The East Africa Tax and Governance Network (EATGN) comprises civil society organisations (CSOs), academia and individuals with diverse interests in fiscal justice within the East African Community (EAC).
EATGN recognises an increasing need for a concise understanding of taxation within public financial management (PFM) debates in each of the member states and across the region. This is because taxation is central to economic growth in relation to infrastructure development, service delivery and wealth creation.
A Double Taxation Agreement (DTA), also known as a double taxation treaty, is a bilateral (two-party) agreement made by countries to resolve issues involving double taxation of passive and active income of each of their respective citizens or entities within their jurisdictions. Such treaties generally determine the amount of tax that a country can apply to a taxpayer’s income, capital, estate, or wealth.
DTAs are a subject of interest because of the rising degree of globalisation which has brought about competition between various economies, especially in raising domestic revenues. Over the last decade, there has been a mad rush by East African economies to negotiate tax treaties. Whilst many of them are still under negotiation and therefore not in force, this signifies a change in fiscal policy.
The demand for Double Taxation Agreements (DTAs) has arisen because of various contexts in the region such as:
- Constitutionalism plus demands to implement new public finance management principles.
- Growth in trade and services across countries in the region or with other countries across the globe.
- Discovery of natural resources requiring more inflows of foreign direct investments.
- New economic visioning that was initiated at the turn of the 21st century e.g. the EAC Vision 2050, AU Vision 2063, Burundi Vision 2025, Kenya Vision 2030, Rwanda Vision 2050, Uganda Vision 2040 and Tanzania Vision 2025.
Kenya has the highest number of DTAs in the region. It has a total of 15 tax treaties with 7 being ratified after the passage of the constitution of Kenya 2010 (COK 2010). The top ten countries in the world that have signed DTAs in the EAC region are as follows:
- In first place is South Africa which has 4 treaties in force.
- India, Zambia, Denmark, and Norway come in second place with 3 treaties each.
- China, Iran, Korea, Kuwait, Mauritius, The Netherlands, and Singapore all have 2 treaties each.
DTAs allow individuals and businesses from one country residing in another country to be taxed only once in each country for the same income. They provide the legal basis for the protection of taxpayers against direct and indirect double taxation.
They also protect investments against non-commercial risks such as nationalisation, confiscation, foreclosures, freezing of assets, creation of authorised investments and transfer of profits and income in convertible currencies. DTAs create a legal framework allowing tax authorities to cooperate without violating the sovereignty of other countries or the rights of taxpayers.
However, whereas DTAs have been hailed as enablers of international trade and investment by equitably and efficiently sharing the taxing rights between the participating countries, studies have indicated that DTAs have been used by developed countries for the benefit of their multinational corporations.
DTAs in the region still differ substantially regarding the permanent establishment, profits, dividends, interest, management or professional fees, royalties, capital gains, other incomes, and the elimination of the double taxation that are open to exploitation through tax evasion and avoidance.
As a result, they are potentially harmful to capital importing countries involved On 19-20 August 2019, EATGN participated in an experts’ meeting to discuss the ruling on the Kenya-Mauritius Double Taxation Agreement (DTA) and its relevance in different jurisdictions.
The meeting provided relevant experts with the opportunity to broaden their understanding of the recent court decision that voided the Kenya-Mauritius DTA.
The meeting also examined the possibilities and limitations of this ruling to craft a future strategy in using the outcomes of the case as a framework to help CSOs pursue tax justice by preventing illicit financial flows in the EAC.
Because of these consultations, EATGN committed to engage in the promotion, training, and research of DTAs at the regional level. This was based on the opportunity the ruling against the Kenya-Mauritius DTA court case provided in developing a new strategy and advocacy efforts needed in challenging harmful DTAs across the EAC.
The court ruling against the Kenya-Mauritius DTA is a ground-breaking case in which a CSO won against the government.
However, there is little understanding of its impact among members of parliament, academicians, non-governmental organisations (NGOs), faith-based groups and members of the public at large who are interested in fiscal justice debates, especially at a regional level.
The ruling temporarily halted the implementation of the treaty, thereby exerting significant policy influence in the revenue arena, and giving prominence to tax justice advocates’ advancement of innovations or approaches in the fight for better public finance management.
Considering the traditional dominance of governments in making decisions on what, who, when and how to tax, this ruling has opened space for more stakeholder groups to have a direct bearing on how to influence the trajectory of tax policies henceforth.
It is now possible to further influence issues in such exclusive spaces on trade and investment rules or promotion through advocacy endeavours like public litigation that demand strict observance of the constitution as seen in the case of Kenya.
Despite this, there is still a lack of awareness, thus an urgent need to have a wider scope of actors getting more involved in tax discussions in various East African jurisdictions as a way of getting more momentum behind DTA advocacy efforts.
This can be done through building awareness by evidence generation, and capacity building that will help various entities develop adequate policy and make the issue of DTAs more relevant to the ordinary citizen.
It is therefore imperative to ask: what activities and interventions are needed in the medium to long term to push the agenda forward against harmful DTAs in East Africa; what are the political questions linked to the development of DTAs; and how can we develop active participation of broader constituencies in the wider EAC?
Soon after the experts’ meeting, a specific need arose to answer two critical questions following further interactions with EATGN members in Burundi on DTA issues.
Other than defining what is a DTA, their purpose and their need to interrogate them, EATGN members asked: how many DTAs do their countries have; and which countries have their governments signed DTAs with?
Based on EATGN’s commitment during the experts’ meeting, this publication is a cursory attempt to begin answering the questions as raised by its members as the beginning of efforts to build contextual evidence, build capacity and publicise the issues surrounding DTAs in East Africa.
Looking at the East African region, the tax treaties that were negotiated and ratified before 2010 appear to be giving more taxing rights to Kenya compared to those negotiated post the new constitution. It would be expected, with the current accountability obligations under the law, that the regulator, the Kenya Revenue Authority (KRA), should be in a position to tabulate the amount of tax lost and/gained for the existing DTAs that are in force.
In addition to this, citing the provisions of the Treaty Making and Ratification Act 2012, it presumes that a “regulatory impact assessment” is done before the treaty is concluded therefore this information should be readily available.
From the East African perspective, Tanzania has concluded negotiations but not yet ratified DTAs with EAC, Vietnam, Oman, and Botswana. Also, there are negotiations of DTAs at various levels with the UAE, Netherlands, Mauritius, Turkey, China, Morocco, Iran, Kuwait, South Korea, and the United Kingdom. There are no ongoing re-negotiations of existing DTAs.
When it comes to Uganda, the distributive rules in the current treaties with respect to passive income (dividends, interest, and royalties) and technical fees are largely fair to the country as a source country and net capital importer.
The main concern that needs to be addressed in the treaties with the emerging global trends in taxation is with regard to redefining the permanent establishment and moving away from the “fixed place” and moving to tax where value is created.
Rwanda has a total of 7 tax treaties in force. Of these seven enforced tax treaties, two have been signed in the early 2000s. All other 6 tax treaties have been signed over the last decade, with exactly one tax treaty concluded annually from 2013 onwards.
Burundi’s tax system which was inherited from the colonial administration was applied until 2007. Considerable efforts have been made to modernize it and adapt it to the challenges of globalization. Burundi has recently ratified the tax agreement signed with other EAC states. Other agreements with the Arab Republic of Egypt, Turkey and the UAE are still under the adoption process.