Why the East African Community needs to enact a Double Taxation Treaty

The East African Community Common Market Protocol came into force on July 1st, 2010. The main objective of the Protocol is to accelerate economic development of the East African citizenry through the elimination of barriers to regional trade, movement of people and services.

Friday, October 22, 2010

The East African Community Common Market Protocol came into force on July 1st, 2010. The main objective of the Protocol is to accelerate economic development of the East African citizenry through the elimination of barriers to regional trade, movement of people and services.

One of the key stumbling blocks to the enhancement of trade between businesses within the East African Community (EAC) member states is the problem of double taxation.

Double taxation occurs when two different countries levy a similar tax on the same taxpayer for the same transaction or income. For instance, under the current tax laws of EAC member states, a company with a branch in another country within the region is taxed twice on its annual income; it pays corporate tax both at the branch in the host country and at the parent company in the country where it is headquartered.

Based on the above illustration it is clear that double taxation is a disincentive to the free movement of capital, goods and services since it discourages companies from establishing a presence in other member states besides their own. 

However, the double taxation problem in the EAC can be addressed by enacting a Double Taxation treaty.
Double Taxation treaties are bilateral or multilateral agreements between countries that determine the amount of income tax that each country party to the treaty can apply to a taxpayer’s income. They do not cover other forms of taxation, such as Value Added Tax (VAT) and Excise Duty.

Double Taxation treaties normally stipulate that an income which has already attracted any form of taxation in a signatory country cannot be subjected to another levy by any of the other countries involved.

Alternatively, they provide for a reduced rate on certain types of income received from sources within countries bound by the treaty. 

For income derived from transactions not envisaged by the Double Taxation treaty between a source of income country and the resident’s home country, residents are required to pay it on the income in the usual way and at the same rates applicable in both the host country and the home country.

Consequently, Double Taxation treaties reduce the tax burden on tax payers involved in transactional businesses.
Therefore, with the implementation of a Double Taxation treaty within the EAC bloc, a boost in regional trade will be appreciated. This would encourage companies to expand their operations throughout the region, creating numerous jobs in the process given the significantly lower tax burden they would be subjected to.

Also, a double tax treaty will provide certainty to investors as they require that tax laws are to be applied in a non-discriminatory manner to entities being taxed.

It is interesting to note that while EAC member countries do not have tax treaties amongst themselves they have pacts with other countries outside the EAC bloc. 

Rwanda has Double Taxation treaties with South Africa and Mauritius. Uganda has tax treaties with 10 countries, Tanzania with 9 countries, Kenya with 8 countries and Burundi does not have any tax treaty.

It is high time the EAC formulated a uniform tax regime to address the issue of double taxation.

The writer is a lawyer.

kalricardo@yahoo.com