UNIVERSITY OF DAR-E-SALAAM

SCHOOL OF LAW

THE GRADUATE ESSAY

IN PARTIAL FULFILMENT FOR THE REQUIREMENTS OF THE

Legum Magister (LLM) in Taxation

TOPIC: Performance Analysis of the Bilateral Treaties and Foreign Direct

Investments: A Focus on the Recent Development in Tanzanian Tax
System

STUDENT: MAFWENGA Handley Mpoki [Reg No: 2013-06-01743]

SUPERVISOR 1: Prof F. Luoga Ph.D

SUPERVISOR 2: Mr E. Mshana
 CONTENTS
CERTIFICATION ................................................................................................................................... i
DECLARATION AND STATEMENT OF COPYRIGHT .................................................................... ii
APPRECIATION ................................................................................................................................... iii
ABBREVIATIONS ............................................................................................................................... iv
LIST OF CASES..................................................................................................................................... v
ABSTRACT........................................................................................................................................... vi
Desirability of Promoting Foreign Direct Investment ........................................................................ 1
Meaning and Roles of Double Taxation Treaties ........................................................................... 1
Meaning and Roles of Foreign Direct Investment .......................................................................... 3
Meaning and Roles of Bilateral Investment Treaties ...................................................................... 4
Evolution and Development of Bilateral Tax Treaties ....................................................................... 6
SCOPE OF THE STUDY AND METHODOLOGY ........................................................................... 11
Scope of the Study ............................................................................................................................ 11
Methodology and Data Collection .................................................................................................... 11
STATEMENT OF THE PROBLEM .................................................................................................... 12
BRIEF LITERATURE REVIEW ......................................................................................................... 12
The Regulatory Framework .......................................................................................................... 14
Bilateral Investment Treaties and Foreign Direct Investment ...................................................... 15
Double Taxation Treaties and Foreign Direct Investments .......................................................... 16
EMPIRICAL FINDINGS ..................................................................................................................... 17
Trend Analysis of DTTs and BITS between Developed and Developing Countries .................... 17
Trend Analysis of DTTs and BITs in Tanzania ............................................................................ 19
CONCLUSION ..................................................................................................................................... 20
LIST OF TABLE AND FIGURES ....................................................................................................... 21
Table 2: Performance of the DTTS Negotiation under ITA, 1973 and ITA, 2004 ......................... 21
Figure 1 Performance of DTT‘s Negotiation under ITA, 1973 and ITA, 2004 ............................. 22
Figure 2: The BITs and IIAs in Tanzania ...................................................................................... 22
Figure 3: The FDIs Flow and Greenfield FDI Projects ................................................................ 23
Figure 4: The Growth in the Number of BITs and DTTs (1960-2006)-(Number) ......................... 23
Figure 5: DTTs Concluded as of End 2006 by Country Group (Percent)..................................... 24
Figure 6: The Ten Countries with the Highest Number of DTTs, End 2006 ................................. 24
Figure 7: DTTs Signed Between G20 Summits ............................................................................. 25
Figure 8: Comparative Analysis of BITs and IIAs for EAC Countries.......................................... 25
Figure 9: SADC Comparative Analysis of BITs and IIAs ............................................................. 26
Figure 10: SADC Regional Comparative Analysis of the FDIs Flows and Greenfield FDI
Projects ......................................................................................................................................... 26
REFERENCES ..................................................................................................................................... 27
CERTIFICATION

I hereby declare that this Graduate Essay is from the student’s own work and effort, and all
other sources of information used have been acknowledged. This research paper has been
submitted with my approval

SUPERVISOR: E. Mshana

Signature:……………………………………………………………………………………….
.

Date……………………………………………………………………………………………

i|Page
DECLARATION AND STATEMENT OF COPYRIGHT

I hereby declare that this submission is my own work and that, to the best of my knowledge
and belief, it contains no material previously published or written by another person (except
where explicitly defined in the acknowledgements), nor material which to a substantial extent
has been submitted for the award of any other degree or diploma of a university or other
institution of higher learning.

Likewise, this research paper is copyright material protected under the Berne Convention, the
Tanzania Copy-right and Neighbouring Right Act, 1999 and other international and national
enactments, in that behalf, on intellectual property. It may not be reproduced by any means,
in full or in part, (except for short extracts in fair dealing; for research or private study,
critical scholarly review or discourse with an acknowledgement), without the written
permission of University of Dar-Es-Salaam School of Law and the author.

