It’s been a bit quiet on here recently, the result of a busy term at LSE. At least I am at not the only PhD-student-and-tax-blogger whose blog has been suffering from the demands of teaching and research!

This week I’ve been at the International Centre for Tax and Development Annual Meeting, a chance to compare notes with other people working on tax and development, as well as with tax officials from a range of African countries. It’s a great environment to present in, because there is feedback on both an academic level and also from the tax practitioners present.

Here’s the presentation I gave based on my field research in Uganda earlier this year. This is just a taster of what will hopefully result in a couple of full length papers in the new year.

[Link to presentation on Slideshare]

I’m on my way to the UN tax committee’s annual session in Geneva. This year’s agenda contains quite a few interesting topics. I can’t write about them all, but I thought I might pick out three that seem particularly interesting. Since they are all discussions about the model treaty and its commentary, the common question that they pose is, “what is the purpose of a model tax treaty?” I think you can take three (not mutually exclusive) views about this:

  1. It tells countries what works technically. It combines the wisdom of some of the most experienced tax officials in the world to produce a technically sophisticated template that negotiators can rely on.
  2. It tells countries what is politically palatable. If a provision is included in the UN model, for example, a group of experts from developed and developing countries have all been willing to agree to its inclusion, so neither side is going to consider it too outrageous.
  3. It tells countries what is acceptable behaviour. The models sketch out the concepts and principles that committee members think should underpin a country’s international tax system. It conveys an expectation that a country’s tax rules should be compatible with these concepts and principles.

From an international relations side, we might say that the first two purposes are about reducing transaction costs for negotiations, by providing countries with information ahead of time. The last one, on the other hand, would suggest that treaties act as instruments through which norms about acceptable behaviour are established and diffused within an international community.

The status of the OECD transfer pricing guidelines

When the 2010 update to the UN model treaty was being finalised, there was some controversy around article 9, which deals with transfer pricing and the arm’s length principle. The commentary to the previous version of the UN model stated that the OECD’s transfer pricing guidelines were “internationally accepted guidelines” and recommended that countries should follow them. A minority of committee members didn’t accept this view, and so rather than resolve the conflict, the commentary now records that [pdf] “The views expressed by the former Group of Experts have not yet been considered fully by the Committee of Experts, as indicated in the Records of its annual sessions.” Unusually, the record of the discussion identifies the dissenters as the Chinese, Brazilian and Indian members of the committee. It is worth noting that none of these three individuals are still members of the committee.

The new committee is going to discuss a proposed wording to resolve those differences. This wording states only that the OECD guidelines “contain valuable guidance” and adds that

the Committee has developed the United Nations Practical Manual on Transfer Pricing for Developing Countries which pays special attention to the experience of developing countries, reflects the realities for such countries, at their relevant stages of capacity development, and seeks broad consistency with the guidance provided by the OECD Transfer Pricing Guidelines.

There is a furious letter [pdf] from the US Council for International Business, which seems to be targeted directly at India, China and Brazil:

It seems inconsistent for G20 countries and other non-OECD countries that are now advocating for their views to be reflected in the OECD Transfer Pricing Guidelines to accept concessions from others participating in the development of those Guidelines and then undercut the very outcome of those negotiations by arguing elsewhere for positions that were rejected in that forum. If any notion of “fairness” has relevance in international tax, surely it should include the concept that acceptance of an invitation to bargain on an equal footing over a set of rules carries with it the good faith obligation to live by those same rules.

The letter argues that the UN Manual was not produced with enough participation from businesses, that the OECD guidelines are now formulated with input from “a broad spectrum of countries”, and that the proposed UN aim of “broad consistency” will permit “multiple, inconsistent applications of that principle, will lead to multiplied disputes, increased double taxation, and ultimately to serious damage to the cross-border trade and investment that fuels economic growth and development.”

This might be an argument based on purpose 1, 2 or 3 above. On 1, USCIB is arguing that the changes will create technical problems. On 2, it is arguing that the political signalling effects of the OECD and UN models undermine each other when countries agree to one thing at the OECD and push a different position at the UN. Finally, on 3, it is clearly concerned about diluting the clear message sent by the treaty commentaries at present, which is that the OECD guidelines are the only internationally accepted authority when it comes to transfer pricing.

