This document summarizes a presentation on Uganda's tax treaties given in Arusha, Tanzania in December 2014. It discusses Uganda's motivations and objectives for signing tax treaties in the past, issues with the current treaties, and options for Uganda's tax treaty policy going forward. Some of the key points made include that Uganda's past motivations like tax sparing provisions are now outdated, the treaties do little to attract investment, and many are vulnerable to treaty shopping abuse. The presentation argues Uganda should comprehensively review its treaty network and negotiating positions.

1. Uganda’s tax treaties: a legal and historical analysis
Martin Hearson, London School of Economics
JaliaKangave, East African School of Taxation
International Centre for Tax and Development annual meeting
Arusha, December 2014

2. Presentation outline
1.Context: tax treaties in sub Saharan Africa
2.Uganda’s treaties past
3.Uganda’s treaties present
4.Uganda’s treaties future

3. Tax treaties signed by sub Saharan countries (and in force in 2013)
Source: IBFD

4. Countries having signed six or more treaties with sub-Saharan African countries
1952
2012
Year signed
Source: IBFD

5. “Double taxation treaties”: a misnomer?
“it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between countries”
-introduction to the OECD model tax treaty
“In the absence of an agreement there is no question of United Kingdom investors being doubly taxedand 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 no worse than overseas competitors”
-UK govtunpublished review of double tax relief, 1976

6. So why sign?
Proponents say that treaties
omop up outstanding double taxation
ostandardise definitions
oguarantee tax stability
oresult in lower (single) taxation
ocreate a framework for cooperation/dispute resolution
osend a signal that a country is open for business
Opponents say that tax treaties
oTransfer the burden of double tax relief from residence to source countries
oBind developing countries into disadvantageous legal concepts and mechanisms

7. Tax treaties and foreign direct investment
The evidence that tax treaties attract new FDI into developingcountries is inconclusive at best
(problems include: poor data, endogeneity, robustness to treaty shopping, competition effects).
Most African negotiators interviewed agree. For example:
“Most of the time developing countries are disadvantaged by treaties. Treaties do not attract investment. It is other factors.”
“I know there’s empirical evidence that it [a treaty] has no effect on investment, but the reality country-to-country is that there’s a bluff goes on, and countries don’t want to take the risk of losing big investments.”

8. A long tradition of treaty scepticism
“The present system of tax agreements creates the anomaly of aid in reverse—from poor to rich countries.” –Charles Irish, 1974
“In treaties between developing and developed countries…re-allocating tax revenues means regressive redistribution-to the benefit of the developed countries at the expense of the developing ones.” –TsillyDagan, 2000
“When you sign an OECD model treaty, you say there is no withholding, or hardly any withholding, on outflows of cash to multinationals. Now why in hell do you want to sign that?” –Lee Sheppard, 2013

9. Contribution of this case study
Most of the academic literature on tax treaties and developing countries consists of:
•Econometricpapers often making herculean assumptions
•Legal papers that do not always consider realities ‘on the ground’
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 govtofficials and private sector tax advisers in Kampala September 2014, combined with analysis of official documents (negotiation minutes, budget speeches) from UK and Uganda.

10. 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 judgement…We 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.

11. Presentation outline
1.Context: tax treaties in sub Saharan Africa
2.Uganda’s treaties past
3.Uganda’s treaties present
4.Uganda’s treaties future

12. 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 MrJ. MayanjaNkangi: “negotiating double taxation agreements with identified major trading partners” because “in the absence of any complementary tax holidays with the home countries of foreign investors, the revenue foregone by reducing a company’s tax 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.
BUTby 2014, UK, South Africa & Italy exempt overseas equity FDI income, so tax sparing redundant.

13. 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:
“to protect taxpayers against double taxation, and to ensure 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).
BUTall these countries relieve double taxation unilaterally. So where double taxation exists it is not on what Dagan calls an “heroic” level

14. 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?
BUTfew tax professionals in Uganda believe treaties influence their clients’ investment decisions, and the UIA doesn’t even mention them on promotional literature.

15. Motivation 4:
information exchange and assistance in collection of taxes
Treaties described as partly “for the prevention of fiscal evasion” through cooperation, including by Ugandan finance ministers:
“The 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.
BUTUganda makes “only about one info request per year”, while 5/11 treaties omit collection of taxes.
ANDUganda’s treaty partners are all signatories to OECD and/or ATAF mutual assistance conventions, which provide same and more!

16. Presentation outline
1.Context: tax treaties in sub Saharan Africa
2.Uganda’s treaties past
3.Uganda’s treaties present
4.Uganda’s treaties future

17. Uganda’s treaties are less generous than the UN model
Officials say Ugandan position is UN+WHT on management fees. But…
UN Article
Description (domestic law in parenthesis)
In how manyUG treaties? (10 total)
5(3)(a)
Construction PE (90days)
All (@ 183 days)
5(3)(a)
Supervisory activities (yes)
8
5(3)(b)
Service PE (90days)
4 (@ 4or 6 months)
10
WHT on FDIdividend (15%)
Mostly @ 10% or 15%
ExceptNL (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 –‘property rich’ (yes)
2
21(3)
Source taxation of other income
3

20. Uganda’s treaties are vulnerable to preventable treaty abuse
“The ones claiming [reduced taxation] under the DTAs are many, about one per 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)
•BahtiAirtel (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 (egdependent agent maintaining stock, limited force of attraction, indirect transfers)
Domestic treaty override provision s88(5) is untested in the courts.

21. Presentation outline
1.Context: tax treaties in sub Saharan Africa
2.Uganda’s treaties past
3.Uganda’s treaties present
4.Uganda’s treaties future

22. 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
“There was an abuse that was inflicting a loss upon Indonesia”
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

23. 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.

24. 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.
OECD: Uganda has not entered “observations” (from Africa, Ivory 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, espfor management fees WHT.

25. A ‘best available’ model as Uganda’s opening position
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 fees, as per Uganda’s treaty with the UK and its domestic 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.

26. 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 (egTullowcase)
•Bilateral Investment Treaties (egUganda- Netherlands does not carve out taxation matters)
•Income Tax Act (egdefinitions of PE, immovable property)

27. Thankyou
For more discussion of the issues covered in this presentation: http://martinhearson.wordpress.com