Many countries have developed competitive investment incentive packages in order to attract both local and foreign capital. With the increasing liberalization of international trade and investment policies and cooperation among nations, the income arising from international transactions is likely to suffer international double taxation. It is therefore necessary to formulate appropriate taxation and physical policies that will minimize the undesirable effects of international double taxation of income. By concluding as many international double taxation relief agreement as possible with the major trading partner nations it is possible to grant tax relief and allow cooperation in training and tax administration to promote the free flow of capital, technology and skilled technical personnel.
International Double Taxation of income
International double taxation of income generally refers to the imposition of income tax or comparable profits tax on the same income in two or more different tax jurisdictions for an identical or same period or year of income in respect of the same person or his agent. On the other hand domestic double taxation concerns double taxation within the same taxing jurisdiction or country. Therefore, double taxation is the situation where the same income is taxed twice or more. This can happen either because income earned in a foreign country may be subject to tax both home and foreign governments, or income might be subject to two taxes, for example where income paid out as dividends is subject to both corporation tax and personal income tax.
International and domestic double taxation relief
The tax credit given to a taxpayer who suffered a double taxation is termed a double taxation relief. Thus, international double taxation needs cooperation among nations concerned in granting the relief while the relief mechanism in the case of income doubly taxed within the same country in respect of the same person and period is administratively easier.
Relief is important in order to promote the flow of trade, investment and encourage capital formation. However, the domestic relief does not require any international formal treaty or convention. The country itself can rectify the situation by passing the appropriate legislation without involving a third party country.
Domestic tax relief can also be granted in the form of personal allowances or relief such as certain portions of chargeable income being tax-free or direct reduction of part of total tax liability as computed on the basis of full total income chargeable to tax respectively. Tax relief can be granted even in situations where no double taxation takes place. Both individuals and no-individuals can claim international double taxation relief. But personal relief can only be claimed and granted to individuals and not to non-individuals.
In this unit, any reference to double taxation refers to international double taxation of income only.
Rules of derivation of income and the circumstances under which international double taxation will arise
Income partly earned in Tanzania and partly outside
The main cause of international double taxation of the same income is the overlapping tax jurisdictions due to conflicting source rules among different nations. The right of any country to tax her own nationals in whatever manner she wishes cannot be questioned. Nor can the taxation of non-residents who may derive income from another country in which they are not citizens be questioned. Double taxation will arise from the operation of section 6 of the Income tax Act 2004. Both individuals and non-individuals may have significant dealings with other countries. Under section 6 all resident persons in Tanzania are chargeable in respect of their income accruing in or derived world wide. Foreign income arising from outside the United Republic is chargeable to tax to Tanzanian income taxation even if not remitted to Tanzania. The rules of derivation of income and its liability to income tax in Tanzania are almost the same as in many other countries such as United States, Canada, India, and Britain etc.
Non-Residents with Tanzanian income
All income, which arises in Tanzania, is taxable whether or not it accrues to resident or non-resident persons. Income specified under section 6 is to be charged depending on whether or not the recipient is resident. Under section 6 where a non-resident person is liable to Tanzanian tax and is also liable to comparable foreign tax in his country of residence on the same income double taxation relief claim is likely to be made.
The significance of international cooperation and relief from double taxation
Due to high rates of tax which exist generally in most countries, double taxation gives raise to the following (effects of double taxation):
- Financial hardship on the side of the taxpayer; and
- Harmful effects on the exchange of goods and services as well as the movement of capital, technology and skilled personnel.
- Tax avoidance and evasion
The purpose of concluding International double taxation conventions/agreement is to relieve or eliminate altogether double taxation. The greater the volume of international trade, level of education and professional activity among countries the more double taxation and evasion is likely to exist and therefore the need to relieve or to prevent it in order to minimize any adverse effects on the flow of trade, capital and technology. The preferential taxation rules contained in the treaties are particularly designed to encourage international trade and investment on a selective basis. Whether or not this is achieved practically, this is a different question open to debate.
Double taxation relief Agreement and International Cooperation
While the problem of international double taxation and evasion could be ignored at the risk of considerable financial hardship and adverse economic implication it can be relieved either unilaterally or bilaterally. Whatever the type of relief the main burden of granting relief on doubly taxed income falls on the country in which the claimant is resident for income tax purposes.
