Is renegotiating double tax agreements the new normal?
Economy, Opinion

Zambia has over the years invested greatly in foreign direct investment (“FDI”). Outside its other advantages, a key attraction of FDI is the favorable tax implications it affords. However, one downside to this is the element of double taxation. Double taxation entails the levying of taxes on the same income or capital of the same taxpayer in the same period. Generally, the division is between economic double taxation (same income taxed twice, e.g. profits then dividends) and juridical double taxation (same income taxed in two different countries). Double taxation occurs when a taxpayer pays tax on the same corporate income earned from economic activity twice, in different countries; once to the tax authorities of the foreign country which is host to the economic activity, and once to the tax authorities of the entity’s country of domicile.

This undeniably hampers the flow of investment as investors may be averse to being taxed twice. Hence, in a bid to avoid double taxation, most countries enter into double taxation agreements which are agreements between two or more countries to divide up taxing rights on cross-border income. Zambia has entered into a number of such agreements, for instance the Double Taxation Agreement with Mauritius (the “Agreement”), The Agreement deals with income from a number of sources such as business income, dividends, interests and royalties. However, the import of this Agreement has been that Zambia has not been retaining taxing rights on tax dividends, interests and royalties arising in Zambia and payable to residents in Mauritius.

Abigail Chimuka

At a meeting of June 22, 2020, the Zambian Cabinet approved the termination of this Agreement. The Government of Zambia announced that it has plans to initiate negotiations of a new agreement which will introduce shared taxing rights and anti-abuse clauses. The nature of these shared taxing rights is yet to be disclosed. Similarly, specific mechanisms to address anti-abuse have not been disclosed.

Gilbert Chama

In terms of international agreements, Zambia is a dualist state, which entails that international agreements and treaties must undergo a ratification process set out under sections 3,4 and 5 of the Ratification of International Agreements Act, No. 34 of 2016 (the “Ratification Act”). The Ratification Act also addresses the process for termination of international agreements. In relation to the Agreement, which was domesticated pursuant to statutory instrument number 105 of 2011, the Income Tax Act also sets out the process for revoking a statutory instrument issued under the Income Tax Act. Further, Articles 28 of the Agreement sets out a termination procedure and the effective date of termination.

 

The decision by the Government of Zambia raises issues of fairness with respect to taxation, appropriate termination procedure, rights of a sovereign, accrued rights of clients (if any) and uncertainty with respect to clients whose structural set up is anchored on Mauritius being a favourable tax jurisdiction and those utilizing other jurisdictions-could they be next?

Matters of FDI and related taxation agreements are of paramount importance to the Zambian economy. The implications of such decisions are particularly felt by our esteemed clients and parties who utilize favourable tax destinations. The team at Abigail & Chama Advocates are committed to sharing relevant updates on matters to do with FDI, taxation and certainty of the legal system. We will be following developments related to this decision and plan to keep you updated.

 

Should you have any questions relating to the information in this alert or any other foreign direct investment issues, please do not hesitate to contact Gilbert Chama or Abigail Chimuka.

Disclaimer: The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter.

 

 

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