Why Rules of Origin (RoO) should not be used exclusively to pursue trade policy objectives

This article shades light on a major instrument in international trade and customs management, which has been used by states to achieve multiple trade objectives. The concept of RoO has become controversial in the current interconnected global trading system where the point of production and sale across have become quite seamless and yet international trading rules requires that the definite origin of goods are identified for preferential treatment, statistical and tax purposes. The article argues that despite the implicit functions they play RoO should never be used a tool for negative trade pursuit rather a conduit for trade facilitation. The paper defines rules of origin and trade policy, outlining the objectives of trade policy, explaining the linkages between the two and discusses other instruments which can be used to achieve trade policy objectives

By Moses Kulaba; Governance and Economic Policy Analysis Center

Rules of origin (RoO) are common defined as laws, regulations and administrative criteria applied by a country to determine the country of origin of goods, for tariff preference purposes, subject to specific conditions as defined in WTO agreements and Regional Trade Agreements (RTAs)[i].  The East African Customs Union has summarized the rules of origin as ‘the vital link between the goods and country where they are produced’[1][ii] RoO are categorized as Preferential and non preferential depending on their characteristics and objectives.

Preferential RoO aim at determining whether goods qualify for preferential treatment and while Non Preferential RoO used to determine goods for trade statistical purposes. Rules of origin have significant relation and influence on a country’s trade policy or member countries which are contractually related or mutually obliged under a given contractual or non contractual trade arrangement. Rules of origin also may determine or assist the countries in understanding their comparative and competitive advantage. They are commonly used as a trade policy tool to protect local markets, give preferential treatment and a measure against unfair trade.

Trade policy can be defined as a collection or law, rules and practices aimed at achieving a country’s trade objectives. Tanzania’s trade policy aims to contribute to raising per capital income to levels targeted in National Development Vision 2025, trade development measures to stimulate and expand domestic demand through product and market diversification and limited interim safe guard of domestic economic activity threatened by liberalization, while building economic competitiveness[iii] It seek to achieved sustainable growth rate in trae of not less than 14% and long-term share of exports to GDP  of about 25%, double fold increase in manufacturing and raised value of merchandise export earnings in absolute terms to USD1,700 in the next five years[iv]

The Tanzania government recognizes the importance or Rules of origin as a tool for implementing trade policy objectives and has committed towards using the RoO in a manner that can strengthen the country’s industrial and trade potential. The Tanzanian clearly articulates this position in its trade policy where it states:

The Government of Tanzania will undertake measures to observe RoO preferences requirements prevailing in the different trading arrangements with a view to maximizing benefits accruing in the cause of implementation…with priority focus on building national capacity for effective utilization of this instruments[v]”

While RoO are a common factor in Trade policy, because of the challenges that RoO have in relation to international trade, they are considered as not the tools of most preference in achieving trade policy objectives. Indeed, increasingly governments are being advised that RoO should not be used to achieve trade policy objectives for the following reasons.

Firstly, they can be distortionary and work contrary to trade policy objectives especially where there is no harmonization of trade policy objectives. “If Clear, predictable, transparent and fair, rules of origin and their application facilitate the flow of international trade. Nevertheless, RoO can create unnecessary obstacles to trade and nullify or impair the rights of members in regional and multilateral trading arrangements including the EAC, SADC and WTO. Consequently, RoO have to be applied in a transparent, predictable, consistent and neutral manner so as to avoid their negative effects[vi].

Secondly, rules of origin is also important in facilitating international trade where the objective is free flow of goods, irrespective of trade policies or various countries

It can be sometimes difficult for countries to achieve trade targets in situations where it is a member to multiple contractual obligations which may conflict with its own national trade objectives. This is a common challenge for countries like Tanzania which belongs both to the EAC and SADC and has therefore a challenge in determining or applying RoO for goods originating from both economic blockings

Implementation of rules of origin is sometimes cumbersome and sometimes can be distortionary especially where there is need to determine various technical dimensions to the items for preferential purposes.

Rules of Origin are also not the only instruments for achieving trade policy objectives. They are just one instrument and other instruments could be effectives. These instruments include a combination of other trade policies, which can be elaborated as below:

Trade policy instruments are described as measures taken by governments to influence the direction and pattern of trade development. The application of these instruments in Tanzania is guided by the need to stimulate domestic production, promotion of exports, safeguard domestic industry against dumping practices and protection of consumers. Tanzania exercises these trade policy options in line with its international obligations. These instruments include: Tariff Based (Advalorem) Instruments, NTBs: Trade defense mechanisms; trade development instruments; and international trade policy instruments.

Tariff based instruments, include;

Tariffs, which are major trade instruments for trade policy implementation which are used to achieve duo objectives of revenue generation and protection of domestic industry. Heavy import substitution protection regimes can harm unprotected industry and ultimately reduce consumer welfare. It is for this purpose that Tanzania has been reforming its tariff band structure to a current four band structure (0,10,15 and 25)

Duty Draw Back Schemes (DDB) which are tools for export promotion through refund of import taxes on imported inputs that go towards production for exports. Tanzania has implemented a DDB scheme, although the scheme faces multiple challenges, including difficulties in technical verification. This also includes the mechanisms for VAT refund

Taxation, which comprises of   tax regime characterized by different taxes and levies imposed by the central and local government to achieve a duo purpose of revenue collection and protection used for administration of quota restrictions

Export Taxes which are levied as instruments to discourage export of raw materials in favour of value added products. In Tanzania the use of export taxes has been gradually reduced, with restrictions currently imposed on export of geological or mining products and raw hides and skins.