The methods of double taxation relief are discussed bellow:
- Unilateral relief
Some countries are willing to grant double taxation relief on a unilateral basis i.e. without regard to whether the other taxing country is prepared to do the so in similar circumstances. The relief is given by the country in which the claimant is resident and may or may not wholly relieve the foreign tax. The granting of unilateral relief is often a “last resort” or desperation measures where two countries are not able to enter into the more desirable bi-lateral agreement usually for political or other reasons.
However, countries may enter into bi-lateral agreement where a particular type of income has been excluded from the agreement and the source country and the country in which the taxpayer is resident each insisting on taxing the whole of the income fully. In this case the country of residence will often grant a unilateral relief. Section 67 of the Act allows the granting of unilateral relief. Unilateral action is not desirable. It is regarded as disfavour because it is likely to interfere with foreign tax jurisdiction and national sovereignty. It may also be very expensive and yet the most ineffective option.
- Bi-lateral and Mutual Agreement Relief
In view of the above factors, mutual international cooperation between different taxing jurisdictions is a superior alternative and is much more frequently resorted to than unilateral relief or enforcement and much less ignoring the problem or informal contacts through hardship. Multinational agreement s are less frequent and rare probably because they are not easy to negotiate and run smoothly. Cooperation based on personal friendship among officers of two different tax jurisdictions without formal agreement is not reliable There is no guarantee that any information requested by either country will always be provided.
Some of the countries with which Tanzania has entered into Double taxation agreements are Zambia, Sweden, India, Canada, etc.
Consideration for granting International Double taxation relief
Relief from international double taxation relief is not granted in each and every case where double taxation occurs. The following are the main factors, which the commissioner will insist on their fulfillment before the claim can be granted:
- The importance of concluding International Double Taxation Relief Agreements before relief is granted
In almost all cases international double taxation relief cannot be granted in the absence of any formal double taxation convention because Tanzania has no legislation authorizing the granting of unilateral relief. However, section 67 allows relief even where there is no formal double taxation relief agreement.
- Double taxation of the same income
In the event that foreign income is subjected to income tax or any tax of similar nature in Tanzania and in another foreign country relief will be granted to the taxpayer usually in only one of the countries. However, the definition of income and its computation may not be the same in the two countries. Consequently either country may not recognize the credit. This and any other related difficulties should be referred to the competent authorities as specified in the relevant convention if any for arbitration.
- Foreign income to constitute part of the total income of the resident Person
Under section 6 the total income of a resident taxpayer includes foreign income if any. Where the whole of the total income is earned within a single tax jurisdiction international double taxation will not arise. International double taxation is likely to arise where the taxpayer has some trade and business interests, property or investments in another foreign country that give rise to the foreign income. The foreign income need not be remitted to Tanzania although there may be some countries that do insist on remission of income requirement before liability to tax can arise.
- Actual payment of income or comparable tax
The claimant should prove to the satisfaction of the commissioner that he has actually paid or is due to pay income tax or comparable tax on the same income which was accrued in or derived from another foreign country in each of the two or more tax jurisdictions. Some kind of evidence e.g. receipt is necessary otherwise relief may not be granted.
- The tax must be paid in respect of the same year of income or period
It is important to ensure that the tax is not only payable on the same income, but it is equally necessary to determine whether it is in fact paid or payable in respect of such income in the same year of income or period in which the claim is relates.
- The tax on foreign income must be income tax or other comparable tax
Tax on income may not be universally called income tax. It may assume different names in different countries such as (excess) profits tax. Whatever the nomenclature the tax for credit relief is one on income only. Capital gain tax, wealth tax or inheritance tax etc. would not qualify for relief because they are not comparable to income tax. The tax base is quite different from income consequently some double taxation conventions may sometimes specify the various types of taxes due for claim of relief
- Only resident persons can claim the relief
Any taxpayer that claims international double taxation relief must be resident of the United Republic chargeable to tax under the Act in the relevant year of income before the relief can be granted. Non-resident persons are not entitled to the relief and exempt persons are unlikely to claim and secure relief either.