Signature: ……………………………………….

Date:……………………………………………..

ii | P a g e
APPRECIATION

The completion of Master degree of law (LLM) is the culmination of my life as a student at
the University of Dar-Es-Salaam. As such, there have been countless individuals who have
shaped my life, both contributing to my successes and helping me overcome my failures.
While a comprehensive list of all those people could comprise another Essay, therefore, I
hereby use this opportunity to express my gratitude to those who have contributed the most
pedagogical achievement. A disproportionate amount of thanks goes to my supervisors- the
unique model in tax issues Ebenezer Mshana, Prof Florence Luoga Ph.D and my wife Bertha,
they have been trusted advisors, role models of the highest regard, and invaluable allies,
without them I would not be the person I am today. Their unwavering love and support have
been the foundation for all of my accomplishments, for which they can never be fully repaid.
My sons Issack, Malcom, Clerick and Alvin also deserve a great deal of thanks. They
continued to provide an unending encouragement and have been my most treasured friends
through life's ups and downs, both personal and academic. Without them, my successes
would be joyless and my failures more painful.

No single person is more responsible for my growth as guru in tax laws- Emmanuel Masalu
(the Coordinator of the Programme), Dr Saudin Mwakaje Ph.D, Erasmus Nyika, Semu and
Joseph Chikongoye have also been instrumental in my development. I am grateful to them for
sharing their wealth of knowledge and I value our many conversations over the past several
years. I am extremely fortunate to have worked so closely with people of such great character
and can only hope to live up to the examples they have set.

Lastly, I would like to express my appreciation to the almighty God for enabling me to
accomplish my Legum Magister (LLM) without any pungent in pedagogical commitments
during the entire period of my studies.

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ABBREVIATIONS
BITs Bilateral Investment Treaties
CEO Chief Executive Officer
CIR Commissioner for Internal Revenue
DTAs Double Taxation Agreements 1
DTCs Double Taxation Conventions
DTTs Double Tax Treaties
EAC East African Community
ECT Economic Charter Treaty
ESC Economic and Social Council
FDIs Foreign Direct Investments
IIAs International Investment Agreements
IMF International Monetary Fund
ITA Income Tax Act
MFN Most Favoured Nation
OEEC Organization for European Economic Cooperation
OECD Organization for Economic Cooperation and Development
OFCs Offshore Financial Agreements
P/E Permanent Establishment
SADC Southern African Development Cooperation
TIEAs Tax Information Exchange Agreements
TRAB Tax Revenue Appeals Board
TRAT Tax Revenue Appeals Tribunal
UAE United Arab Emirates
UN United Nations
UNCTAD United Nations Conference on Trade and Development
URT United Republic of Tanzania
US United States

1
Note: DTTs, DTAs and DTCs are terms used interchangeably in this essay

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LIST OF CASES

1. Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan (2005)
ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005
2. Biwater Gauff (Tanzania) Ltd Vs The United republic of Tanzania (2005)
3. CIR Vs Ayrshire Pullman Motor Services & Ritchie and CIR Vs Duke of Westminster
(1936) 19 TC 490
4. Franz Sedelmayer Vs. The Russian Federation(1998), SCC Award, 7 July 1998
5. Gregory Vs Helvering, Commissioner of Internal Revenue (1934) 6469 F 2nd 809 at
810
6. Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt(2006), ICSID
Case No. ARB/04/13, Decision on Jurisdiction, 16 June 2006.
7. Jacques Vs Federal Commissioner of Taxation (1924) 34 C.L.R 328 at 362

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ABSTRACT

Individuals and companies are increasingly conducting business across borders, making
Foreign Direct Investments (FDIs) and carrying out international financial transactions as
globalization and technological developments continue to provide new opportunities. Yet tax
sovereignty stops at the border and tax administrations are increasingly in need of
information from foreign jurisdictions in order to administer and enforce their tax laws. Tax
evasion and tax avoidance including base erosion and profit shifting are significant global
challenges for both developed and developing countries. In that regard, Double taxation
treaties (DTTs) are intended to eliminate double taxation and prevent fiscal evasion, and
bilateral investment treaties (BITs) on the other hand, thereby encouraging FDI2, and
prevent tax evasion, which previous literatures argue will have a negative effect on FDI.
Using a segmented data set, this essay shows that double taxation treaties have no effect on
FDI and explores the performance trend of the DTTs and BITs for Tanzania which have
shown that Tanzania has not been effective in the Bilateral Treaties negotiation.

