As countries struggle to shore up revenues from taxes, multinationals will find it harder to avoid taxes as new tax information sharing rules come into play.
Tax information sharing manual was published last month to aid netting of tax cheats. The manual, jointly published by the World Bank, African Development Bank, Organisation for Economic Co-operation, and Development (OECD) and the Global Forum on Transparency, provides for fines against leakage of confidential tax information by employees of affiliated tax agencies around the world.
It also provides for simultaneous tax audits on a taxpayer in different countries. The manual will go a long way in catching multinationals active in tax avoidance schemes across several borders.
According to Moses Kaggwa, director for Economic Affairs at Uganda’s Finance Ministry, “A Ugandan travelling to do business in the UK could not inform Uganda Revenue Authority about their dealings but the British tax authority would pass on information related to that person to its Ugandan counterpart without being asked.
The same would apply to a British investor doing business in Uganda. This eliminates cases of tax payers earning interest income somewhere and declaring it as dividend income back home.”
More than 300,000 tax information sharing requests were captured from Global Forum members between 2009 and 2020 while an estimated 100 countries engaged in automatic exchange of tax information during 2019 in an exercise that affected 84 million financial accounts and exposed total assets valued at Euro 10 trillion ($11.7 trillion), according to the latest Model Manual on Exchange of Information for Tax Purposes.
But there are naysayers who cite hostile attitudes among rich nations when confronted by sensitive tax information requests made by poor countries. Faced with considerable tax revenue losses triggered by Double Tax Agreements (DTAs) signed with offshore tax havens in the past, some have opted to cancel renegotiate.
For instance, Zambia and Senegal cancelled their DTAs with Mauritius last year following revelations of massive revenue losses.
Senegal’s previous tax treaty with Mauritius is blamed for the loss of $257 million in tax revenues over a period of 17 years, which was linked to aggressive tax avoidance activities carried out by foreign multinationals based in the West African country and sister companies registered in Mauritius.
In comparison, Lesotho renegotiated its double taxation treaty with Mauritius earlier this year in a strategic move that allows the former to collect taxes on technical fees charged by holding companies located in Mauritius against sister businesses operating in Lesotho. Besides Lesotho, Kenya and Rwanda have similarly renegotiated double taxation treaties signed with Mauritius in recent times.
Under existing DTAs, foreign investors enjoy a discounted tax package in areas of corporation tax charged on profits, withholding tax applied on dividends and other income taxes charged on management services, technical services and royalties among others.
For instance, shareholders in private companies operating in Uganda, excluding listed companies, are charged withholding tax of 15 percent on dividends earned every year compared to 10 percent charged against foreign investors based in Mauritius, according to a double taxation treaty signed between Uganda and the offshore tax haven in 2005.