Capital gains

Both as a discussion in its own right [pdf], and through a paper for the Extractive Industries subcommittee [pdf], there’s a lot of discussion of “indirect transfers”, where a capital asset in a developing country is sold, but the transaction takes place through the sale of a holding company located in another country. I have written about an example of this recently, and it was highlighted in the recent IMF spillovers report. As I observed, it doesn’t look like the G-20/OECD processes are going to look at this problem in any depth, so this is an instance where the UN committee is examining an issue of clear concern and interest among developing countries.

The discussion focuses on article 13(4) which covers the sale of a company whose value consists principally of immovable property. This may include a mine, or a capital-intensive business such as a mobile phone network. The UN papers highlight a range of administrative issues: how a developing country can know if a sale taking place abroad falls within the scope of this article, how to value the gain, how to define “immovable property” since the model treaties are not as clear as they could be on this matter.

What interests me most is the question of how to actually collect the tax, when the payment is made outside the country, and when by definition the company making the gain may no longer have any assets in the country. As the extractives paper observes:

While both the UN and OECD Models now contain optional Assistance in the Collection of Tax Debt Articles for countries wanting to provide for this in bilateral tax treaties, and there is a multilateral OECD/ Council of Europe Convention on Mutual Administrative Assistance in Tax Matters on the subject, this is not yet something most developing countries have provision for in their bilateral or multilateral relationships.

This is something tax authority officials from developing countries are definitely seeking from renegotiations. In the meantime, the extractives paper describes alternatives, which include asking the purchaser (who by definition will have assets in the country) to withhold the capital gains tax when paying for the transaction, and refusing to grant export licenses until the capital gains tax has been collected.

I don’t know how controversial this is going to be, but insofar as it is about providing advice to developing countries, I think that makes it a matter of purpose 1.

Services taxation

The committee is going to discuss a draft article [pdf] that would allow developing countries to tax technical services. This is a provision that exists in some form in many tax treaties already, and has been introduced into models such as the East African Community’s new model treaty. But neither the UN nor OECD model treaties include it. From a technical point of view (purpose 1), this new addition should be a good thing: since these provisions are fairly popular among developing countries’ tax treaties already, having an international Committee of Experts formulate a model provision built on their collective wisdom is surely a good thing.

That’s not the view taken by the International Chamber of Commerce in a letter [pdf] that outlines the main arguments likely to be raised against a withholding tax on management fees. The ICC is opposed to such a tax per se, but it emphasises that it is even more concerned about the double taxation that might result if countries impose such a tax it unilaterally. Here is what it says:

Given that it is the unanimous view of OECD Member States that the source basis taxation is not appropriate for services performed by a nonresident outside that State, it is unlikely that the country where services are performed will give up its right to tax and therefore such a provision is unlikely to serve as an effective model for bilateral agreements. While the UN Model reflects different interests than the OECD Model and different rules are therefore appropriate in some cases, it should be considered if deviating from a rule in the OECD Model that reflects unanimous agreement among OECD member countries will inevitably lead to conflicts in treaty negotiations. Doing so will likely encourage countries to take aggressive unilateral positions (in the absence of a treaty). The adoption of this rule on a unilateral basis will increase double taxation, reduce cross-border trade and increase costs for local consumers.

This is an argument that really goes to the heart of what the UN model is for. I think the ICC’s concern is that including an article sanctioning withholding taxes on technical fees in the model treaty will embolden developing countries to insist on the right to levy such taxes, and that this will make it harder for them to reach agreement with developed countries. That’s purpose 3.

An opposite argument, of course, would be that the UN committee, with members from OECD and non-OECD countries, should be in a good position to formulate an article that reconciles the concerns of OECD members and non-members. That’s purpose 2.

Following the ICC’s argument cited above, the model treaty’s job is not to provide a template that is to be used where countries do agree to include a particular provision. It is about circumscribing a definition of what is considered reasonable behaviour by a developing country. Keep it out of the model, they are saying, to discourage developing countries from doing it altogether.

In 2010, Zambian NGOs obtained a leaked copy of an audit report conducted for the Zambia Revenue Authority into Mopani Copper Mine, a subsidiary of the Swiss behemoth Glencore. I was working at ActionAid at the time, where we took an active interest in the case. The particular allegation concerning systematic transfer pricing abuse contained in the report was consistent with the experience of many tax authorities, so much so that many Latin American countries have a specific transfer pricing rule to combat it. And with the Grant Thornton imprimatur, it seemed like the perfect story. The company denied it, but then of course they would.