2
The International Monetary Fund defines FDI as an international investment with a long term horizon and
significant influence over the management of the operation, (IMF, 1993).

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INTRODUCTION

Desirability of Promoting Foreign Direct Investment

The desirability of promoting greater inflows of foreign investment to developing countries

on conditions which are politically acceptable as well as economically and socially beneficial
has been frequently affirmed in resolutions of the General Assembly and the Economic and
Social Council (ESC ) of the United Nations and the United Nations Conference on Trade
and Development (UNCTAD). The growth of investment flows from developed to
developing countries depends to a large extent on what has been referred to as the
international investment climate. The prevention or elimination of international double
taxation—i.e., the imposition of similar taxes in two or more States on the same taxpayer in
respect of the same base—whose effects are harmful to the exchange of goods and services
and to the movement of capital and persons, constitutes a significant component of such a
climate.

Meaning and Roles of Double Taxation Treaties

Broadly, the general objectives of DTTs may today be seen to include the full protection of
taxpayers against double taxation (whether direct or indirect) and the prevention of the
discouragement which taxation may provide for the free flow of international trade and
investment and the transfer of technology. They also aim to prevent discrimination between
taxpayers in the international field, and to provide a reasonable element of legal and fiscal
certainty as a framework within which international operations can be carried on. In addition,
the treaties have an objective of creating the improvement of cooperation between taxing
authorities in carrying out their duties. This is provided under the Article 26 (relating to the
exchange of information) and Article 27 (Assistance in the Collection of Taxes) respectively
of the OECD Model Convention and in the DTTs that Tanzania has signed with other
Countries.

Substantial progress towards the elimination of double taxation has been made through
unilateral relief measures and more particularly through bilateral tax conventions, which have
emerged since the 1960s as a salient feature of inter-State economic relations. However, until
1965, only a relatively small number of treaties had been concluded between developed and
developing countries, the reason being probably the fact, acknowledged in 1965 by the Fiscal

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Committee of the OECD, that ―the traditional tax conventions have not commended
themselves to developing countries‖.3 According to that Committee, ―the essential fact
remains those DTTs which capital-exporting countries have found to be of value to improve
trade and investment among themselves and which might contribute in like ways to closer
economic relations between developing and capital-exporting countries are not making
sufficient contributions to that end. Existing treaties between industrialized countries
sometimes require the country of residence to give up revenue.

More often, however, it is the country of source which gives up revenue. Such a pattern may
not be equally appropriate in treaties between developing and industrialized countries
because income flows are largely from developing to industrialized countries and the revenue
sacrifice would be one-sided. But there are many provisions in existing DTTs that have a
valid place in conventions between capital-exporting and developing countries too.‖4

It is a widely held view that, DTTs define a fixed place of business that undertakes active5
business to be a Permanent Establishment (P/E). This is a key definition as the treaty
establishes the taxing rights of the Host country to be over the business profits attributable to
a P/E located within its borders, (source taxation). The DTTs also provide that the Home
country must either exempt such income from taxation (residence taxation) or provide a
foreign tax credit for the Host taxes paid against Home taxes otherwise payable (whichever is
less) and provide for the allocation of taxing rights over passive income, (dividends, interest
and royalties).

As a general school of thoughts, DTTs taking into account their key functions6 can influence
FDIs in two possible ways. From the viewpoint of the first objective, tax treaties contribute to
an increase in foreign direct investments because they reduce harm of investments by
eliminating international double taxation. On the other hand, from the viewpoint of the
second objective, tax treaties may contribute to a reduction in the investment scale, because
they discourage international tax avoidance. In light of this nature of tax treaties, does the tax

3
Organisation for Economic Co-operation and Development, Fiscal Incentives for Private Investment in
Developing Countries: Report of the OECD Fiscal Committee (Paris, 1965), para. 164.
4
Ibid. paras. 163 and 165
5
This is as opposed to passive business activities such as being of a preparatory or ancillary nature, (e.g. a
warehouse purely for the purpose of storing or displaying goods).
6
Key functions of DTTs: (1) Allocation of tax jurisdictions (Positive effect on investment) (2) Adjustment of
double taxation (Positive effect on investment) (3) Prevention of international tax avoidance (Negative effect on
investment) (4) Resolution of international tax issues (Positive effect on investment) (5) Economic cooperation
for developing countries (Positive effect on investment)

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treaty actually influence foreign direct investment? If it does, which of the effects above
would be relatively greater? The objective of this article is to empirically find the answer to
these questions.

