Martin Hearson has written a new report for Tax Justice Network-Africa, Tax Treaties in Sub-Saharan Africa, which highlights the extent to which tax treaties have been negotiated amid highly unequal power relationships in this continent.
The consequence is that “policymakers in African countries in 2015 have inherited tax treaty networks that are based on past priorities stretching back as far as 60 years. These treaties are not based on their present day needs or informed by today’s evidence on their positive and negative effects. This leaves African countries vulnerable to unnecessary revenue loss, not only through tax treaty shopping, but also because past governments negotiated away taxing rights for which they now get no concessions in return”.
The reports highlights some important recommendations for the necessary evidence-based review of these treaties:
-Review all their existing tax treaties and domestic legislation, to identify areas where they are most vulnerable to revenue loss. This should include permanent establishment definitions, protection from treaty shopping, and withholding and capital gains taxes.
-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 renegotiations of treaties that have the greatest actual (or potential in terms of capital gains) cost. These renegotiations 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.
-Incorporate an assessment of tax foregone due to tax treaties into an annual breakdown of tax expenditures.
-Ensure that all tax treaties are subject to parliamentary approval as part of the ratification process.
-Ensure that future updates to provisions of the UN and OECD model treaties, or to their commentaries and reservations/observations, reflect the positions set out in their national models.
-Strengthen the African model treaties (EAC, COMESA, SADC) so that they act as opposite poles to the OECD model, rather than compromises between the UN and OECD models.
You can download the full document here.