A group of NGOs filed a complaint with Swiss National Contact Point for the OECD Guidelines for Multinational Enterprises (not to be confused with the OECD Transfer Pricing Guidelines), triggering an investigation, but with the parties disputing the facts, there was no concrete outcome. The European Investment Bank, which had lent money to Mopani, conducted an investigation, but so far the findings have not been published. The whole thing feels frustratingly inconclusive.

So while I was in Zambia recently I thought I would look into the story. I have pieced together the account below from interviews with current and former government officials, and with tax advisers from the private sector. It is no doubt only one interpretation of the facts, given to me by stakeholders with their own interests to defend. But it is certainly an interesting one.

In the mid 2000s, as copper prices rose dramatically, the lack of tax revenue from copper mines started to become an issue in Zambia. So in 2008, the government decided to break the fiscal stability clauses in its agreements with mining companies, and enact new taxes.

Historical Copper Prices - Copper Price History Chart

There were two: the windfall tax was based on the value of copper extracted, and the variable profits tax was levied when profitability exceeded a certain amount. There’s an excellent paper by David Manley [pdf], who was in the Zambian finance ministry at the time, explaining all of this. The idea, so I was told, was to begin with a moderate tax on sales, and meanwhile to build capacity in the Zambia Revenue Authority to administer a variable profits tax.

Officials were frustrated, however, that the original proposal to levy the withholding tax at between five and 15 percent (depending on the price of the copper sold) was rejected by politicians, who instead set it at between 25 and 75 percent. This was politically unsustainable in a country where the mining industry is willing and able to lay off hundreds or thousands of unskilled workers in a standoff with the government, as it is doing now in a dispute over VAT refunds, and (so I was told by one researcher) powerful enough to manipulate the exchange rate.

“At the time the mines were in the development stage, and it would have killed them to tax on sales,” a former official told me. According to a tax adviser, “It was pushing the mines into a loss.” Manley is more understated:

The mining companies were upset by the unilateral revocation of the Development Agreements and some refused to pay the new taxes. The announcement was followed shortly after by the onset of the global financial crisis. Copper prices fell sharply and marginal mines started laying off workers.

In 2009, the government backed down, and the windfall tax was repealed. It is here that the Mopani audit comes into play. The ZRA, with support from Norwegian technical assistants, began to conduct (or rather commission) audits of all the mining companies. The purpose was to start enforcing the variable profits tax with a clear idea of the mines’ cost bases. This targeted approach would work well with limited tax authority capacity and only a few very large mines. As the Mopani audit report makes clear, the company wasn’t very cooperative with the audit. Here I paraphrase what a former official told me:

“It was a tactic.” It’s what you do in an audit if they are not supplying the information. There was a lot of missing information and so the report was written with the intention of giving it to the company and saying ‘either you provide the information, or we will tax you on this basis.’ So of course you take an aggressive position in the audit report to create an incentive for them to supply the information. Then it was leaked and it all exploded internationally. Over time, some information came and we settled with them. Of course it was lower than the amount in the audit.

According to this official’s version of events, the audit tells a tale of a company doing its best to frustrate a tax authority by obfuscating, but for that same reason it can’t be read as a final word on Mopani’s tax affairs.

As for taxing mining profits, it now seems that Zambia’s new government has given up on this altogether, opting instead for a much higher royalty rate – effectively a return to the windfall tax. The industry is unhappy. Worse still, “as audit firms we’ve been rendered useless,” a tax adviser said to me.

But one way to interpret this in the light of the Mopani audit is that, if firms make it difficult for developing countries to administer taxes on their net income, they risk being taxed on gross instead. Zambia has, after all, already raised withholding taxes on management and consultancy fees to 20 percent.

 

One big theme from the interviews I conducted on my recent African trip is that tax officials in developing countries are really starting to raise concerns about some of their tax treaties. This is particularly true of treaties with the Netherlands, Mauritius and other countries that can leave them vulnerable to treaty shopping, although it doesn’t stop there.

Why are you thinking about this now? I asked. One finance ministry official told me that there had been three factors: first, seeing countries such as Mongolia and Argentina cancel some of their treaties; second, recent NGO reports that had focused on the abuse of tax treaties, in particular the ActionAid report on Zambia sugar; third, the growing body of practical experience inside the country’s revenue authority.