Non Tarrif Barriers/Measures these are measures aimed the protection of industry that work on the basis of restriction of imports. These instruments include;

Import licenses which is aimed at both controlling and regulation of the volume of imports and also taking track of importers, automatic licences issued automatically without discretionary powers and non-automatic licenses

Reshipment Inspection requirements (PSI) which are sets of activities aimed at the verification of quality, quantity, price, exchange rates, financial terms and customs classification of goods undertaken in the exporting countries

Trade Related Investments Measures (TRIMS)-Local Content Requirements, falling within the WTO TRIMS agreements, which cover a number of restrictive issues on foreign investments in view of their restricting impact. These include conditionalities on local content, local equity, foreign exchange balancing, import obligations and others that are specifically prohibited. This is aimed at enabling local industry to gain the necessary capacity and competence in developing its competitiveness.

Customs Valuation; which involves determination and ascription of value to items based on WTO customs compatible valuation procedures, guided with principles of fairness, uniformity and certainty

Standards-Technical Barriers to trade (TBTs) such as sanitary and phytosanitary (SPS) measures and other standards, used as instruments of trade policy to authenticate the quality and specification of imports and exports in conformity with the international safety requirements and regulations aimed at consumer protection.

State Trading Operations which are undertaken by both Government and Non Government enterprises, including marketing boards, which are granted exclusive special rights or privileges including statutory or constitutional powers in the exercise of which they influence through their purchases or sale the level or direction of imports or exports.  State Trading is clearly different from government procurement.

Government Procurement: This refers to a system which governs or regulates government procurement, requiring it to procure goods and services through a centralized international and national procurements process. It requires this process to be fair, transparent and allow competitiveness amongst suppliers and thus lowering costs. In pursuing trade objectives, the policy of transparence and open competitiveness has to be balanced with considerations for protection or stimulation of local industry.

Administrative procedures. These are other instruments that can be used to achieve trade policy objectives. Administrative procedures prevail in developing economies as a response to difficult situations at times of natural disasters such as the need to ensure food security when grain shortages are envisaged due to shortfalls in production yields. These may applied from one region to another as a way of balancing out the shortages. In Tanzania, this instrument has been used from time to time, especially in the control and regulation of export of maize and coffee to neighboring countries.

Trade Instruments

Trade policy objectives are also achieved through other trade defence instruments which are allowed by the WTO for safeguarding specific economic activities within a limited time-frame through application of  a set of instruments. These include:

Safeguard Measures aimed at protecting a sector or subsector of the economy or domestic industry from suffering from certain consequences. These normally take the form of raised tariffs and temporary relief measures

Antidumping aimed at protecting a country’s economy or industry from being flooded by cheap goods, which have no significant economic value. The WTO prescribes action against dumping

Subsidies and Countervailing duties: These include measures that confer benefits to producers and exporters and exist where a public body or government provides financial contribution to producers in the form of grants, soft loans or equity etc. These subsidies can be categorized into permissible and non specific subsidies that are non-actionable, permissible but actionable subsidies and prohibited subsidies. Currently Tanzania has not developed an export subsidy regime although it is permissible under the WTO arrangement.

Rules of origin are a combination of laws, regulations and administrative criteria used by a country to determine the origin of goods and determines how specific goods should be treated for tax purposes.

Trade Development instruments include:

Export Process Zones–This refers to trade development instruments used to stimulate export oriented economic activities through inculcation of a value addition and import culture, acquisition of appropriate technology

Investment Codes and rules which work through compensation for distortions which impede the flow of foreign investments largely due to market imperfections

Export promotion and market linkages which entails provision of support services to exporters with the objective of expanding trade for existing product lines

Export Facilitation which is pursued through the simplification of trade procedures and reduction of high costs involved through measures such as provision of export credit

International Policy Instruments can also be achieved to achieve trade policy objectives and these include

  • Bilateral Cooperation initiatives amongst willing countries depending on the variant agreements between contracting partner’s states
  • Regional Trade Agreements (RTAs) which have evolved through the growth and expansion of Economic Integration arrangements like the EAC
  • WTO agreements and Multilateral trading system which aims at stimulation of sustainable economic growth through trade expansion, encouraging specialization and opening up of national economies through elimination and reduction of Non Tarrif Barriers (NTBs)

Conclusively, despite the limitations, rules of origin still play an important role in driving trade policy objectives. However, for them to be effective, they need to be applied in a transparent, fair and predictable manner to avoid causing distortionary effects to international trade.

[i] URT: National Trade Policy for a Competitive economy and export led growth, Ministry of Industries and Trade, February, 2003

[ii] East African Community Customs Union Rules of Origin, September 2005

[iii] ibid

[iv] ibid

[v] ibid

[vi] ibid

A British tax haven, Jersey Island, is returning a Nigerian dictator’s $270 million to his country

As  Africans celebrate the Africa  Anti-Corruption day on 12th July 2019,  the good news for Nigeria in a longtime is that a famous British Overseas territory , Jersey Island, known for its secrecy jurisdiction, as a tax haven,  has announced to return billions of dollars stashed in its offshore banks by late Nigerian Leader, Sani Abacha as reported by Article below by Max de Haldevang, of Quartz online newsletter.