In order to help eliminate double taxation and to relieve jurisdictional conflicts, double
taxation treaties standardize tax definitions in the countries party to a treaty, and they detail
specific allocation rules for different categories of income, reducing uncertainty about the tax
environment in both countries. DTTs also can limit transfer pricing, help to combat tax
evasion (notably through the exchange of information), reduce the risk of treaty shopping7,
provide non-discrimination rules, and outline ways in which tax disputes can be resolved by
prescribing specific conflict resolution mechanisms and arbitration procedures. 8 Furthermore,
while unilateral measures can often eliminate double taxation on their own, thus obviating the
need for DTTs to prevent double taxation, the treaties can still be useful in ―borderline‖
situations, such as cases in which the source of income is disputed.9 Importantly, DTTs
provide greater legal certainty to foreign investors with respect to the tax treatment of their
cross-border

Meaning and Roles of Foreign Direct Investment

FDI denotes the acquisition from abroad of physical assets, such as plant and equipment, with
operational control ultimately residing with the parent company in the home country. FDI
may take different forms such as the establishment of new enterprises in an overseas country
either as a subsidiary or branch, the expansion of overseas branch or subsidiary and the
acquisition of overseas business enterprise or its assets or to provide goods and services. FDI
is a financial investment made abroad with the purpose of acquiring significant influence or
outright control over a foreign firm. It may involve establishing a new company abroad or
investing in an existing enterprise (Asian Development Bank 2010)10.

FDI is important because it contributes to employment and it usually involves the transfer of
technology and managerial skills from more developed to less developed economies. FDI

7
Robert Gilpin with assistance of Jean M. Gilpin, The Political Economy of International Relations 247–48
(1987); Michael P. Todaro, Economic Development 534 (5th ed. 1994)
8
Barry W. Poulson, Economic Development: Private and Public Choice 39 (1994).
9
These expropriations included notably the seizure of petroleum assets in Iran in 1951 and in Libya in 1955,
and Castro’s expropriation of the private sector in Cuba starting in 1959. These waves of expropriations
continued in the 1970s. One study by the United Nations has identified 875 expropriations occurring in sixty-
two countries between 1960 and 1974. Salacuse & Sullivan, supra note 29, at 75 n.54.
10
Asian Development Bank (2010), Key Indicators for Asia and the Pacific 2010, 41st edition

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also mainly benefits countries that are growing rapidly and have a politically stable
environment. One of the implications when an investment (no matter what sort of investment)
is considered is that certain risk have to be taken. In case a firm wants to invest abroad, the
firm wants to minimize the risk. When a country faces political, economic and/ or social
instability, the risk for the firm who wants to invest in a particular country will increase.
These kinds of instability could occur when a country does not have a stable legal system,
lack of appropriate laws, faces high inflation, volatile exchange rate etcetera. These factors
could increase the investment risk and these have to be taken into account when a firm wants
to make an investment (abroad)11.

Meaning and Roles of Bilateral Investment Treaties

A BIT could help attract investment by serving as a commitment device. In particular, a BIT
could be a commitment device to overcome or mitigate dynamic inconsistency problems;
Riskier countries tend to attract a higher level of FDI, most likely because of the risk
premium payable through such direct measures as tax holidays. BITs lay out various
principles which include provisions on the scope of application, entry and establishment of
investment, fair and equitable treatment, national treatment and MFN treatment,
expropriation and compensation, transfer of funds and dispute settlement, both between
contracting parties and between a contracting party and an investor. Rights secured in a BIT
are reciprocal; For example; investors from country A investing in B are the same as those
given to investors from country B investing in country A. However, in practice there is
usually tremendous asymmetry as almost all the FDI flows covered by BITs are in fact in one
direction, mostly from Developed Countries to Emerging Economy Territory;