If developing countries are watching what each other does, as well as learning from their own experiences, that’s interesting for international relations. It means we can draw direct parallels with Bilateral Investment Treaties (BITs), where a similar process has been studied in a lot more depth. This first chart compares the growth in BITs and tax treaties (DTTs) over time.

Growth in Bilateral and Investment Treaties (BITs) and Tax Treaties (DTTs)Whereas the number of tax treaties is still on the upward slope of a comparatively gentle exponential rise, investment treaties went through an explosive period in the mid 1990s and early 2000s, before tailing off almost to zero. (By the way, bilateral investment treaties are usually signed by developing countries, since this is the situation where investors are most concerned about possible appropriation of their investments by governments. The chart below shows that the overall pattern for tax treaties is the same if you only consider treaties signed by developing countries)

The spread of tax treaties to developing countriesThe now-classic explanation for this pattern of “three waves of diffusion” of BITs is as follows [pdf]:

In the first period, BITs provided a solution to the time inconsistency problem facing host governments and foreign investors. In the second period, these treaties became the global standard governing foreign investment. As the density of BITs among peer countries increased, more countries signed them in order to gain legitimacy and acceptance without a full understanding of their costs and competencies. More recently, as the potential legal liabilities involved in BIT signing have become more broadly understood, the pattern of adoption has reverted to a more competitive and rational logic.

Lauge Poulsen and Emma Aisbett present some pretty convincing evidence that the tailing off of BIT signatures in that “third wave” came as countries started to see the consequences of their actions in the form of claims made by investors. Their study suggests that countries only really learned from their own experience, or to a lesser extent from that of other countries in their own region: their field of vision didn’t extend much further than this.

I think there are three relevant points for the comparison between tax treaties and investment treaties. First, there has been no significant tailing off in tax treaty signings yet, which is consistent with the fact that there has not been the same volume of high-stakes disputes resulting from tax treaties as there has been over investment treaties. The comparison seems to offer support for Poulsen and Aisbett’s argument.

Second, this might change. Like BITs, tax treaties result in occasional disputes over large amounts of capital gains tax, as I wrote about recently in Uganda’s case. But tax treaties also have an ongoing cash cost to a developing country government in lost withholding tax and corporation tax. This includes the amount that is sacrificed directly to businesses from the treaty partner, but it also includes additional amounts lost through treaty shopping and transfer pricing structures, such as those documented in the ActionAid report and last year’s report produced by SOMO on Dutch treaties.

The question is whether only high profile cases with large amounts at stake – in other words capital gains disputes and reports by NGOs – are enough to cause developing countries to review their approach to treaties, or whether decisions might also be made on the basis of that ongoing cash cost. In fact, I think most of the instances of treaty cancellations have been for the latter reason. Certainly that appears to have been the rationale behind Mongolia’s decision to cancel treaties with several European tax havens [link is in Mongolian], as well as Indonesia’s decision to cancel with Mauritius. Where there wasn’t a dramatic case to catch policymakers’ attention, what provoked countries to reconsider their tax treaties?

A third point for comparison is that there is actually a fundamental difference between investment treaties and tax treaties. The whole point of the former has become to give investors recourse to arbitration, the very thing that then caused developing countries to stop signing. In contrast, what generally leads to concerns about tax treaties is when they are abused in tax planning structures, something that can be prevented through a well-negotiated treaty. Tax treaty cancellations have generally come about when requests to renegotiate fail (the above Mongolian link says the Netherlands and Luxembourg cancellations happened because of lack of progress with renegotiations) or as tactics to bring the other side to the table (Argentina-Spain and Rwanda-Mauritius are both examples of treaties cancelled by a developing country and then subsequently renegotiated).

The upshot is that with tax treaties we may not see a wave of cancellations, or a slow-down in negotiations, but rather a wave of renegotiations, something that is already ticking along in the background.

Tax treaty renegotiationsNote on data: I compiled the numbers of tax treaties from the IBFD database. The numbers only include treaties that have been signed (including treaties that have been signed but not ratified, and excluding treaties initialled but not signed). They exclude treaties signed by jurisdictions that were not fiscally independent at the time (no treaties signed by colonies, except for British and Dutch overseas territories that set their own economic policy). Numbers of investment treaties were taken from UNCTAD, and compiled by Lauge Poulsen.

