Double Taxation Treaties in Uganda: Impact and policy implications

On 18th September, SEATINI-Uganda and ActionAid Uganda launched an analysis of the double taxation treaties Uganda has signed. The analysis shows that the treaties often facilitate tax avoidance instead of protecting taxes that companies and individuals should pay in Uganda.

Multinational companies are extracting resources or selling their goods and services in Uganda and all over Africa while contributing little as taxpayers. This deprives Uganda and other African countries of money to pay for schools, hospitals and other essential services.

Countries across Africa losses $50-60 billion every year to illicit financial flows, the UN High Level Panel on Illicit Financial Flows estimates. Two-thirds of this is lost to manipulation of commercial transactions such as tax evasion and avoidance mechanisms. Multinational companies often rely on the global network of double taxation treaties or agreements to avoid or reduce their tax payments.

Double taxation or double non-taxation?

There are perfectly legitimate reasons to have such agreements: citizens and companies who earn their income in a country other than their home country should not pay tax twice. However, it is usually a bad deal for poor countries to sign treaties with rich countries or tax havens. In many cases, treaties made to prevent double taxation are now facilitating double non-taxation.

Treaty abuses and tax havens

Multinational companies often take advantage of double taxation treaties to shift profits to countries with low withholding tax rates. This strategy, known as ‘treaty shopping’ is particularly problematic when it involves secrecy jurisdictions such as Mauritius, and conduit countries like the Netherlands which companies us to direct money through to avoid taxation. ActionAid and SEATINI-Uganda analyses the treaties with Mauritius and the Netherlands as examples, and the findings expose high levels of secrecy and highlight the risk with the extensive tax treaty networks both countries have. One of the effects from the secrecy is that Mauritius with its extensive treaty network is highly exposed to illicit transfers. Ugandan money is routed to Mauritius and from there into other tax havens that have treaties with Mauritius.

Uganda taking control

Like many other developing countries, the Government of Uganda are in recent years taking bold steps towards ensuring that Uganda receives all due taxes. It has stated that it is developing a policy framework to guide treaty negotiations ahead. The analysis that SEATINI-Uganda and ActionAid has authored encourages the Government to follow suit this track and develop a policy that will ensure that Uganda maintains the taxing right to reflect what is actually produced and resourced from Uganda. One key element is that the starting point should be the UN Model Treaty that favours developing countries. So far, most treaties have been giving away taxing rights to the benefit of Western developed countries and multinational companies, using an OECD Model which disfavours developing countries.

SEATINI-Uganda and ActionAid therefore call upon the Government of Uganda to maintain their positive steps in reviewing their policy framework on double taxation treaties. They should be based on the UN Model Treaty rather than the OECD Model Treaty.