TJN-A report: Tax Treaties in Sub-Saharan Africa

DOWNLOAD REPORT
Tax justice reports
Tax justice reports

TJN-A report: Tax Treaties in Sub-Saharan Africa

The report highlights the extent to which tax treaties — which have profound implications for how the tax revenues from cross-border investments are shared between countries — have been negotiated amid highly unequal power relationships. It explores the historic legacy of colonial powers on current tax treaties arrangements and examines the failure within treaties to reflect current need or to adequately assess either positive or negative impacts. The dire consequence of the legacy is loss of government revenue for countries in the region.

The report highlights the extent to which tax treaties — which have profound implications for how the tax revenues from cross-border investments are shared between countries — have been negotiated amid highly unequal power relationships. It explores the historic legacy of colonial powers on current tax treaties arrangements and examines the failure within treaties to reflect current need or to adequately assess either positive or negative impacts. The dire consequence of the legacy is loss of government revenue for countries in the region.

The report explains the problematic genesis of many tax treaties which have interests sway in the favour of investors and examines the equally biased nature of tax incentives.

Tax treaties vary in nature and character according to to the laws of partner countries. Accordingly, the report warns, there can be no ‘one size fits all’ approach to addressing the risks they present to governments and their revenue. The report urges African countries to review their tax treaty networks and stresses the need for clear policy to ‘guide re-negotiations, cancellations and any new future treaties’.

Key findings

  • Treaty partners’ tax laws and the investment flows determine the nature of any specific tax treaty.
  • Post-colonial legacy has significantly influenced African countries approach to tax treaty development
  • Tax treaty development is misaligned with the needs of countries in the region.
  • Use and abuse of ‘tax sparing credits’ to advantage investors was commonplace in tax treaties.
  • Tax treaty regime leaves countries vulnerable to tax revenue loss

Key recommendations

  • SSA countries would benefit by reviewing all their existing tax treaties and domestic legislation, to identify areas where they are most vulnerable to revenue loss.
  • Formulate ambitious national models by applying a “best available” approach to existing models (EAC, COMESA, UN), current treaties, and domestic legislation, none of which are currently adequate.
  • Identify red lines for negotiations from within these models.
  • Based on investment and remittance data, request re-negotiations of treaties that have the greatest actual (or potential in terms of capital gains) cost. These re-negotiations should be conducted on the basis of an improved distribution of taxing rights, not a “balanced” negotiation.
  • Cancel these high-impact treaties if the red lines cannot be obtained..

Additional resources