By Max de Haldevang, June 25, 2019

A trio of secretive British tax havens beloved of kleptocrats and money-launderers are facing unprecedented pressure to open their books.

Two influential backbench MPs, Labour’s Margaret Hodge and the Conservatives’ Andrew Mitchell, have been pushing an amendment that would force Jersey, Guernsey, and the Isle of Man to publish a public register revealing who actually owns the roughly 80,000 companies registered on them.

Anti-corruption activists allege that the three jurisdictions dotted around Britain’s coastline, known as the Crown Dependencies, are hotbeds for financial crime and tax evasion. They point to the family of Azerbaijan’s dictator Ilham Aliyev allegedly owning a $25 million house through an Isle of Man shell company, and the notorious wife of a jailed Azeri state banker holding a $28 million golf course through a Guernsey firm.

Last month, after a five-year court saga Jersey announced it was putting $268 million, which had been stashed in a Deutsche Bank account on the island by former Nigerian military dictator Sani Abacha, into an asset recovery fund that will eventually return the cash to Nigeria. The island’s solicitor general said the move showed “Jersey’s determination to deal with international financial crime more generally.”

The announcement was one of several actions taken by various actors seemingly in response to international scrutiny over the Crown Dependencies and other tax havens. The Abacha case dates back to US enforcement efforts under the Obama administration, but the Crown Dependencies only need look at Britain’s Caribbean tax havens—known as the Overseas Territories—to understand the threat posed by Hodge and Mitchell. Last year, the two former government ministers pushed through an amendment forcing the territories, which include the British Virgin Islands and Cayman Islands, to set up a public register by 2020.

Last week (June 19), all three Crown Dependencies promised of their own accord to set up corporate ownership registries. While transparency advocates say the islands aren’t moving as fast or comprehensively as they should, the move in itself is a win for Hodge and Mitchell. “This is [the Crown Dependencies] acting before Margaret Hodge attempted to do anything before Parliament,” says Ben Cowdock, a senior research officer at anti-corruption NGO Transparency International UK. “Rather than face some constant battle with the UK Parliament, they’ve decided to go of their own accord with this announcement.”

Banks have also stepped up their monitoring of accounts in the Crown Dependencies and other European tax havens. At the end of 2018, Lloyds Bank shuttered 8,000 accounts in Jersey, after their owners spent three years ignoring the bank’s questions about their identity, the Financial Times reported in June (paywall). HSBC, Barclays, and Royal Bank of Scotland have also tightened their questioning of customers on the island, according to the FT. Deutsche, which banked Abacha’s money, has warned (paywall) 1,000 of its customers that they may also lose their accounts.

 

How will the South African 2019 Proposed Financing Provisioning Regulations affect mining companies? *

As East African Countries grapple on how best to manage environmental payments for compensation and rehabilitation of decommissioned mining sites, the new legal regime in South Africa could be a development to watch as it provides some drastic measures that have sent shockwaves with in the mining fraternity as reported by Ensight Africa, Online tax bulletin.

By Edwin Berman, Ntsiki Adonis-Kgame and Zinzi Lawrence, Ensight Africa Online Tax Newsletter

In May 2019, the South African Proposed Regulations Pertaining to the Financial Provision for the Rehabilitation and Remediation of Environmental Damage caused by Reconnaissance, Prospecting, Exploration, Mining or Production Operations, 2019 (the “2019 Regulations”) were released for public comment. The 2019 Regulations are informed by industry consultation; however, they still fail to address some of the serious concerns raised by the mining industry and introduce new onerous provisions.

The first attempt at regulating financial provision for costs associated with the remediation and rehabilitation of impacts to the environment associated with mining activities, was through the Financial Provisioning Regulations, 2015 (the “2015 Regulations”). Following an outcry from the mining industry, the 2015 Regulations were amended on 26 October 2016. Since then, two iterations of the financial provision regulations (2017 and 2019) which sought to repeal the 2015 Regulations, have been published.

Some of the effects of the 2019 Regulations on mining companies are the following:

Applicants and holders

Applicants and holders of reconnaissance permits will be required to provide financial provision for rehabilitation. By definition, reconnaissance permits, as contemplated in the Mineral and Petroleum Resources Development Act, 2002, involve non-invasive work and therefore do not lead to environmental harm. Accordingly, there is no basis for requiring holders of reconnaissance permits to make financial provision.

Double provisioning

Regulation 7(3) provides that “funds set aside for financial provision must remain in place until a closure certificate is issued, unless a withdrawal as contemplated in regulation 11 is allowed”. Regulation 11 outlines the procedure for holders to follow when seeking to withdraw financial provision, and provides that the Minister of Minerals and Energy (“Minister”) must approve withdrawals with the concurrence of the Ministers of Human Settlements, Water and Sanitation and of Finance. The withdrawal of financial provision can only occur after the stringent requirements stipulated in regulation 11 are met and are only allowed for decommissioning and final closure and not for ongoing or concurrent rehabilitation.

Since the financial provision is not accessible to the holder for use during the life of the right, the holder has to effectively make double provision (the first being financial provision and the second being actual expenditure incurred for rehabilitation). The implications of regulation 7(3), read with regulation 11, is that there will be a rise in the cost of mining.

Auditing and specialist reviews

Regulation 12(2) prescribes that the determination, review and assessment of financial provision must be undertaken by a specialist. Regulation 13(1)(a) requires that the assessment undertaken by a specialist must be audited by an independent auditor, included in an environmental audit report and must be submitted for approval to the minister. This however places an extraordinarily administrative and cost burden on the industry, more so on junior mining companies.

