Why and how Africa should extend its network of double taxation treaties with China

Eric Ntini KasokainAuthor: Eric Ntini Kasoko
PhD candidate, University of Liege (Belgium)

There are currently over three thousand double taxation treaties (DTTs) worldwide. DTTs are agreements between two states that are designed to relieve international double taxation and prevent fiscal evasion with respect to taxes on income. Double taxation occurs when the same income is subject to two, or even more, taxing jurisdictions, which may result in an impediment to cross-border trade and investment.

When concluding a DTT, the two sovereign states involved draw inspiration mainly from the OECD Model Tax Convention on income and capital (OECD Model). However, DTTs can also be based on the so-called UN Model, which is supposed to be a suitable framework for DTTs between developing countries and developed countries. Since DTTs have been traditionally viewed as one means of increasing the movement of foreign direct investment (FDI) to the developing world, African countries would find it advantageous, at least prima facie, to multiply such agreements with a country like China.

Even though it is obvious that China still remains a developing nation, the African continent has been benefiting from the export-driven Chinese economy in terms of massive foreign investments by Chinese companies during the past few years. Interestingly enough, the trade volume between these two areas of the world is expected to double by the end of 2015. All of these have been notably facilitated, not only through the existence of almost thirty bilateral investment treaties (BITs) between China and its African trade partners, but also by the relatively recent China’s joining of the World Trade Organization (WTO).

Tax picture Africlaw tax article

All these trends suggest that Sino-African economic relations are getting exponentially stronger as the African nations are struggling to cope with the ongoing poverty of their growing populations. While a wide range of actions are likely to be necessary to achieve development goals in Africa, one avenue that may prove efficient is the strengthening of domestic tax systems through implementation of principles of the rule of law and good governance in the area of taxation. Relying almost solely on indirect taxes on international trade and on goods and services, as is the case at the moment, could strip away governments’ fiscal capacity to bring local populations out of entrenched problems of poverty and inequality. The onus seems to be on African authorities to improve their tax revenues at a time when many African countries have the world’s fastest-growing economies, hence leading to the increase of some types of revenues.

It should be pointed out that, in the past decades, African nations had extensive recourse to DTTs with developed countries to attract foreign investors to the continent. However, the large tax incentives offered to multinational companies (MNCs) have been proven to have little impact on FDI inflows in both low- and middle income African economies. Thus, in addition to a loss in tax revenue, the expected private international flows of financial resources have not flourished in the continent. This failure should be turned into an opportunity for African governments to set new priorities when it comes to concluding future DTTs.

Despite the strong economic presence of state-owned Chinese corporations throughout Africa, only about a dozen African countries have signed a DTT with China. It appears that Africa should extend its network of DTTs with its largest trading partner, which may yield many substantial benefits. More precisely, this may likely further integrate Africa into global economy and, at the same time, increase income from taxes imposed on businesses. On the one hand, such agreements would prevent all forms of discrimination against African interests business in China, which could favor a more balanced economic cooperation between these two parts of the world. Also, it seems to me of utmost importance that African countries should establish technology transfer as a negotiating strategy for avoiding past mistakes.

On the other hand, and following the same logic, Africa would gain much by making the fight against tax evasion a high priority when negotiating future DTTs with China. This would enable African taxing authorities to raise significantly tax revenue once the income tax breaks that have been granted to state-owned Chinese companies will expire. Likewise, by promoting the exchange of information between national taxation authorities, such agreements may contribute to the broader goal of improving the efficiency of domestic tax systems. In addition, given privately owned Chinese companies are still reluctant to increase significantly their investments in Africa, DTTs could induce them at least slightly to take the leap.

By way of conclusion, as China seems to be relatively flexible within the framework of DTTs with other developing countries, African nations should take advantage of the opportunity to negotiate or renegotiate agreements consisting of an appropriate mixture of both OECD and UN Models. In my view, this is the price to pay to respond to the double challenge of improved investments and increased tax revenues.

About the Author:
Eric Ntini Kasoko holds a Bachelor of Laws (LLB) from the Congo Protestant University (Democratic Republic of Congo), an advanced Master’s in Human Rights from the Catholic University of Louvain (Belgium), and a Certificate in Tax Management from the Solvay Brussels School of Economics and Management (Belgium). Kasoko is currently a PhD candidate at the University of Liege (Belgium). His research interests are comparative taxation and international human rights law.

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