Tanzania: Information Exchange With Tax Bodies
Double tax treaties enable competent authorities of the treaty partners to exchange important tax information necessary for implementing the treaty or the domestic laws on taxes of every kind and description imposed. For instance, exchanges of information may be made regarding tax avoidance by companies of the contracting states.Nevertheless information received by a treaty partner is treated as confidential and disclosed only to persons or authorities (including courts and administrative bodies) dealing with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals for the taxes covered by the treaty. These persons or authorities are required to use the disclosed information only for the intended purposes.
Multinational enterprises should be aware that the exchange of information with other tax authorities will enable tax authorities to uncover any tax structures which attempt to take tax advantages of interactions between the tax laws of two or more countries. For instance, a tax structure which minimises foreign tax, rather than Tanzanian tax. By sharing this information with the other foreign tax authority it will enable the other country to take measures to rectify its weaknesses in its tax laws. Information can also be exchanged with countries not in double treaties through signing on tax information exchange agreements.
There are two common methods used to eliminate double taxation in double tax treaties. These are the exemption method and the credit method. Under the exemption method the resident state exempts foreign-sourced income, i.e. income derived in the other state whereby taxation is completely avoided. On the other hand when the credit method is used the resident state grants a tax credit for foreign taxes paid on foreign sourced income. For instance: Mr A, resident in South Africa, is shareholder of B-company which is resident in Tanzania. Company B is a very profitable business with a significant undistributed profits.
From tax consequences perspective should the profits of company B be distributed as dividend or Mr A should sell his shares for capital gain? If the double tax treaty with Tanzania and South Africa entitles Tanzania to a tax up to 10pc of the dividends then using the credit method South Africa should allow Mr A a deduction of the 10 per cent dividend levied as taxes. For instance the double tax treaty between Tanzania and South Africa stipulates that “Tanzanian tax paid by residents of South Africa in respect of income taxable in Tanzania, in accordance with the provisions of this Agreement, shall be deducted from the taxes due according to South African fiscal law. Such deduction shall not, however, exceed an amount which bears to the total South African tax payable the same ratio as the income concerned bears to the total income.” Similarly the treaty has a clause stating that “South African tax paid by residents of Tanzania in respect of income taxable in South Africa, in accordance with the provisions of this Agreement, shall be deducted from the taxes due according to Tanzanian fiscal law. Such credit shall not exceed the amount of the tax chargeable upon the income in respect of which the credit is to be allowed or upon each part of such income, as the case may be, computed in accordance with the Tanzanian fiscal law”.
Some Tanzania double tax treaties follow both the OECD and the UN model. For instanceTanzania has concluded a treaty with South Africa with UN model provisions giving it greater taxing rights to protect its tax base. For instance, the definition of permanent establishment is broad to include interest, royalty and dividend. Further, withholding tax is also levied on a number of items including dividend, interest and royalties etc.Nevertheless treaties which follow the OECD model provide some benefits including provision of certainty to multinational enterprises when planning their tax affairs, have common interpretation rules using the extensive OECF commentary and facilitate reduction of tax evasion and avoidance through exchange of information clauses.
Further, anti-avoidance measures have been put in other tax laws including in the transfer pricing regulations.
