Tanzania: Managing Tax Risks – Double Tax Treaties and Implications to Undertakings of Multinationals

The term double taxation refers to an exposure to tax more than once on the same profit or income. There are two types of double taxation i.e. economic double taxation and juridical double taxation.

Economic double taxation is broad and occurs in a situation where an amount of income is taxed twice. For instance corporate tax on profits and another tax on the same distributed profits i.e. dividend. Juridical double taxation occurs in circumstances where more than one country seek to tax the same income.

In most cases, juridical double taxation arises because a company or individual sources its income in a country which is not its country of residence i.e. a person resident in one country may have the right to income or gains arising in another country whereby each country may wish to ensure that it collects a tax it is entitled on the income. It may also arise because of different rules by countries on attribution of tax residence e.g. the use of place of incorporation by one country as compared to the use of effective management and control by another country to decide on the jurisdiction status of a company.

What is a double tax treaty?

A double tax treaty is an agreement between two taxing states or countries. The fundamental challenge leading to the need for double tax treaties is based on the question “which individuals and entities does a particular country have the right to tax?” This is because a country’s right to tax individuals and firms is not always limited to geographical boundaries of the country i.e. a country may decide to tax its residents on their worldwide income and gains or to tax all income and gains generated within its jurisdiction i.e.cover individuals and firms who are not tax residents in a particular country but who are earning profits in that country using the facilities and infrastructure of that particular country.

Thus the two countries may decide to form an agreement on which country should have the right to tax the income. Thus several countries including Tanzania have entered into these agreements which are termed double tax treaties with the main objective of stipulating which country a particular tax payer should be treated as a resident for tax purposes. The treaties will also stipulate how various taxes on income or capital will be shared between the respective countries.

The first double tax treaty for income taxes was between Prussia and Austria-Hungary entered into in 1899. Tanzania has signed and ratified double tax treaties with Sweden, South Africa, Zambia, India, Norway, Italy, Denmark, Canada and Finland. Some few other treaties have also been signed but not yet ratified.

Purposes of double tax treaties

• Overall the major purposes of double tax treaties are:
  Provide protection to tax payers against double taxation over and above the protection offered by domestic law.
• Assist in ensuring that tax does not discourage free flow of international trade and investment as well as the transfer of technology.
• Assist tax authorities to curb tax evasion. This is through provisions in the treaties for exchange of information between tax authorities as well as provisions for assistance in collection of unpaid taxes to a treaty partner.
• Multinational Enterprises can have certainty on fiscal and legal matters in their international business operations as they will be aware to a larger extent on the tax treatments applicable to their investments.
• Double tax treaties also assist in preventing discrimination between tax payers.