014
- 2. My contract for this research Signed in September 2014 The UK-‐Kenya tax treaty Signed in July 1973
- 3. Inland revenue telegram January 1972
- 4. Letter from Tanzanian negotiator March 1974
- 5. Presentation outline 1. Context: tax treaties in sub Saharan Africa 2. 3. 4.
- 6. Tax treaties signed by sub Saharan countries (and in force in 2013) Source: IBFD
- 7. Countries having signed six or more treaties with sub-‐Saharan African countries 1952 2012 Year signed Source: IBFD
- 8. the obstacles that double taxation presents to the -‐ introduction to the OECD model tax treaty there is no question of United Kingdom investors being doubly taxed and the main cash benefit for the investor is matching credit for pioneer reliefs... An acceptable double taxation agreement will normally ensure that United Kingdom investors are treated -‐ UK govt unpublished review of double tax relief, 1976
- 9. So why sign? Proponents say that treaties o mop up outstanding double taxation o standardise definitions o guarantee tax stability o result in lower (single) taxation o create a framework for cooperation/dispute resolution o send a signal that a country is open for business Opponents say that tax treaties o Transfer the burden of double tax relief from residence to source countries o Bind developing countries into disadvantageous legal concepts and mechanisms
- 10. Tax treaties and foreign direct investment The evidence that tax treaties attract new FDI into developing countries is inconclusive at best (problems include: poor data, endogeneity, robustness to treaty shopping, competition effects). Most African negotiators interviewed agree. For example: treaties. Treaties do not attract investment. It is other effect on investment, but the reality country-‐to-‐country is the risk of losing big investments
- 11. A long tradition of treaty scepticism of aid in reverse Charles Irish, 1974 -‐allocating tax revenues means regressive redistribution-‐to the benefit of the developed countries at Tsilly Dagan, 2000 withholding, or hardly any withholding, on outflows of cash to multinationals. Now why in hell do you want to sign Lee Sheppard, 2013
- 12. Contribution of this case study Most of the academic literature on tax treaties and development consists of: Econometric papers often making herculean assumptions Legal papers that An historical and legal case study helps to ground the debate: What were the actual objectives of treatymaking? Were they achieved? Are they still relevant? How significant are the current costs and benefits? Data source: interviews with govt officials and private sector tax advisers in Kampala September 2014, combined with analysis of official documents (negotiation minutes, budget speeches) from UK and Uganda.
- 13. The Uganda treaty review All negotiations currently frozen while policy is developed. Treaty with China remains unratified. Motivations for review: When I go to negotiate, all I have is my own thought that cabinet should express itself Oil industry: taxation of technical services provided by consultant professionals Treaty with China is notably worse than any Ugandan treaty in force.
- 14. Presentation outline 1. Context: tax treaties in sub Saharan Africa 2. 3. 4.
- 15. Motivation 1: tax sparing Unfruitful negotiations with (at least) the UK in 1970s and 1980s. Uganda insistent on high WHTs. 1991: Investment Code Act 1993: Finance Minister Mr J. Mayanja Nkangi: because in the absence of any complementary tax holidays with the home countries of liability in Uganda represents a revenue gain by the Ministry of Finance in the home country Treaties with UK (1992), South Africa (1997), Italy (2000) and Mauritius (2003) contain tax sparing provisions. BUT by 2014, UK, South Africa & Italy exempt overseas equity FDI income, so tax sparing redundant.
- 16. Motivation 2: double tax relief From 2001, successive finance ministers justified treaties to parliament on the grounds of double tax relief and investment promotion. Eg: that the tax system does not discourage direct foreign investment -‐ Mr G Ssendula, 2001 Treaties signed with Norway (1999), Denmark (2000), the Netherlands (2004), India (2004) and Belgium (2007). BUT all these countries relieve double taxation unilaterally. So where double taxation exists it is not on what Dagan calls an
- 17. Motivation 3: Tax treaty = tax incentive? If most treaty partners exempt overseas FDI income from tax, many treaty concessions accrue directly to the investor as a lower effective tax rate. Treaty is a tax incentive? BUT few tax professionals in Uganda believe treaties
- 18. Motivation 4: information exchange and assistance in collection of taxes through cooperation, including by Ugandan finance ministers: purpose of this agreement is to reduce tax impediments to cross border trade and investment and assisting tax administration in information sharing Dr Ezra Suruma, 2006 Information exchange on request: not just wealthy individuals, also e.g. related parties in transfer pricing cases. Assistance in the collection of taxes: valuable for developing countries in cases of short-‐term PEs, capital gains tax. BUT treaties omit collection of taxes. AND mutual assistance conventions, which provide same and more!