Value-added tax

Another onerous provision introduced in the 2019 Regulations is the inclusion of value-added tax (“VAT”) in the financial provision calculation. Expanding money for rehabilitation is not a vatable supply as contemplated in the VAT Act, 1991. Inevitably, this will result in a further increased cost of mining in addition to the issues of duplicate funding/double provisioning and the burden of auditing discussed above.

Date of compliance

Holders of prospecting rights and mining rights or permits, who applied for the right or permit prior to 20 November 2015, will be required to comply with the new regulations no later than three months following the first financial year end of the holder post 19 February 2020. Given that the due date for submission of comments to the 2019 Regulations was 1 July 2019, the 2019 Regulations are most likely to be finalised later this year, giving holders insufficient time to comply with the 2019 Regulations. Current financial provision quantum calculations for holders would need to be revised in accordance with the new methodology and this would require existing holders to fund the increased financial provision. Practically, most mining companies will encounter difficulties with complying within the contemplated compliance date.

Penalties and offences

The 2019 Regulations have increased the number of offences tha are punishable, by a penalty of up to ZARR10-million, or up to 10 years imprisonment, or both a fine and imprisonment. The offences include inter alia, the failure to provide funds for annual rehabilitation from the operational budget and set aside funds for financial provision; the failure to provide funds using one of the agreed vehicles and failure to make reviews and decisions accessible to the public.

*This article first appeared in ENSAfrica ENsight Africa online tax bulletin

Basic understanding of Tax justice and illicit financial flows in extractive sector

Basic understanding of Tax justice and illicit financial flows in extractive sector

By Moses Kulaba, Governance and economic analysis centre, Dar es Salaam-Tanzania

The call for tax justice has in recent years gained credence as alarming evidence now shows that while ordinary tax payers are sinking under the burden of taxation on the other hand,  multibillion profiteering corporate and well connected individuals use both illegal (illicit) and deemed appropriate means to dodge taxes and shift their profits and financial proceeds   outside the country and the African continent to other destinations and largely low tax jurisdictions. The amounts moved out of less developed countries and the African continent is estimated in billions of United States dollars. The extractive sector is evidently of one of the major conduits of this illicit game of sorts and hence the focus on illicit financial flows as a subject in the extractive sector makes sense.

This policy brief highlights the basic concepts and practice of this increasing murky subject and the relevancy of   talking about tax justice and tax dogging in the Extractive Sector with various stakeholders such as professionals and students in higher institutions of learning. Students in higher institutions are a critical nexus in defining the current and future landscape of fiscal policy, taxation, tax justice and curbing illicit capital flight from Tanzania and the African continent as a whole. They are;

  • Citizens and have a right to know the intricacies of taxation, dodging tax and development
  • Scholars and Researchers
  • Future politicians and leaders
  • Future policy and decision Makers
  • Future Government Negotiators
  • Future Corporate professional and executives
  • Future Civil Society Activists, Community and Development workers

In simple terms, the future lies in the present!

Taxation and tax justice

A tax is a compulsory imposition of the state on its citizens. The tenor of Tax Justice is that everyone should pay a fair amount of tax so that the government can be able to finance or provide social, public and development needs for its citizens.

Taxation and a strong tax system may contribute to improved governance through 3 maximum channels. Taxation establishes a fiscal social contract between citizens and the taxing state. Tax payers have a legitimate cause to expect something in return for paying taxes and are more likely to hold their governments to account. Governments have a stronger incentive to promote economic growth when they are dependent on taxes.

The major concern from a tax justice point of view is that in recent times, it is evident that those who are able and should pay more are paying less or none while poor and less privileged carry a big burden through payment of various direct and indirect taxes like VAT which are regressive and unfair in nature

In this case, the concern is that available data shows that Corporate persons in the extractive and telecommunications sector dodge paying taxes by enjoying generous tax exemptions and by engaging in tax planning , tax avoidance, outright tax evasion and moving their proceeds out of the country or African continent where its generated to low or zero tax jurisdictions through illicit or deemed legal means.

These illegal movement of tax proceed and capital from one jurisdiction to another is what has been described as Illicit Financial Flight (IFF). According to reports, IFFs typically originates from three sources: Commercial tax evasion (trade mis-invoicing and abusive transfer pricing); criminal activities (including drug trade, human trafficking, and illegal arms dealing, smuggling of contraband; bribery and theft by corrupt government officials.

According to experts (Ndikumana, Boyce and Ndiaye 2015), Africa’s high level of poverty has been aggravated by the high level of capital flight. As a consequence of IFFs, tax revenue collection is low, social delivery has remained poor and development agenda are stagnating in most poor countries where it occurs

Tanzania’s Tax Collections and tax gap 2016/17

According to Tanzania’s Revenue Authority (TRA)

  • Tax Collection of 12.6% of GDP (Tsh15.1Trillion) was envisaged in 2016/17
  • However, proportion of GDP collected has not increased
  • Tanzania’s tax revenues are also low compared to international standards
  • Tax to GDP ratio is 11.9% below the EAC standards which is at 13.1% to 14.7%
  • The current tax to GDP ratio of 12% is far below the targeted mark of 20% by
  • PAYE  and VAT as largest contributors

Illicit capital flight or Illicit Financial Flows (IFF)

