East African Community partner states have moved closer to implementing the Double Taxation Agreement by adopting the EAC Tax Treaty Policy and the EAC Model Tax Treaty.
The EAC Tax Policy sets out the recommended policy positions that should be pursued in tax treaties negotiated by EAC with non-EAC countries.
These policy positions reflect EAC countries’ current economic status as developing countries and net importers of capital as well as the need to protect their revenue bases without deterring foreign investment.
According to a report by the EAC Council of Ministers’ meeting held in Kampala on November 27 to December 2, the tax policy will guide the countries on how to eliminate double taxation without creating loopholes for tax evasion.
The EAC ministers during their meeting proposed that partner states should use the UN tax convention as the starting point with the aim of guiding countries in designing double taxation treaties, as well as in applying and interpreting them.
The UN model is used by countries as a basis for negotiation of the bilateral tax treaties with emphasis on investment and technology transfer, while allowing governments to retain taxing rights over the money that comes from those investments.
The EAC tax policy identifies the international tax norms that the EAC should follow with respect to scope, distributive rules, elimination of double taxation, non-discrimination, mutual agreement procedures and exchange of information.
In terms of the scope, the policy suggests that EAC treaties should only cover income taxes as none of EAC partner states imposes taxes on capital.
The policy makes specific proposals on distribution rules, including income from immovable property, business profits, international transport, dividends, interests and royalties, income from service, capital gains and directors’ fee, entertainers.
It sets out the recommendation of policy positions that should be pursued in tax treaties negotiated by EAC countries.
In Uganda, Rwanda and Burundi, non-residents are taxed at a rate of 15 per cent while in Kenya and Tanzania they are charged at a rate of 10 per cent.
In the context of taxation, the cost of capital is higher in Uganda and Burundi compared with Kenya, Tanzania and Rwanda. However, it is intended by the EAC DTA that governments and public institutions borrow within the Community at no cost.
“These policy positions reflect EAC countries’ current economic status as developing countries and net importers of foreign capital as well as the need to protect their revenue bases without deterring foreign investments,” reads the ministers’ report.
The tax treaty on the other hand seeks to eliminate double taxation among the states by imposing an obligation on the resident state to give credit for the source state tax against the resident state tax on income or exempt the income from tax.
Source: The East African