Link to Google spreadsheet

This is the second of three posts in which I’m reflecting on the recent report on BEPS and developing countries [pdf] during a short stay in Africa. Today, I’m looking at the digital economy. This visit to Africa has been the first time I’ve really grasped the scale of what mobile internet is doing to Africa. It’s huge. Half of all urban-dwelling Africans have smartphones, and mobile internet use is growing at twice the rate of the rest of the world. Nairobi, Kampala and Lusaka have all been festooned with adverts promising “world class internet”.

Buying a SIM card in Kampala, I commiserated with the vendor about the recent discontinuation of Skype on our outdated Windows Phone devices. Later, I debated the merits of Facebook and Whatsapp with the boy serving breakfast at my guest house. At a music festival I found the best implementation of a Twitter wall that I’ve seen.

Here in Lusaka, I had a long chat with the manager of a hostel about Zambians’ penchant for second hand Japanese cars, only to log on to the internet and find every website plastered with adverts for exactly that. And when you ask for directions, people just say “don’t you have Google maps?”

So I thought it quite odd that the BEPS and developing countries report – unlike the BEPS project itself – pretty much skips over the digital economy. McKinsey think that by 2025 the internet could be the same or even a bigger share of African GDP than it is in the UK – as much as ten percent. It’s precisely because Africa lags behind in everything from telephone lines to bank accounts to textbooks that this might happen: the internet, and particularly the internet on mobile devices, offers the chance to leapfrog that capital-hungry stage.

There are two sides to the digital challenge when it comes to taxation, as the BEPS digital economy report [pdf] outlines. The first is the challenges it creates for getting our current international tax rules to deliver the intended outcome, which is broadly that multinational companies pay tax on their profits where they generate them through a physical presence.

Leaving aside the stratospheric “double Irish” schemes and their like, the report discusses some nuts and bolts areas where companies have gone right to the edge of the definition of a taxable permanent establishment (PE), without crossing it. For example, OECD (but not UN) model treaties exempt a delivery unit from the definition of a PE, which is how Amazon avoided a tax liability in the UK despite its huge warehouses. Zambia is not well prepared for similar developments, as most of its treaties follow the OECD provision on this, not the UN one.

But it’s the second side of the issue that I think is big for Africa. This is the growing irrelevance of physical presence to modern business models. The OECD report talks about problems with ‘nexus': how digital companies can make a lot of money in a country over the internet without needing any physical presence at all. It moots the idea of supplementing the physically-rooted PE concept with a new concept of “significant digital presence”, levying a withholding tax on digital transactions, or even abandoning PE altogether,

It also talks about the value attached to data: how digital companies can generate significant value in a country from user data without any money changing hands. There’s no mention of the French Colin/Collin report [pdf], which I thought was fascinating on this. Digital companies like Facebook and, I guess, WordPress, have millions of users creating value (and hence, profits) for them for free, so how does that affect a tax system that tries to allocate taxing rights based on where a company’s value is created?

It’s not just the likely size of the digital economy in Africa that makes this an important issue for the future here. It’s also the fact that digital’s exponential growth here is happening precisely because there isn’t the infrastructure to support physical presence. People will be increasingly downloading textbooks instead of buying them, Whatsapping instead of telephoning, faxing or writing, and using Facebook instead of sending out mailshots, Digital will render irrelevant some of the growth of the physical, taxable economy that already exists in more developed regions. (The exception, of course, is the mobile phone companies…but that’s for another day).

I imagine that the more radical ideas mooted in the OECD paper to deal with the challenges of nexus and data will face stiff opposition from certain countries that are big exporters of digital services. After all, this is not strictly speaking base erosion or profit shifting, because it’s about changing what the rules are intended to do, rather than making sure that they work.

Ordinarily, in this kind of situation I would suggest that developing countries band together to implement a home-grown, tailor-made solution to this problem, and add it to their domestic laws and the COMESA/EAC/SADC model treaties. But they are going to need help. The reason is that if companies are making money from their citizens without any physical presence, they don’t have any cash in the country to take the tax from. To collect tax revenue from digital companies, African governments will need the assistance of tax authorities in the home countries of those companies, which will in turn mean a treaty (either bilateral or multilateral) that supports this.