Illicit or illegal Capital flight is the transfer of assets abroad in order to reduce loss of principal, loss of return, or loss of control over one’s financial wealth due to government-sanctioned activities”

  • Also referred to as movement of resources from one jurisdiction to another through illegal means.
  • Legal means are supported by the law or through tax avoidance measures which are used to exploit the weaknesses and lacunas within the tax laws
  • Illicit flows take place through transfer mis pricing, tax scheming, illicit profit repatriation, tax dodging and money laundering.
  • In Tanzania capital flight was reported to be taking place through both legal and illegal means

Statistics of Illicit Financial Flows from Tanzania

  • According to existing studies, it is estimated that Tanzania loses USD1.83Bln (Tsh4.09Trillion) every year from tax incentives, illicit capital flight, failure to tax informal sector and other forms of evasion. This figure is an estimate and yet to be confirmed by the Tanzanian government which commissioned its own independent study.
  • If estimated loss was collected, it would triple government budget on health and nearly double spending on education.
  • Global Financial Integrity (GFI) estimates, USD7.73bln lost from Tanzania illegally in the past five years as a result of trade –mis-invoicing
  • At corporate rate of 30% Tanzania could have lost an average of USD464Mln annually

Statistics of Illicit Financial Flows in Extractive Sector

  • Export revenue from mining increased from 16% in 2013 to 26% in 2015 due to increase in taxes paid by companies. However, this is still low compared to an average 30% for other Countries such as South Africa.
  • TMAA Audit showed Mining (Including Construction) had not paid up to USD688Mln worth of taxes between 2013-2015. An average of USD229Mln annually is not paid
  • This figure has since increased as per the estimates made by the Presidential Commission reports (Dr Osoro report).

Some statistics on Gold mining and Resource leakage in Tanzania in 1998-2005

According to available study reports

  • Gold worth more than USD 2.54bln was exported between 1998-2005
  • Only USD 28mln received in Royalties and taxes
  • This was equivalent to only 10% over a 9-year period
  • The 3 % royalty charged then brought government only an average USD 17mln a year in recent years
  • Cumulatively, USD 26.5mln lost in excessive low rate, government tax concession
  • In 2005 at least 400,000 small artisan miners were unemployed since 1998 when they were evicted from the mining areas and therefore denying government billions in tax revenue.

Consequences of extractive resource leakage and development potential

  • According to the UNDP and World Bank measure of poverty and development standards, Tanzania is still among the poorest Countries in the world. At least 12mln out of 39mln live in abject poverty. Yet, Tanzania processes around 45mln ounces of Gold.  At current prices, Tanzania has a fortune of USD39bln. If well, harnessed Tanzania would be compelled to a middle-income country within less than 10 years.

Vents for extractive resource leakage

  • As per the Mining Act of 2010, mining companies offset 100% after their capital expenditure
  • 100% ownership of Gold mining Companies
  • Mining dominated by two foreign mining companies-Barrick Gold and Anglo Gold Ashanti
  • In 2005-AGA paid USD144mln in Royalties
  • It sold gold worth USD 1.55bln, paid only 9% royalty
  • Barrick Gold paid only 13% of its export. No accurate data on total exports was available
  • The Parliamentary Accounts (PAC) reported in 2007, both companies declared losses worth USD1.045bln. Tanzania Extractive Industries Transparency Initiative (TEITI) reconciliation reports also indicate that Barrick has persistently reported loses and never paid corporate tax
  • Yet, a leaked ASA tax audit report indicated companies overstated losses by USD502mln between 1999-2003
  • Government thus lost revenues worth USD132.3mln between that period alone.

Tanzania’s tax incentive regime as at 2017

  • Non tax incentives include
  • immigration quotas on employment of foreign staff,
  • guaranteed transfer of net profits or dividends of the investments,
  • payment in respect of foreign loans, remittance of proceeds net of all taxes and other obligations, royalties, fees and other charges on emoluments and other benefits to foreign personnel
  • Under mining Act , 2010, Royalty of 3% execpt for diamonds which is 5% & 12.5% for petroleum
  • No tax, duty, fee or other fiscal impost on dividends
  • No capital gain tax
  • No windfall tax
  • Losses carried forward for unrestricted period
  • Duty rate at 5% and VAT charged after 5 years of commercial production
  • Yearly appreciation  of unrecovered capital in investment, exploration, prospecting, mineral assaying, drilling or mining company of goods, imported are eligible from duty under customs law
  • Services  for exclusive use in exploration, prospecting, drilling or mining activities
  • Zero rating of all capital goods, spare parts, fuel, oils together with explosives
  • Corporate tax of 30% and capital allowance of 50% on  Y1 of income
  • All capital expended on  prospecting and mining is expended
  • 100% transferability of  profits  to foreign accounts

Major strategies for facilitating illicit financial flows in Extractive Sector

Tax Base Erosion and Profit Shifting (BEPS)

  • Collective tax planning strategies used by multinational companies that exploit gaps and maximizes in tax rules to artificially reduce its tax base or obligations by shifting profits to low or no tax locations where there is little or no economic activity. In 2012 the OECD Countries initiated collective efforts to tackle concerns over BEPS and perceived international tax systems facilitating tax avoidance (BEPS project and action plan).

