Tanzania double taxation agreements retrospect

DAR ES SALAAM: TANZANIA, strategically located in East Africa, boasts significant natural resources and a robust growth trajectory that has positioned it as a prime candidate for Foreign Direct Investments (FDIs).

With a diverse economic base spanning agriculture, mining and manufacturing, the nation seeks to leverage FDIs not only as a crucial source of capital but also as a means for technology transfer, job creation and overall economic diversification.

As FDIs becomes increasingly integral to Tanzania’s economic strategy, understanding the mechanisms that facilitate such investments is vital.

Double Taxation Agreements (DTAs) significantly enhance Tanzania’s attractiveness as an investment destination, particularly in the construction sector.

Engineer Brenda Kiwelu from the Tanzania National Roads Agency (Tanroads) in Manyara Region, highlights how DTAs mitigate the issue of double taxation, where income is taxed in multiple jurisdictions. This fiscal relief not only boosts Tanzania’s investment appeal but is especially influential in attracting foreign construction firms.

In her explanation, Eng Kiwelu said that the commitment of a leading Chinese company to construct the Mburu-Garababi Road in Manyara exemplifies the trust that international investors have in Tanzania’s tax environment, enhanced by DTAs.

These agreements streamline tax duties and are in sync with Tanzania’s wider tax reforms designed to foster a transparent, fair and efficient tax system.

This supportive tax framework is crucial for multinational construction companies undertaking capital-intensive projects, thereby positioning the country as an attractive market for significant international construction initiatives. This article takes a closer look at Tanzania’s DTAs, exploring how they support tax reforms and drive economic growth.

Daily News will uncover how these agreements align with national tax goals, attract foreign investment, and shape Tanzania’s economic future. By diving into their successes and challenges, this review offers fresh insights into the role DTAs play in transforming the nation’s financial landscape.

Tanzania’s DTAs Overview Tanzania has proactively engaged in establishing DTAs to foster foreign direct investments (FDIs) and streamline tax obligations for international investors.

These agreements play a critical role in mitigating the double taxation of income that could, otherwise, be taxed in both the country of the investor and in Tanzania. This is key to influencing investment decisions and economic relationships.

Mr Kelvin Paschal, an accountant and tax consultant based in Dar es Salaam, explained during an interview that Tanzania has signed DTAs with a range of countries, enhancing its global economic connections and providing clear taxation frameworks.

Among these countries are India, South Africa, Italy, Canada, the United Kingdom and Scandinavian nations—Sweden, Norway, Denmark and Finland.

These are just a few examples of Tanzania’s wider network of DTAs, which aim to eliminate double taxation and prevent fiscal evasion on income and capital taxes.

By doing so, they reduce tax burdens on various income streams such as business profits, dividends and royalties, making Tanzania a more attractive destination for foreign investors.

Additionally, Tanzania has regional agreements with neighbouring countries like Zambia, Kenya and Uganda, which promote economic integration and address shared investment and taxation challenges within East Africa.

While these countries represent a portion of Tanzania’s broader DTA network, they serve as key references for understanding how these agreements facilitate cross-border trade and investment. According to Mr Barita Taseni, a renowned tax expert, the benefits of DTAs are multifaceted and essential for fostering a favourable investment climate in Tanzania.

He explained that DTAs primarily work to prevent double taxation by ensuring income is taxed in only one country or at reduced rates in the source country, with tax credits available in the resident country.

“This mechanism significantly lowers potential tax liabilities for foreign investors,” Mr Taseni noted, “making Tanzania a more attractive destination for international investment.”

He further emphasised that DTAs extend beyond tax relief, contributing to broader economic cooperation by enhancing mutual economic relations between treaty countries.

“DTAs also play a vital role in improving tax compliance by facilitating better enforcement of tax laws and enabling the exchange of information between tax authorities, ensuring greater transparency and efficiency,” Mr Taseni added.

In his view, Tanzania’s expanding network of DTAs is part of a strategic effort to integrate more closely with the global economy.

Mr Taseni remarked: “By creating a tax environment that is clear, transparent, and investor-friendly, Tanzania aims to attract international investment and stimulate economic growth through fair and favourable tax regulations.”

DTA Case Study

The DTA between Tanzania and India serves as a pivotal example of how such treaties can foster economic collaboration and drive investment.

ALSO READ: Expert insights on Tanzania’s personal, business income tax systems

Originally enacted in 1979 and updated in 2013, the agreement has become a cornerstone of the economic partnership between the two nations. Insights from various experts highlight its significance, with emphasis on its practical applications and impact on the Tanzanian economy.