Therefore BITs are unlikely to have much of an impact on FDI since they lower risk. This is
because, BITs defend and promote investment abroad by providing core protections to
foreign investors, reducing investors’ exposure to political risk and uncertain business
environments. One of the vacuums in the BITs in Tanzania is lack of clear definition of
investment as it does not give specific definition of investment; and this may open Pandora
box in what should really be deemed as investment. This is supported by the case of Biwater
Gauff (Tanzania) Ltd Vs The United republic of Tanzania12

11
J. P. Chousa, K.C. Vadlamannati , B. P. Aristidis and A. Tamazian (2008), Determinants of Barries to quality
of direct Foreign Investments – Evidences from South & East Asian Economies
12
Biwater Gauff (Tanzania) Ltd Vs The United republic of Tanzania (2005) the Tribunal observed that the BIT
(Tanzania – UK BIT, 1994) defines ―investment‖ in extremely broad terms. Under Article 1(a), an ―investment‖

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The 1998 Energy Charter Treaty (ECT) in its article 1(7) (a) (ii) defines ―investor‖ with
respect to a contracting Party to include a ―company or other organisation organised in
accordance with the law applicable in that Contracting Party‖. This broad definition is
somewhat qualified by Article 17 of the ECT which calls for an inquiry into a company’s
substantive connection with the state in which it is incorporated13 (see below, denial of
benefits clause). In Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt,14
the tribunal concurred in relying on the so-called Salini-test to qualify as an investment the
activities carried out in connection with the dredging operation of the Suez Canal. Likewise
in Bayindir v. Pakistan15 the operation at stake was a highway construction contract. In
determining whether there was an investment, the Tribunal relied once again on the Salini-
test. Likewise, in the case of Franz Sedelmayer Vs. The Russian Federation 16 which is the
first case in which an arbitral tribunal has interpreted the notion of investor in a way that

means ―every kind of asset‖, including (without limitation)… and thus dismissed the Preliminary Jurisdictional
Objection of the URT (that the BGT‘s claim did not directly arise from the BIT) as the ―every kind of asset‖,
notion could possibly include even worthless assets.
13
These companies are usually called ―mailbox‖ or ―brass-plate‖ companies. They are typically favoured for tax
and regulatory reasons and also for treaty protection availed to the investors.
14
Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13,
Decision on Jurisdiction, 16 June 2006 identified the following elements as indicative of an investment for
purposes of the ICSID Convention: 1) a contribution; 2) a certain duration over which the project is
implemented; 3) sharing of operational risks and 4) a contribution to the host state’s development. The tribunal
also emphasised that these elements may be closely interrelated, should be examined in their totality and will
normally depend on the circumstances of each case. The tribunal found that the amount of work involved and
the related compensation showed that the Claimants’ contribution was substantial. The operation was deemed of
such magnitude and complexity that there could be no question as to the involvement of a risk. Lastly, the
tribunal noted that it could not be seriously denied that the operation of the Suez Canal was of paramount
significance for Egypt’s economy and development.

15
Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan ICSID Case No. ARB/03/29,
Decision on Jurisdiction, 14 November 2005 took the view that Bayindir made a significant contribution, both
in terms of know-how, equipment and personnel and in financial terms. The duration of the contract was
considered as a paramount factor to distinguish investments from ordinary commercial transactions, having in
mind that the bar should not be put very high. In the present case, the project extending over three years was
deemed sufficient to meet the duration test. The tribunal recognised that besides taking the risk inherent to long-
term contracts, Bayindir incurred an obvious risk related to the very existence of a defect liability period of one
year and of a maintenance period of four years against payment. On the last feature, the tribunal while
recognising that an investment should be significant to the host state’s development, it also pointed out that as
stated by the LESI tribunal this condition is often already included in the three classical conditions set out in the
Salini test. In any event, Pakistan did not challenge the declarations of its own authorities on the importance of
the road infrastructure for the development of the country. The tribunal indicated that all these elements ―may be
closely interrelated, should be examined in their totality, and will normally depend on the circumstances of each
case‖.

16
Franz Sedelmayer Vs. The Russian Federation, SCC Award, 7 July 1998. In this case, Sedelmayer, a German
national, was the sole owner and CEO of SGC International incorporated in Missouri, USA. The latter made an
investment in Russia in the area of enforcement equipment. When a dispute arose from this activity, Mr
Sedelmayer initiated an arbitration procedure under the German-Russia BIT (since the US-Russia BIT was not
in force). The Tribunal held that SGC international was a simple vehicle by which Mr Sedelmayer has

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allowed the protection of an investment made by the intermediary of a company incorporated
in a third state.