Tax avoidance

  • Tax ‘avoidance’ constitutes an ‘arrangement of tax payer’s affairs that is intended to reduce his ability and that although the arrangement could be strictly legal it is usually in contradiction with the intent of the law it purports to follow’
  • Justice Reddy in Mc Dowell & Co. Ltd Vs CTO 154 ITR 148 (19985) India, has defined tax avoidance as ‘the art of dodging tax without breaking the law. It is the avoidance of tax payment without the avoidance of tax liability.
  • Tax avoidance simply involves structuring your affairs legally so that you are paying less tax than you might otherwise pay. It could involve exploiting lacunas with the law to ones advantage.

Tax Evasion

  • Tax evasion can be defined as a deliberate measure to escape one’s tax obligation through illegal means
  • tax evasion is also defined as the illegal non payment or under payment of taxes, usually by making a false declaration or no declaration to tax authorities; it entails criminal or civil legal penalties
  • Tax ‘evasion’ involves ‘illegal arrangements through or by means of which liability to tax is hidden or ignored’ as a consequence of which “the tax payer pays less than he is legally obliged to pay by hiding income or information from the tax authorities

Tax planning

  • Tax planning’ is defined as the arrangement of a person and or private affairs in order to minimise tax liability
  • It enables reduction in the liability through the movement or non movement of person, transaction or funds or other activities that are intended by the legislation
  • There is also something called as ‘aggressive Tax planning’ which is the severest form of tax planning -illegal

Differences and similarities of Tax Evasion and Tax planning

Tax Evasion

Tax Avoidance

A deliberate refusal to pay a tax

Exploitation of the weakness in the low to pay less or nothing at all

Clearly illegal

Appears to be legal

Similarities

Thin line exists between the two and quite often all use to achieve the same goal-minimal or none payment of the tax

Both are unethical in the face of tax Justice

Overlap between tax evasion, avoidance and tax planning

How is tax evasion

  • Failure by a taxable person to notify of a tax authority of a presence of its operations, if they are taxable operations,
  • Failure to report full amounts of taxable income, deduction claims for expenses that have not been incurred or which exceed the amounts incurred but not for the purposes stated,
  • Falsely claiming reliefs that are not due, for example VAT refund and exemptions
  • Failure to pay over to tax authorities’ due taxes,
  • Departure from a country leaving taxes unpaid without intention to pay and
  • Failure to report items or sources of taxable income for example profits or gains where there is an obligation to do so

Tax Avoidance measures include

  • Income splitting measures whereby incomes are shared amongst more than one tax payer for purposes of reducing tax rate or tax obligation.
  • where transactions between two related parties are inflated or fixed a Transfer pricing or mispricing measures above the average market price (arms-length) for purposes of avoiding taxes by minimising profits in a high tax location and maximising profits in a low profit location

Relevant readings

  • Marc Curtis, Tundu Lissu: A Golden Opportunity? How can Tanzania is failing to benefit from gold mining; A report for the Christian Council of Tanzania, Tanzania Episcopal Conference and the National Muslim Council of Tanzania, 2015
  • Marc Curtis, Dr Prosper Ngowi and Dr Attiya Waris: One Billion Dollar Question: How can Tanzania stop losing so much tax revenue; A report for the Christian Council of Tanzania, Tanzania Episcopal Conference and the National Muslim Council of Tanzania, 2012
  • CMI Chr Michelsen Institute: Lifting the veil of secrecy; Perspectives on international taxation and capital flight from Africa, Norway, 2017
Understanding the basics of Transfer pricing, mispricing and other aggressive tax planning measures and concepts

Understanding the basics of Transfer pricing, mispricing and other aggressive tax planning measures and concepts

By Moses Kulaba, Governance and economic analysis centre, Dar es Salaam-Tanzania

In a persistent ambition and search to maximize share vale and returns to their beneficial owners, Multinational companies use various means to gain a tax advantage. Some of these advantages are achieved by legally existing means while others such as Transfer mispricing are purposely designed to circumvent existing provision of the tax law.  As Countries grapple to increase their domestic resource mobilization, governments, policy makers and tax authorities will need to learn and adapt new techniques to debunk and disrupt the various tactics and schemes used by these MNCs. Such learning and adoption has to take place at a faster than lightning speed and gusto In less developed and resource rich countries where value and wealth is generated and sourced yet little is paid back in the form of taxes.

Transfer pricing is setting of the price for goods and services sold between controlled (or related) legal entities with an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent is the transfer price.

Transfer price is not illegal if the goods are sold between related parties at an actual comparable price in the market (arm’s length price).  However, if the prices are distorted so as to achieve a tax advantage (by either selling below or above the market price), then transfer mispricing or aggressive transfer pricing is said to have occurred which is an illegality.

Multinationals engage in transfer mis-pricing for purposes of achieving a tax advantage by shifting profits from subsidiaries in high tax jurisdiction to low tax jurisdictions. By doing so multinationals pay less or no taxes at all in countries where they have economic activities (generate income) and should be paying taxes.

Demonstration of Transfer pricing arrangements

Figure 1: Transfer pricing arrangements of a telecommunications company-Source: http://thecastreet.com/introduction-to-transfer-pricing

From the above illustration the Company A located in India will sell goods and services worth 120 rupees to its 100% controlled subsidiary Company C located in a tax haven in Dubai and thereafter the Company C will sell to another Subsidiary B located in the US at a higher or inflated price of 130 rupees. The 30 rupees made in profit will be kept in Dubai where the pay company pays 0% tax.