I’ve realised in my interviews here that developing countries are running just to keep up with the changes to model tax treaties. All their energy is taken up trying to understand, obtain and implement the newer treaty provisions, transfer pricing rules, and information exchange standards. What they aren’t doing so much is evaluating them. So I’d suggest that countries such as Zambia stop, take a breath, and think about what they are likely to want to tax in ten or twenty years’ time. Then they’ll be ready to throw themselves into building a future-proofed set of international tax rules that works for them.

Zain

Uganda is pursuing Zain for $85m capital gains tax on the indirect sale of its Ugandan subsidiary

I’m writing this post from under a mosquito net on a close Kampala evening. Since arriving on Wednesday I’ve had a whistlestop tour of the issues facing Uganda as it embarks on a review of its tax treaties. So far I’ve met with four tax inspectors, two finance ministry officials, four (count ‘em) tax advisers, one academic and three NGO people. I also spoke at an event to launch a a report on Uganda”s tax treaties written by Ugandan NGO SEATINI and ActionAid Uganda.

This post is about “indirect transfers” of assets, where a sale is structured to take place via offshore holding companies, thus escaping capital gains tax. It turns out there is an $85m tax dispute on this between Uganda and the mobile phone company Zain. This is just about the biggest issue in Ugandan tax right now: the tax inspectors are even tweeting about it.

“Indirect transfers” were highlighted in the recent (and generally solid, I thought) OECD report to the G-20 development working group [pdf].* It says:

Developing countries report that the profit made by the owner of an asset when selling it (for example, the sale of a mineral licence) is often not taxed in the country in which the asset is situated. Artificial structures are being used in some cases to make an ‘indirect transfer’; for example through the sale of the shares in the company that owns the asset rather than the sale of the asset itself.

Unfortunately, it is pretty lame on the solutions. As far as I can tell from the G-20 response [pdf], what is going to happen on it is this:

(deep breath…)

As part of its multi-year action plan, the G-20 development working group will consider calling on the OECD, in consultation with the IMF, to report on whether further analysis is needed.

(…and exhale)

I don’t hear the sound of tax positions unwinding.in response to that one.

To remind you, the big daddy of indirect transfer cases is the Vodafone-India dispute. In that case,  according to this handy summary:

In 2007, Vodafone’s Dutch subsidiary acquired the stock of a Cayman Islands company from a subsidiary of Hutchinson Telecommunications International Ltd. (the subsidiary was also located in the Cayman Islands). The purchase price was $11.1 billion. The Cayman company acquired by Vodafone owned an indirect interest in Hutchinson Essar Ltd. (an Indian company) through several tiers of Mauritius and Indian companies.

Like India, Uganda is trying to tax the sale of a mobile phone company when the transaction took place via offshore holding companies:

Zain International BV owned Zain Africa BV, which had equity in 26 companies all registered in the Netherlands, but effectively owning the telephone operator business in as many African countries. One of them, Celtel Uganda Holding BV, owned 99.99 per cent of the Kampala-registered Celtel Uganda Ltd. On March 30, 2010 Zain International BV sold its shares in Zain Africa BV to Bharti Airtel International BV. As all three companies are registered in the Netherlands, and as the transaction was a sale of shares rather than assets, the company said it did not attract capital gains tax.

The cases are of course not identical. For one thing, Uganda is going after the firm that actually made the capital gain. But the Indian jurisprudence is being used in the Ugandan case.

Just last week, an appeal court ruled that the Uganda Revenue Authority does have the jurisdiction to assess and tax Zain on the gain. Zain will now argue that the transaction was exempt. One of its core arguments is sure to be the Netherlands-Uganda tax treaty.

In common with 86% [pdf] of tax treaties signed by developing countries since 1997, this treaty does not contain the UN model treaty provision that would have allowed Uganda to tax gains on the sale of shares in Ugandan companies made by Dutch residents. It may be that Celtel Uganda counts as a ‘property rich’ company because of all its infrastructure assets, in which case Uganda would have been able to fall back on the OECD and UN model provision permitting it to tax those…except (oops!) even that isn’t included in its treaty with the Netherlands. Yes, this treaty is worse for Uganda than the OECD model, never mind the UN.