Mr Emmanuel Edwin, Managing Director of an engineering company and former tax consultant, elaborated on the scope and purpose of the DTA.

According to him, the agreement was designed to eliminate the risk of double taxation on income earned across borders, covering a wide range of income streams, including business profits, dividends, interest, royalties and capital gains.

“This treaty reduces the financial and administrative burdens on investors,” Mr Edwin explained, “facilitating smoother financial operations and encouraging deeper economic engagement between Tanzania and India.” I

ndia, as one of Tanzania’s major investment partners, is heavily involved in key sectors such as manufacturing, mining, and services.

Mr Edwin noted that the DTA simplifies tax obligations and provides muchneeded predictability in tax regimes, making Tanzania an attractive destination for Indian corporations.

“Before the DTA, dividends paid by Tanzanian companies to Indian shareholders could be taxed in both countries. Now, these dividends are either taxed solely in India or at reduced rates in Tanzania, with tax credits available in India for taxes paid here, effectively eliminating double taxation,” he explained.

These sentiments were echoed by tax expert Mr Taseni, who emphasised that such provisions reduce tax liabilities for foreign investors, fostering a stable and attractive investment environment.

Similarly, tax consultant Mr Paschal highlighted the broader implications of the DTA, particularly in ensuring fair treatment for foreign investors through capped tax rates on interest and royalties and the favourable treatment of capital gains, which are generally taxable only in the seller’s country of residence.

“The economic benefits of the DTA are evident in the transformative investments it has encouraged,” stated Mr Emmanuel.

He highlighted how companies like Bharti Airtel have significantly expanded their operations in Tanzania’s telecommunications sector, supported by reduced tax burdens on repatriated profits and royalties for technology use.

Similarly, institutions such as the Bank of Baroda have played a key role in supporting local projects and businesses, aided by favourable tax treatments on earnings such as interest income.

These examples underscore the positive impact of the DTA in fostering greater economic collaboration and investment. Quantitative data further underscores the DTA’s impact.

Indian investment in Tanzania has grown by an average of 20 per cent annually since the 2013 revision, contributing to a 15 per cent increase in tax revenue from Indian enterprises. Employment by Indian companies has surged by 25 per cent, creating over 15,000 jobs.

These figures, according to Mr Paschal, illustrate how DTAs can lower barriers to international business and drive economic activity. However, challenges remain.

Administrative complexities and compliance costs often hinder the full realisation of DTAs’ benefits. Additionally, disparities in economic gains between treaty partners have led to calls for renegotiation to ensure equitable outcomes.

“While DTAs have undoubtedly boosted investment, ongoing adjustments are necessary to maximise their potential,” Mr Taseni remarked.

Reflecting on these challenges, Mr Edwin concluded, “There’s still work to be done to ensure that DTAs continue to deliver mutual benefits and align with Tanzania’s evolving economic priorities.”

DTAs’ Impact on Tax Reforms

DTAs play a crucial role in Tanzania’s efforts to modernise its tax system and attract foreign investment. By preventing double taxation, they reduce the tax burden on investors, making Tanzania a more appealing destination for international businesses.

These agreements go beyond simplifying taxation; they foster trust and cooperation between nations by enabling information sharing and strengthening compliance frameworks.

Additionally, DTAs contribute to creating a predictable tax environment, which is essential for long-term investment planning and economic stability. While the advantages of DTAs are clear, their implementation presents certain challenges.

Aligning treaty obligations with Tanzania’s evolving domestic tax priorities remains a delicate task. Achieving the right balance between attracting foreign investment and safeguarding national revenue objectives requires strategic negotiation and consistent application.

Moreover, as global economic conditions shift, ensuring these agreements provide equitable benefits for all stakeholders become increasingly important.

Despite these complexities, DTAs continue to be a cornerstone of Tanzania’s strategy to integrate into the global economy and drive sustainable growth.

Post Script

This exploration highlights the significant role DTAs play in shaping Tanzania’s tax landscape and attracting foreign investments.

However, alongside their many benefits, these agreements come with challenges that need to be addressed to fully unlock their potential. In our next issue, we’ll delve deeper into the intricacies of DTAs, examining the administrative and compliance issues that can limit their effectiveness.

We’ll also discuss innovative reforms that could refine these agreements, ensuring they remain a powerful tool for Tanzania’s economic development.

Stay tuned for a deeper dive into the opportunities and obstacles in the world of DTAs!

● Join the conversation by calling 0655963224 or emailing your thoughts to kelvinmsangi@protonmail. com. Your insights are essential in building a tax system that is fair, efficient and beneficial for all Tanzanians.