Exemptions & Reliefs

Generous tax breaks and advantages given to a taxable entity for purposes of achieving a given economic or tax objective such as increasing or facilitating investment. Tanzania extends generous incentives and exemptions to foreign investment corporations.  In recent times, there is limited evidence to show that tax exemptions and reliefs are major factors influencing investor’s choice of investment destinations.  On the contrary they have been used for tax evasion by circumventing the provisions within the law

Round tripping

A self-explanatory term denoting a trip where a person or thing returns to the place where the journey began.

In illicit financing and tax evasion terms, it refers to a situation where money or income leaves the country through various channels such as inflated invoices, payments, to shell companies overseas (tax haven) etc and returns back to the same country as investment for purposes of benefiting from existing gaps and incentives within the Country’s laws.

False Declaration

A deliberate measure by a liable tax payer or corporation to under disclose or not to disclose at all the accurate taxable income or items or services for purpose of reducing the tax payers tax obligations or evading paying taxes completely. Individuals or corporations use this strategy to hide their taxable liabilities from the tax authorities.

Thin Capitalization

Thin capitalisation measures, where a company finances its operations with a high proportion of loans rather than shares and therefore reduces the business profits of its subsidiary in highly taxed jurisdiction and maximises profits via interests paid on the loan to a bank or financial institution located in a lower tax jurisdiction.

Profit laundering and re-invoicing

These methods also include profit laundering and re-invoicing measures;  a process which involves transferring profits from a territory in which they would be taxed to another in which there is either no tax or a lower tax rate or a sale to an agent based in a safe tax haven who subsequently sells on to a final purchaser.

The agent pays part of their mark-up price to the original vendor or to the purchaser, usually to an offshore account located in a secrecy jurisdiction

Use of Offshore, Secrecy Jurisdictions and Tax ‘Havens’

The use of low tax jurisdictions or tax havens has become the common strategy for hiding income from the tax authorities.

Tax havens are legal jurisdictions that offer a combination of low tax rates, limited regulations and total secrecy about ownership of registered corporations and individual assets.

In the Cayman Island there is a famous building called Ugland House, a small building, where 12,748 companies are registered and supposedly conduct their business (among them Coca Cola and Intel Corp). However, in reality these are shell companies and postal addresses and no real business activity goes on here. In a sarcastic remark of surprise, the US President Barack Obama on January 5th, 2008 said either this is the largest building in the world or the largest tax scam.

Characteristics of tax havens and examples of ‘Tax Havens’

  • Assured Total Secrecy on identity of owners, accounts and operations
  • Assured legal assistance
  • 0% Corporate tax or Low Tax rates on income
  • Financial and Auditing assistance
  • Logistics and supplies assistance
  • Human Resource Management assistance and facilitation
  • Reported Tax Havens or Secrecy Jurisdictions include:
  • Canary Islands
  • Bahrain
  • Ireland
  • Bermuda
  • Antigua
  • Bahamas
  • Panama
  • Andorra
  • British Virgin Islands
  • Jersey Island
  • The Netherlands
  • Liechtenstein
  • Isle of Man
  • Mauritius
  • Barbados
  • St Kits and Nevis
  • Guernsey
  • Cabo Verde
  • Hong Kong
  • Maldives
  • Albania
  • Brunei
  • Nauru
  • Azerbaijan
  • Monaco
  • Aruba
  • Belize
  • Curaçao
  • Armenia
  • St Vicent and Grenadines
  • Dominica
  • UAE-Dubai
  • American Samoa Islands

Selected corporations operating in Tanzania and potentially incorporated and using tax havens

Extractive Company

Country (ies) of Incorporation and Subsidiaries

Acacia Mining

Incorporated in UK. Has 3 subsidiaries in the Cayman Islands, One in Mauritius and one in Barbados

AngloGold Ashanti

Incorporated in South Africa, Has one subsidiary in the Isle of Man and One in New Jersey

Petra Diamond

Incorporated in Bermuda

Shanta Gold

Incorporated in Guernsey

Bezant Resources

Incorporated in UK. Has one subsidiary in the British Virgin Islands

Orphir Energy

Incorporated in UK, Has 24 Subsidiaries in Jersey, 14 the British Virgin Islands, 3 in Bermuda and 3 in Delaware

Stratex International

Incorporated in the UK has 100% owned subsidiaries in Switzerland and 33% owned subsidiary in Jersey

Wentworth Resources

Incorporated in Canada. Has 3 Subsidiaries in Jersey and in in Mauritius

Statoil

Incorporated in Norway, with one Subsidiary in Switzerland

Telecommunications

Bharti Airtel Tanzania

Incorporated in India. Has 25 subsidiaries in the Netherlands and one in Jersey

Milicom (Owns Tigo)

Incorporated in Luxemburg. Has 4 subsidiaries in the Netherlands

Estimated value of wealth held in Tax Havens

The actual estimates of the total size of wealth held in tax havens is not quite clear. However it is estimated that

  • The value of assets held offshore, either tax-free or subject to minimal tax, was estimated in 2015  at over US$11.5 trillion; over one-third of global GDP;
  • It is estimated Developing countries lose over $385 billion annually to tax dodging by wealthy individuals, profits laundering by companies and to untaxed activities in the grey economy
  • Recent financial leaks show that wealthy Africans hide their wealth in tax havens
  • It is estimated that USD 500 billion in financial wealth is kept offshore amounting to 30% of all the financial wealth held by Africans.
  • It is estimated that African Countries are among the fastest growing but capital flows to tax havens are one factor limiting the benefits of economic growth for ordinary Africans.

