The Double Taxation Avoidance Agreement of the East African Community

204 Pages·2013·4.95 MB·English

The Double Taxation
Avoidance Agreement of the
East African Community
Handbook
X
A
T
X
A
T
X
A
T
X
A
T
X
A
T
Imprint:
Published by Authors and Contributors Production
East African Community Michael Blank, Ulrich Bott, Dr. Gerhard Ege, Frankfurter Freiheit, Frankfurt am Main,
P.O. Box 1096 Katharina Gunselmann, Prof. Dr. Roland Ismer, Germany
Arusha, Tanzania Laurian Justinian, Mohamed Kilimo Mfaume,
Evariste Munyampundu, Stephen Mutsiambo
Tel: [phone] Anami Analo Printing
Fax: + 255 27 2504255 W.B. Druckerei GmbH, Hochheim am Main,
[email protected] Germany
www.eac.int Structural design, chapter illustrations,
layout & information design
© creative republic
Funded by Thomas Maxeiner Kommunikationsdesign,
International Tax Compact (ITC) Frankfurt am Main/Germany
ITC Secretariat | GIZ Bonn Tel.: [phone]
Godesberger Allee 119 [email protected]
53175 Bonn, Germany
[email protected] Photos
www.taxcompact.net © Oswald Scheibe, Katharina Gunselmann,
Hartmut Fiebig, Ursula Meissner, Cordula
Kropke
The Double Taxation Avoidance Agreement
of the East African Community
Handbook
IV
TABLE OF CONTENT
ABBrEviATiONs ................................................................................................................................ vi
FOrEwOrd ......................................................................................................................................viii
ACkNOwLEdgEmENT ........................................................................................................................ X
1. iNTrOduCTiON .....................................................................................................................1
2. dOuBLE TAXATiON CONvENTiONs – HisTOry ANd NATurE .................................................5

3. dOuBLE TAXATiON CONvENTiONs – iNTErprETATiON ........................................................17
4. THE usiNg OF dOuBLE TAXATiON CONvENTiON LiTErATurE ..............................................37

5. THE sOLviNg ANd prEsENTiNg OF CAsEs ..........................................................................43

6. EAsT AFriCAN COmmuNiTy dOuBLE TAXATiON AgrEEmENT ..............................................53
7. mETHOds OF TAX ELimiNATiON wiTHiN EAsT AFriCAN COmmuNiTy –
dOuBLE TAXATiON AgrEEmENT .........................................................................................61
V

8. prOCEdurEs wiTHiN EAsT AFriCAN COmmuNiTy –
dOuBLE TAXATiON AgrEEmENT .........................................................................................73
9. BusiNEss prOFiTs & rELATEd iNCOmE ..............................................................................81

10. dEpENdENT sErviCEs & rELATEd iNCOmE ........................................................................97
11. CApiTAL iNCOmE & rELATEd iNCOmE ................................................................................107
12 TrANsFEr priCiNg ............................................................................................................123
12.1 introduction ..................................................................................................................123
12.2 Transfer pricing methods ..............................................................................................129
12.3 Comparability Analysis .................................................................................................146
12.4 Corresponding Adjustments .........................................................................................148
13. CAsE sTudiEs .........................................................................................................................151
14. LiTErATurE ANd CONTEXT ....................................................................................................171
15. suggEsTEd sOLuTiONs TO CAsE sTudiEs .............................................................................175
VI
ABBrEviATiONs

