Double taxation, advantage of vat and devices that have been developed to address the problems of Double taxation.

PART ONE;  Double taxation in international arena

Double Taxation is said to occur where two or more taxes must be paid for the same assets or financial transaction and, or income and arises due to overlap between different countries tax laws and jurisdiction.[1]

This concept under international arena means the imposition of income tax or comparable profits tax on the same income in two or more different tax jurisdictions for an identical or same period or year of income in respect of the same taxpayer or his agent[2].

The concurrent application of tax systems based in varying degrees on the source, residence and citizenship principles inevitably give rise to overlapping assertions of tax jurisdictions, resulting in international double taxation in the following ways:

Under Dual Residence; here two countries may treat a person ,a resident in its country and tax that person, individual or a company or a body co operate on the worldwide income or capital in the sense that that person has a direct or personal link with the two countries. The same arises when countries use different tests to determine the fiscal home of their taxpayers. For example, with respect to individuals, country A may claim residence jurisdiction over a taxpayer who is domiciled within its territory, but who spent most of his tax year working in country B, while country B asserts residence jurisdiction over the same taxpayer because he has

net the limited stay test of residence which country B employs A corporation may also be subject to dual residence double taxation if it is organised in one country which uses a place of incorporation test to determine residence jurisdiction, and managed in another country which use a place-of-effective management test as its residence criterion.

Under Source Conflicts;   here also two countries may assert tax jurisdiction over a transaction where by both countries or each state claims that income under its rules as generated within its borders and thus is subject to its taxing powers. Rules for determining the territorial source of various types of income are very fluid in their application by different jurisdictions. Assuming that the jurisdictions even purport to apply the same rules may yield different results. This leads to source conflicts between countries. One kind of source conflict relates to the source of income derived from services rendered by construction and engineering firms in country A undertaking projects in other countries with tax systems quite different from country A’s. The services for which these firms are paid are usually carried out both in county A (design, research etc) and in the other countries (e.g. supervision). Country A may view that in such cases, only that portion of the income which directly relates to the actual activities performed outside of country A may be regarded as having a foreign source and tax the income of home-source. The other countries, however, will often impose an income tax on the entire contract profit.[3]

Another kind of source conflict occurs when an enterprise in country D has a permanent establishment in country E which derives income from country F and the income is concurrently taxed in countries D and E. A third source conflict arising where both the lending country and the borrowing country claim that its country’s the source-country of the interest and asserts tax jurisdiction on the same interest arisen from the transaction. There is still another source conflict which arises where one foreign jurisdiction imposes a non-resident withholding tax similar to the have country version, but the income cannot be properly treated as having its source in that jurisdiction. In this situation, the tax paid in the foreign country cannot be deducted if the home country adopts the foreign tax credit system.

Under Residence-Source Double Taxation; here there are some circumstances where one country taxes a person on his worldwide income or capital because he is resident of that country and that  other country will have to tax the same person on income he derives from that country or on capital situated therein, hence, the conflict of residence against source. Residence – source double taxation canaries despite the absence of definitional problems concerning the residence of the taxpayer or the source of the income. This form of double taxation will occur any time country D taxes its residents on their worldwide income and a resident of that country derives income from a source within country E a country that taxes that income at source.

PART TWO:  Advantage of VAT

VAT is defined under sectin 2 of the Value Added Tax[4] as a tax levied on all sales of commodities at every stage of production.The VAT replaced the Sales Tax Act[5] where the standard of VAT is 20% standard and Standard Zero rate. Turnover tax/ sales taxes , VAT (Value Added Tax) is a tax on the rise in value of a product at each stage of its manufacture[6]. The Value Added Tax Act of 1997 defines VAT to mean the Value Added Tax imposed by this Act[7]. It is a tax consumption charged by VAT registered traders on all taxable goods and services. It is a multistage tax, revere at each stage of production and distributed chain up to retail stage.

Sales tax can be defined as a tax paid by a customer who buys retail goods[8].

The advantages of VAT over Turnover tax/ Sales taxes are given as hereunder.

First, VAT is a broad based consumption tax; it is charged on a wide range of goods and services and on imports (taxable supplies). Unlike sales tax it is levied at every stage in the production and distribution chain. This can be explained as follows; in view of broad tax base revenue yield is generally higher and stable and is less susceptible to fluctuations. Be it as it may, the one big need of VAT is to increase revenue 

Second, in administrative advantage, VAT is relatively less complex than sales tax. There is no multiplicity of tax rates. The registration threshold eliminates small business to minimize administration costs. A culture of maintaining business records is encouraged for proper assessment of the tax[9].