So instead we come to Section 88(5) of Uganda’s Income Tax Act [pdf] . This is an anti-treaty shopping provision, which denies the benefits of the treaty to a company whose ‘underlying ownership’ is mostly in a third country:

Where an international agreement provides that income derived from sources in Uganda is exempt from Ugandan tax or is subject to a reduction in the rate of Ugandan tax, the benefit of that exemption or reduction is not available to any person who, for the purposes of the agreement, is a resident of the other contracting state where 50 percent or more of the underlying ownership of that person is held by an individual or individuals who are not
residents of that other Contracting State for the purposes of the agreement.

Sounds like Uganda has it in the bag, right? Unfortunately, this matter will turn on whether Uganda’s domestic law can override its treaty commitments. It is quite likely (certain, if you ask Zain’s tax adviser) that a court will decide it cannot. What everyone I have spoken with agrees on (apart, perhaps, from Zain’s tax adviser) is that it would be preferable to have some certainty about this unresolved question.

The URA has recently begun denying treaty benefits under section 88(5), and until now taxpayers have accepted its reasoning. But, speaking in genera terms at the SEATINI/ActionAid public meeting, a tax official said that the URA doesn’t know if its position will stand up to a court challenge. Tax advisers in the private sector say that, as well as the question of treaty override, the meaning of “underlying ownership” needs to be clarified. Because the Zain case has so far been fought on technicalities, “we were robbed of the opportunity to see how it [Section 88(5)] would work in practice,” one told me.

Perhaps the next stage of the Zain case will answer this question. If it does, it should give some welcome guidance to developing countries struggling with these indirect transfers. If they can’t use their domestic law to override their treaties, they will need to insert an anti-abuse clause into their treaties, strengthen their source taxing rights, or consider cancelling them.

This brings us back to BEPS, and the action on tackling treaty abuse. The OECD is proposing a limitation of benefits clause based on that used by the US, which is similar to that in Uganda’s domestic legislation, only a lot more detailed about who is ruled in and out. This would do the trick, but the challenge would be getting it into treaties that have been already signed.

To solve that, the OECD is pushing a multilateral convention to modify treaties all at once, built on a flexible level of commitment. It concedes [pdf] that the multilateral instrument “has not been identified as high priority by developing countries.” For it to work for them, I think it would need two things:

1. Genuine flexibility so that developing countries can opt into only the bits they want, such as the anti-abuse clause.

2. Willingness on the part of high-risk jurisdictions for treaty shopping (in Uganda’s case the Netherlands, Mauritius, and perhaps now the UK) to opt in to the anti-abuse clause as well.

For Uganda, it might not make sense to wait for this, since we are only talking about two or three treaties. It could ask its partners for a protocol containing a limitation of benefits clause right now. Or, of course, it protect itself and raise more revenue by strengthening all its treaties’ capital gains articles, as the UN model provides for in the first place.

*thanks to @psaintamans for the link!

WordPress can’t make its mind up if this is my 100th or my 101st post. No matter, I thought I’d mark the milestone by telling you all about who you are. So here are some of the key stats for this blog. Page views by country:

Page views by country

Page views by country

Top 5 posts by total views (or “maybe I could have stopped writing a while ago”):

  1. UN transfer pricing manual: what Brazil, India and China do differently (June 2013)
  2. The United Nations Practical Manual on Transfer Pricing: a bluffer’s guide (June 2013)
  3. What will BEPS mean for developing countries? (February 2013)
  4. ABF’s misleading statements (February 2013)
  5. Why the US and Argentina have no Tax Information Exchange Agreement (September 2013)

Words people search for to get here:

Wordle of search terms

Wordle of search terms

A few typical search terms that brought people here:

  • how taxation can help improve growth
  • base erosion and profit shifting wiki
  • do tax treaties increase gdp
  • “name-and shame campaigns”
  • tax havens for venezuelans
  • difference between un and oecd transfer pricing
  • double taxation treaties benefits to developing countries
  • what do professional advisers say on starbucks tax avoidance?
  • ngo tax studies vodafone
  • base erosion profit shifting what do you think?
  • what have uk uncut achieved?

And some less typical:

  • parental products manufacturers in india “leave a reply”
  • “margaret hodge” “politicised”
  • starbucks tax jokes
  • sol picciotto wikipedia
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  8. green-tax.co.uk
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  11. sbs.ox.ac.uk
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  13. ictd.ac
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