It is a widely held view that, the DTTs are intended to eliminate double taxation for
multinational companies, thereby encouraging FDI, and prevent fiscal evasion which has a
negative effect on FDI. Using the time series approach, the paper shows the extent to which
Tanzania has entered into the DTTs with other countries as one of the Performance criteria
and encouragement of those treaties for FDIs flows as another criterion in DTTs recent
development. Another part shows the extent to which the existing DTTs is compatible with
the OECD Model Convention, UN Model Convention and US Model Convention as guiding
models for the assessment of the negotiating powers to make possible for their existence.
This also has been taken as another criterion that substantiates the way the Government of the
URT through Treasury Performed in entering into the DTTs venture.

Evolution and Development of Bilateral Tax Treaties

The desirability of encouraging the conclusion of bilateral tax treaties between developed and
developing countries was recognized by the Economic and Social Council of the United
Nations, which in its resolution 1273 (XLIII) adopted on 4 August 1967 requested the
Secretary-General ―to set up an ad hoc working group consisting of experts and tax
administrators nominated by Governments, but acting in their personal capacity, both from
developed and developing countries and adequately representing different regions and tax
systems, with the task of exploring, in consultation with interested international agencies,
ways and means for facilitating the conclusion of tax treaties between developed and
developing countries, including the formulation, as appropriate, of possible guidelines and
techniques for use in such tax treaties which would be acceptable to both groups of countries
and would fully safeguard their respective revenue interests‖. Pursuant to that resolution, the
Secretary-General set up in 1968 the Ad Hoc Group of Experts on Tax Treaties between

transferred his capital to Russia and that he was a de facto investor. Although the language of the Treaty did not
mention the element of control but only the elements of incorporation and siège social, the Tribunal accepted
jurisdiction and noted that: ―The question then arises whether an individual who makes his investments through
a company might be regarded as an investor – a de facto – investor under the treaty. This question concerns the
general issue to what extent the ‗theory of control‘ may be applied. […] during recent years, there has been a
growing support of the control theory […] In the Tribunal‘s opinion, the mere fact that the Treaty is silent on
the point now discussed should not be interpreted so that Mr. Sedelmayer cannot be regarded as a de facto
investor‖[emphasis in the original]

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Developed and Developing Countries, composed of tax officials and experts from developed
and developing countries, appointed in their personal capacity.

The Group of Experts completed the formulation of guidelines for the negotiation of bilateral
Tax treaties between developed and developing countries in the course of seven meetings,
from 1968 to 197717. The guidelines are contained in the Manual for the Negotiation of BTTs
between Developed and Developing Countries.18 According to ESC resolution 1541 (XLIX),
the guidelines represent ―an important form of technical assistance for the conclusion of
future treaties‖. At its Seventh Meeting, the attention of the Group of Experts was drawn to
the fact that the Group of Eminent Persons appointed in 1974 by the Secretary-General
pursuant to Economic and Social Council resolution 1721 (LIII) had stated in its report to the
Secretary- General that ―If, through the work of the Group of Experts on Tax Treaties, the
provisions of these treaties could be standardized, with only a small number of clauses to be
negotiated in particular cases, they would in fact amount to an international agreement on
taxation, which . . . [the Group of Eminent Persons considers] to be the final objective‖.19

In his report to the first regular session of 1978 of the ESC on the work of the Group of
Experts at its Seventh Meeting, the Secretary-General expressed the view that ―the
completion of a model bilateral convention for possible use by developed and developing
countries constitutes a logical follow-up to the work done by the Group of Experts relating to
the formulation of guidelines and would moreover be consonant with the recommendation of
the Group of Eminent Persons that ―BTTs should be as uniform as possible so as to prepare
the way for an international tax agreement‖ (see E/1978/36, para. 15). At that session, the
Economic and Social Council adopted decision 1978/14, in which it welcomed the position of
the Secretary-General as set forth above and requested the Group of Experts ―to complete its
consideration of a draft model bilateral convention at its Eighth Meeting in 1979‖.