Comparison of living standards of poor families in Tanzania and the Caribbean tax havens

Examples of some documented tax planning cases reported in Tanzania

Examples of cases of Tax planning measure undertaken by companies to benefit from the various exemptions under the Investment Act and Customs and Excise Acts have been reported in Tanzania.

  • In the matter of the Commissioner General Vs Geita Gold Mining Ltd which appeared before the Tax Revenue Appeals Tribunal (Originating from Tax Revenue Appeals Board, Case No 22 and 23 of 2004, Geita Gold Mining Limited had failed to pay PAYE as required under section 41 of the Income Tax Act, 1973. In this case a TRA audit revealed that PAYE was paid as additional salary to the employees and recorded as expenses to the company and demanded it to be set off.

TRA argued such an act reduced the taxable income of the respondent and subsequently the tax paid by the company was reduced. Geita had illegally claimed expenses which it was not entitled to.

The Tax Revenue board also made reference to a provision within Geita Gold Mines’ Expatriate Conditions Terms of Service which was aimed at avoiding taxes.  Section 3.1 of the expatriate conditions terms of service stated that subject to Article 3.2 the employees offshore Salary component will paid free of local income tax into the employees nominated bank account. All other benefits may attract local taxation. The tax appeals board ruled in favour of TRA.

In 2017 there more reports of tax avoidance and evasion by the Canadian firm Barrick and its local subsidiary Acacia mining companies. The report was tabled by presidential commission appointed to investigate claims and suspicions of tax evasion by the mining firm. Following this report, the government confiscated the company’s consignment of Gold concentrates and required the firm to pay billions of dollars in accumulated tax arrears. The findings from the commission were disputed and negotiations to resolve the dispute were still ongoing

Causes or Aggravating factors for illicit Financial Flows

  • Weak legislative framework
  • Global Financial Systems which allows capital to move freely across jurisdictions
  • Poor –Interagency collaboration
  • Limited institutional capacity and technical competency
  • Corruption and poor ethical values amongst those entrusted with power and decision making
  • lack of Patriotism

Measures or initiatives that are being undertaken nationally and internationally to tackle IFFs

  • Establishment and training of international tax departments in National Tax Authorities
  • OECD- Base Erosion and Profit Shifting (BEPS) project which seeks to provide guidelines on how multinationals should conduct business abroad and requiring for mandatory disclosure and exchange of information on tax matters.
  • Advocacy for wider transparency through initiatives such as Extractive Industries Transparency Initiative (EITI) and Open Government Partnership (OGP).
  • Advocacy for governments and companies to publish what they pay and what they earn
  • Advocacy for improved reporting of corporate operations such as Country by Country reporting or Project by Project reporting of operations.

Relevant readings

  • Marc Curtis, Tundu Lissu: A Golden Opportunity? How can Tanzania is failing to benefit from gold mining; A report for the Christian Council of Tanzania, Tanzania Episcopal Conference and the National Muslim Council of Tanzania, 2015
  • Marc Curtis, Dr Prosper Ngowi and Dr Attiya Waris: One Billion Dollar Question: How can Tanzania stop losing so much tax revenue; A report for the Christian Council of Tanzania, Tanzania Episcopal Conference and the National Muslim Council of Tanzania, 2012
  • CMI Chr Michelsen Institute: Lifting the veil of secrecy; Perspectives on international taxation and capital flight from Africa, Norway, 2017
Fiscal Governance and Taxation : Latent deficits & Citizen participation

 

Tax is a block on which governments rely to finance development. Implicitly there is a social contract that exists between the citizens who pay the taxes and the government as a recipient, which spends on their behalf. Yet in reality there appears to be a gap and a none mutual accountability.

Taxes must be fair and just. There is weak citizen engagement in fiscal governance. Most citizens view fiscal governance and tax matters as complex, unfair and exploitative. They least see the relationship between taxation and development and this factor has led to low tax compliance amongst citizens. Multiple studies and surveys by Afro Barometer Survey and others reveal that citizens are willing to pay slightly more taxes if the quality of social services would be improved. Citizen apathy against taxation and affinity to evasion and avoidance is increased, with a perception that the fiscal policies are exploitative and taxes collected are not well spent.

Domestic resource mobilisation and quest for alternative development financing

Domestic resource mobilization is growing  as the best fiscal governance approach to reduce aid dependency and take full ownership of national development strategies. Overall, whilst traditional aid donors continue to be critical , foreign aid budgets have become increasingly under stress over the medium and long-term.

The search for alternative sources of development finance is  important yet constant reports show that African countries, such as Tanzania,  have been missing domestic revenue collection targets. National debts have  bludgeoned to unsustainable levels as governments seek to fill their tax holes, required to finance essential development. Tax evasion and illicit financial outflows are rampant. Reports by organizations such as the Global Financial Integrity and Tax Justice Network show massive resources lost through illicit outflows and tax dodging by multinational companies through aggressive avoidance measures such as transfer mispricing.  People’s awareness and participation in  fiscal governance is limited. Taxes are generally unfair and unjust for the poor.

The purpose of this project is to increase awareness and citizen participation in tax matters via

  • Simplified Analytical pieces on fiscal policy and Taxation
  • Strategic convenings and trainings or tax clinics
  • Local and  International advocacy for just and equitable tax policies and systems