Furthermore under zero rating provision which provides that a supply of goods or services is zero- rated by virtue of this subsection if the supply is of a description specified in the first schedule to this Act[10]. This encourages exports because the tax on export is refundable in a transparent and simple manner. Zero rating ensures that exports enter the international market free of tax to make them more competitive. Yet the final consumer bears the total cumulative tax.[11]

Also, VAT eliminates attempts by businessmen to split up their business below the threshold in order to avoid the tax because the tax paid on inputs is still payable and it can be claimed.

Moreover, VAT paid on purchases of inputs is fully creditable, it does not form past of the cost of business. Consequently the tax does not influence business decisions. It creates a conducive climate for investors.

On the other hand, VAT has some elements of self checking mechanism to minimize evasion whereby one person’s output tax becomes the input tax of another. So VAT facilitates cross checking of sales between traders.

Lastly, in VAT the effect of “no tax on tax” is possible because what is charged is only a valued added unlike the sales tax which levied at every stage of in the production and distribution chain hence the cascading effect occurs (tax on tax effect).

PART THREE: Devices that have been developed to address the problems of Double taxation.

Double taxation means the imposition of income tax or comparable profits tax on the same income in two or more different tax jurisdictions for an identical or same period or year of income in respect of the same taxpayer or his agent.[12] The devices that have been developed to address the problems of Double taxation are as follows:

The first efforts are done internationally, to deal with the problems of international double taxation. League of Nations and have been pursued in the Organization for Economic Cooperation and Development (OECD) and regional for, as well as in the United Nations, have in general found concrete expression in a series of model bilateral tax conventions. Draft model conventions include the 1927 model treaty, 1928 model conventions, the 1935 draft convention, the 1943 Mexico model, the 1946 London model, name of which gained widespread acceptance. In 1967 the OECD drafted a model convention which was later revised in 1977.

The OECD Model: This rests on two fundamental premises:

(1) The country of residence eliminates double taxation by giving a credit or exemption.

(2) The source country in turn, reduces considerably the scope of its jurisdiction to tax at source, and reduces the rate of tax where jurisdiction is retained.

This model has been followed in tax treaties made between developed countries. Developing countries have in their tax treaties with developed countries usually accepted the first premise, hat is, and they agree that the residence country, usually the developed country, should give a credit or exemption to eliminate double taxation. But have frequently rejected the second premises. Note that, income flows between developed countries in a two-way traffic, thus it makes little difference to them whether their tax treaties emphasis source or residence jurisdiction. In contrast, between developed and developing countries, income flows in a one-way traffic so that the developing countries should not be expected to sacrifice their national revenue and foreign exchange reserves.

The UN Model: this attempt to strike a compromise between the source principle and the residence principle by giving more weight to the source principle than does the OECD model. To mitigate this source bias the UN model embodies the premises that the source country recognizes that:

(a) Taxation of income from capital is done on a net basis, i.e. taking into account expenses allocable to the earnings of income.

(b) Taxation would not be so high as to discourage investment.

(c) It may be appropriate for a country to share revenue with the country providing the capital.

Besides the above worldwide model bilateral conventions, there are a number of regional and sub-regional conventions, for example, the 1976 LAFTA Convention (i.e. Latin American Free Trade Association), the 1971 model convention by the commission of the Cartagena Agreement and others by most developed countries, but only the US has published its model treaty.13

The US Model of 1981: This sets out the official US policy in its negotiations with other countries on new and revised income tax treaties. Note that, like most other countries, the US recorded reservations to the substantive provisions in the OECD model that it considered unacceptable. Thus a principle purpose of the US Model is to align US tax treaty negotiations with both the substance and form of the OECD model to the extent consistent with US tax law and policy. The second purpose is to indicate to those countries with whom the US conduct treaty negotiations those changes and exceptions the US finds necessary in accommodating the OECD model to the US tax structure.

Reference:

1. Makinyika, F.D.  A Source Book of Income Tax Law in Tanzania.
2. Mponguliana, R, G. The Theory and Practice of Taxation in Tanzania.
3. Oxford Advanced Learner’s Encyclopedic Dictionary by Oxford University Press.
4. The Value Added Tax Act. Act No. 24 of 1997.
5. The Black’s Law Dictionary, 3^rd Ed 2000
6. www.freewikipedia.org

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[1] Makinyika, F.D.A, ‘Tax Law Book’ A Source Book for Income Tax in Tanzania.

[2] The theory and practice of taxation in Tanzania by R.G Mponguliana

[3] Much Discussion on the subject is in Makinyika, Income Tax in Tanzania, 2004

[4] Act, Cap 148 R.E 2002

[5] Act of 1976

[6] Oxford Advanced Learner’s Encyclopedic Dictionary

[7] Section 2 of Act No. 24 of 1997

[8] Oxford Advanced Learner’s Encyclopedic Dictionary

[9] The theory and practice of taxation in Tanzania by R.G Mponguliana

[10] Section 9(1) of Act No. 24 of 1997

[11] http; www.freewikipedia.org

[12] Refference fro part A  above in relation to the definition of Double Taxation