17
The Group of Experts’ Meeting were attended by members from Argentina, Brazil, Chile, France, Federal
Republic of Germany, Ghana, India, Israel, Japan, the Netherlands, Norway, Pakistan, the Philippines, Sri
Lanka, the Sudan, Switzerland, Tunisia, Turkey, the United Kingdom of Great Britain and Northern Ireland and
the United States of America. These meetings were also attended by the observers from Austria, Belgium,
Finland, the Republic of Korea, Mexico, Nigeria, Spain, Swaziland and Venezuela and from the following
international organizations: the International Monetary Fund, the International Fiscal Association, the
Organization for Economic Co-operation and Development, the Organization of American States and the
International Chamber of Commerce.
18
United Nations publication, Sales No. E.79.XVI.3
19
The Impact of Multinational Corporations on Development and on International Relations (United Nations
publication, Sales No. E.74.II.A.5), p. 92.

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The UN Secretariat therefore prepared a draft model convention (ST/SG/AC.8/L.29)
consisting of articles reproducing the guidelines formulated by the Group of Experts, together
with Commentaries thereon incorporating the views of the members of the Group as
expressed at its various meetings and also reproducing, where appropriate, the Commentaries
on the Articles of the 1977 OECD Model. It may be recalled that in preparing the
aforementioned guidelines the Group of Experts had decided to use the OECD Model
Convention as its main reference text in order to take advantage of the accumulated technical
expertise embodied in that Convention and the Commentary thereon, and also for reasons of
practical convenience stemming from the fact that the Convention was being used by OECD
member countries in the negotiation of tax treaties not only with each other but also with
developing countries. However, it was fully understood that there was no presumption of
correctness to be accorded to the OECD Model Convention, and that the decisions of the
Group were in no way required to be governed by the OECD text.

The Group of Experts reviewed the draft UN Model Convention at its Eighth Meeting, held at
Geneva from 10 to 21 December 1979, and adopted the final text of the Convention and of
the Commentary thereon. In 1980, the UN published the UN Model Double Taxation
Convention between Developed and Developing Countries, which was preceded in 1979 by
the Manual for the Negotiation of BTTs between Developed and Developing Countries. By
its resolution 1980/13 of 28 April 1980, the Economic and Social Council renamed the Group
of Experts as ―Ad Hoc Group of Experts on International Cooperation in Tax Matters‖. At
present, the Group of Experts is composed of 25 members—10 from developed countries and
15 from developing countries and economies in transition.

In the 1990s, the Ad Hoc Group of Experts on International Cooperation in Tax Matters
recognized that significant changes had taken place in the international economic, financial
and fiscal environment. In addition, there has been the advent of new financial instruments,
transfer pricing mechanisms, the growth of tax havens and the globalization affecting
international economic relations as well as the subsequent OECD Model Convention revision
and updates in 1992, 1994, 1995 and 1997. Consequently, the Eighth Meeting of the Group
of Experts held in Geneva in December 1997 established a Focus Group consisting of five
members and four alternates, to proceed with the revision and update of both the UN Model
Double Taxation Convention between Developed and Developing Countries and the Manual
for the Negotiation of BTTs between Developed and Developing Countries.

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Accordingly, following its Seventh Meeting (Geneva, 11-15 December 1995), Eighth
Meeting (Geneva, 15-19 December 1997), and the Focus Group meetings (New York, 9 and
10 December 1998, and Amsterdam, 22-25 March 1999), the Group of Experts reviewed the
amendments suggested by its members to the Articles and Commentary of the UN Model
Double Taxation Convention between Developed and Developing Countries. These
amendments were consolidated in the draft revised UN Model Convention presented before
the Ninth Meeting of the Group of Experts20 held in New York from 3 to 7 May 1999. The
main objectives of the revision of the UN Model Convention were to take account of
developments since 1980 in the globalization of trade and investment and in the international
tax policies of developed and developing countries.