ALP Arm´s Length Principle EOI Exchange of Information
AOA Authorized OECD Approach (see also TIEA)
Arg. Argument Etc. Et cetera
CFC Controlled Foreign FAR Function and Responsibility
Corporation/Company GAAR General Anti-Avoidance Regulation
CIV Collective Investment Vehicle GIZ Deutsche Gesellschaft für Internationale
Corp. Corporation Zusammenarbeit (GIZ) GmbH
CPM or C+ Cost Plus Method IBFD International Bureau of Fiscal
CUP Comparative Uncontrolled Price Documentation
DRC Democratic Republic of Congo i.e. In example
DSE D Ar es Salaam Stock Exchange IFA International Fiscal Association
DTA Double Tax Agreement IMF International Monetary Fund
DTC Double Tax Convention IO International Organization
EAC East African Community IT Information Technology
EAC-DTA East African Community ITA Income Tax Act of Tanzania
Double Taxation Agreement ITC International Tax Compact
e.g. Example given HQ Headquarters
MAP Mutual Agreement Procedure
VII
MC Model Convention TPG T ransfer Pricing Guidelines
MNC Multinational Corporation/Company (by the Organization for Economic
MNE Multinational Enterprise Cooperation and Development)
OECD Organization for Economic Cooperation TPSM Transactional Profit Split Method
and Development TRA Tanzania Revenue Authority
Para. Paragraph TZSH Tanzania Shillings
PE Permanent Establishment UK United Kingdom
POEM Place of Effective Management UN United Nations
R&D Research and Development US United States
RPM Resale Price Method VCLT Vienna Convention
SG&A Selling, General and on the Law of Treaties
Administrative Expenses Vs. Versus
Shs. Shillings WDPM Working Draft Practical Manual (on
Subpara. Subparagraph transfer pricing by the United Nations)
TIEA Tax Information Exchange Agreement WHT Withholding Tax
TIN Taxpayers Identification Number
TNMM Transactional Net Margin Method
TP Transfer Pricing
VIII
FOrEwOrd
by Amb. Dr. Richard Sezibera, Secretary General EAC
Double taxation is the levying of tax by two or more The EAC Double Taxation Agreement (EAC­DTA) was
jurisdictions on the same declared income, and as such signed by all Partner States on 30 November 2011.
it creates a considerable hindrance to business trans- It is based on similar agreements developed by the
actions that go across borders. The East African Commu­ Organisation for Economic Cooperation and Develop­
nity (EAC) is committed to creating a level playing field ment (OECD) and the United Nations. It provides a
for trade across its Partner States. This includes the tax- well-balanced and reliable structure for the fair, just
ation of trade and economic exchange according to and predictable taxation of all cross-border income
international standards and best international practice. and activities and can be used as a guideline when
negotiating double tax avoidance treaties with other
Bearing in mind the need for fiscal certainty among countries outside the EAC.
potential investors and the disastrous impact of double
taxation on the developing vibrant business commu- The challenge that lies ahead involves the uniform
nity in East Africa, the EAC Partner States have signed application and interpretation of the DTA in all
an agreement on double taxation avoidance, the Agree­ EAC Partner States. To ensure the uniform interpreta-
ment between the Governments of the Republic of Kenya, tion and implementation of the DTA in the EAC
Uganda, Burundi, Rwanda and the United Republic of region, the EAC Secretariat (supported by German
Tanzania for the Avoidance of Double Taxation and the government cooperation through GIZ) has developed
Prevention of Fiscal Evasion with respect to Taxes on Income. a training handbook on double taxation avoidance.
IX
The handbook is aimed at officials working in revenue I hope this handbook will be a useful tool and guide-
authorities and ministries of finance. It is intended to line and that it will help the tax authorities to apply
help them interpret the EAC-DTA in their day-to-day and implement the DTA in a uniform manner as well
work. It is also meant to serve as a learning/teaching as contributing to the fight against tax evasion for the
tool for national and regional tax training institutes benefit of all East Africans.
alongside existing guidelines and commentaries.
The DTA handbook is based on training materials and
regional case studies that were used to conduct several
training courses on the DTA across the EAC Partner
States. Case studies and sample solutions from the East
African context make up the core of the handbook. It
also deals with approaches to solutions, the presentation Ambassador Dr Richard Sezibera
of cases and the appropriate use of specialist literature. Secretary General EAC
The handbook also includes chapters on the methodol-
ogy of literature and data gathering from various sources
and on techniques for dealing with case studies.
X
ACkNOwLEdgEmENT

German Development Cooperation (GIZ) has supported This handbook could not have been published with-
the tax harmonisation process within the East African out the substantial funding and support provided by
Community since 2008. We therefore wish to express the International Tax Compact. Ulrich Bott, Dr. Ger-
our deepest gratitude to GIZ for its ongoing com- hard Ege, Michael Blank, Prof. Dr. Roland Ismer,
mitment to the harmonisation of tax systems and the Katharina Gunselmann and Evariste Munyam-
fight against tax evasion in the region. Furthermore, pundu deserve mention for proposing and initiating
the invaluable technical and financial assistance pro- the training programme in close partnership and
vided by the Federal Republic of Germany through cooperation with the EAC. The result of all their
GIZ’s programme Support for the EAC Integration endeavours is a targeted and practical handbook for
Process has been tremendously beneficial. future trainees and others with an interest in the
issue of tax harmonisation. In conclusion, we wish to
The International Tax Compact (ITC) aims to pro- express our deepest hopes that this handbook will
mote tax systems that enable partner countries to be further enhance our common goal of achieving tax
more effective in the fight against tax evasion and harmonisation within the EAC; that it will promote
inappropriate taxation practices. It is not possible to understanding and discussion in a spirit of mutual
improve the mobilisation of domestic resources with- respect; and that it will facilitate future negotiations
out first addressing cross-border tax issues and clearly and the vital task of strengthening and fostering
defining the rights and duties of each jurisdiction. regional tax bases within the EAC.