- 19. Presentation outline 1. Context: tax treaties in sub Saharan Africa 2. 3. 4.
- 20. are less generous than the UN model Officials say Ugandan position is UN+WHT on management UN Article Description (domestic law in parenthesis) In how many UG treaties? (10 total) 5(3)(a) Construction PE (90 days) All (@ 183 days) 5(3)(a) Supervisory activities (yes) 8 5(3)(b) Service PE (90 days) 4 (@ 4 or 6 months) 10 WHT on FDI dividend (15%) Mostly @ 10% or 15% Except NL (0), BE (5), CN (7.5) 11 WHT on interest (15%) Mostly @ 10% 12 WHT on royalties (15%) Mostly @ 10% 12a WHT on management fees (15%) 8 (mostly @ 10%) 13(4) Capital gains 2 21(3) Source taxation of other income 3
- 23. to preventable treaty abuse day. The worst culprits are Mauritius, Netherlands. There is a lot of treaty shopping. A lot of companies trading in Uganda have their HQs in Mauritius URA official Examples of investments structured through treaty havens: Total oil (from France via Netherlands) Bahti Airtel (from India via Netherlands) MTN (from South Africa via Mauitius) Zain capital gains case revolves round an indirect transfer, no protection from this in UG-‐NL treaty. Most treaty SAARs are rarely included in Ugandan treaties (eg dependent agent maintaining stock, limited force of attraction, indirect transfers) Domestic treaty override provision s88(5) is untested in the courts.
- 24. Presentation outline 1. Context: tax treaties in sub Saharan Africa 2. 3. 4.
- 25. Cancel or renegotiate? Recent examples of the former Terminating country Partner country Year Reason given Germany Brazil 2005 Non-‐standard transfer pricing rules in Brazil; new Brazilian taxes not included; no need for matching credits. Indonesia Mauritius 2006 Argentina Austria 2008 Suggested to be due to treaty shopping Rwanda Mauritius 2012 Renegotiation Mongolia Luxembourg 2012 Treaty shopping by mining companies; slow response to request to renegotiate Mongolia Netherlands 2012 Treaty shopping by mining companies; refusal to meet renegotiation terms Argentina Chile 2012 Argentina Spain 2012 Renegotiation Argentina Switzerland 2012 Renegotiation Malawi Netherlands 2013 Renegotiation
- 26. Cancel or renegotiate? Cancellation has reputation costs, but is a viable option. A clear treaty policy can help identify priority treaties for reconsideration: Why does Uganda need treaties? No clear answer to this from officials at present. Cost-‐benefit analysis. No systematic assessment of even the easiest-‐to-‐measure WHT costs (which could be included within tax expenditure reporting) Treaty abuse risk assessment. Negotiating red lines.
- 27. Which model to use? UN: Uganda has not attended annual session since 2004, nor submitted written comments, and does not coordinate with African committee members. Coast, Gabon and DRC have done). EAC: has some strengths (management fees WHT, LOB clause), but in other areas weaker source taxation than the UN model and some Ugandan treaties. Also, why MFN clause in WHT articles? COMESA: has some strengths (main purpose test in WHT articles) but weaker than UN, EAC and some Ugandan treaties. Uganda has some reservations, esp for management fees WHT.
- 28. Could be: 1. PE: UN model definition, + 90 day construction and service PEs as per Ugandan law. 2. WHT: 15% across-‐the-‐board, including on technical service legislation, + main purpose tests for passive income as per the COMESA model. 3. Capital gains: All provisions from the UN model. 4. Anti-‐abuse: Limitation of Benefits clause from the EAC model or the forthcoming new OECD provision. 5. Exchange of information and collection of taxes provisions from the UN and EAC models.
- 29. An holistic approach to international taxation Not enough to consider treaties in isolation, when policy objectives may be undermined by: Tax incentives and production sharing agreements (eg Tullow case) Bilateral Investment Treaties (eg Uganda-‐ Netherlands does not carve out taxation matters) Income Tax Act (eg definitions of PE, immovable property)
- 30. Thankyou For more discussion of the issues covered in this presentation: http://martinhearson.wordpress.com