The process of revision and update of the UN Model Double Taxation Convention between
Developed and Developing Countries was initiated in 1995 and culminated in 1999 at the
Ninth Meeting of the Group of Experts21. The UN Model Convention represents a
compromise between the source principle and the residence principle, although it gives more
weight to the source principle than does the OECD Model Convention. As a correlative to the
principle of taxation at source the articles of the Model Convention are predicated on the

20
The Group of Experts adopted the revised United Nations Model Double Taxation Convention between
Developed and Developing Countries, subject to editorial changes. The comments and suggestions received
from the members of the Group of Experts on these changes were examined by a Steering Committee during its
meeting held in New York from 12 to 14 April 2000. The meeting was attended by Mr. Antonio Hugo Figueroa
(Argentina), who was appointed Chairman, Mr. Mayer Gabay (Israel), Mr. Noureddine Bensouda (Morocco),
Mr. Mike Waters (United Kingdom) and Mr. Mordecai S. Feinberg (United States). The Secretariat was
represented by Mr. Abdel Hamid Bouab and Mr. Suresh Shende, Secretary and Assistant Secretary of the Group
of Experts, respectively. The final text of the United Nations Model Convention as so modified was adopted on
a consensual basis by the Steering Committee. It was decided that after the editorial changes had been effected,
a revised version of the United Nations Model Convention would be published. Thus, the revision and update of
the United Nations Model Double Taxation Convention between Developed and Developing Countries was
undertaken by the Group of Experts, Focus Group and Steering Committee under the overall guidance and
supervision of Mr. Abdel Hamid Bouab, Officer-in-Charge, Public Finance and Private Sector Development
Branch, Department of Economic and Social Affairs, United Nations, and Secretary, Ad Hoc Group of Experts,
assisted by Mr. Suresh Shende, Interregional Adviser in Resource Mobilization and Assistant Secretary of the
Group of Experts. The Steering Committee expressed its gratitude to Mr. Abdel Hamid Bouab for his
knowledge, leadership and negotiating skills which contributed to the successful revision of the United Nations
Model Double Taxation Convention between Developed and Developing Countries.

21
The Ninth Meeting was attended by the following members: Antonio Hugo Figueroa (Argentina), Iraci Kahan
(Brazil), Adélaïde Nare (Burkina Faso), Yukang Wang (People’s Republic of China), Abdoulaye Camara (Côte
d’Ivoire), Mona M. A. Kassem (Egypt), Hillel Skurnik (Finland), Helmut Krabbe (Germany), Seth E. Terkper
(Ghana), Ravi Kant (India), Arie Soelendro (Indonesia), Mayer Gabay (Israel), William W. Adler (Jamaica),
Karina Pérez Delgadillo (Mexico), Abdelali Benbrik (Morocco), Ernst Bunders (the Netherlands), Atef Alawneh
(Palestine Authority), María Pastor (Spain), Daniel Luthi (Switzerland), John Brian Shepherd (United Kingdom)
and Mordecai S. Feinberg (United States). Members from France, Japan, Nigeria and Pakistan did not attend the
meeting21.

9|Page
premise of the recognition by the source country that (a) taxation of income from foreign
capital would take into account expenses allocable to the earnings of the income so that such
income would be taxed on a net basis, that (b) taxation would not be so high as to discourage
investment and that (c) it would take into account the appropriateness of the sharing of
revenue with the country providing the capital. In addition, the UN Model Convention
embodies the idea that it would be appropriate for the residence country to extend a measure
of relief from double taxation through either foreign tax credit or exemption as in the OECD
Model Convention.

It may also be noted that domestic tax laws in their turn exert an influence on the content of
BTTs. Thus, although there was general agreement in OECD about the principles embodied
in the OECD Model Convention and although most existing BTTs conform by and large to
the latter, there are often substantial variations from one treaty to another, due to differences
in the domestic laws of the various Contracting States. The UN Model Double Taxation
Convention between Developed and Developing Countries forms part of the continuing
international efforts aimed at eliminating double taxation. These efforts begun by the League
of Nations and pursued in the Organisation for European Economic Co-operation (OEEC)
(now known as the OECD) and in regional forums, as well as in the UN, have in general
found concrete expression in a series of model or draft model DTTs.

In 1921, the League of Nations, acting through its Financial Committee in response to an
appeal by the 1920 Brussels International Financial Conference for action aimed at
eliminating double taxation, entrusted a team of four economists (from Italy, the Netherlands,
the United Kingdom and the United States of America) with the task of preparing a study on
the economic aspects of international double taxation.

In 1922, the Financial Committee of the League invited a group of seven high-level tax
officials (from Belgium, Czechoslovakia, France, Italy, the Netherlands, Switzerland and the
United Kingdom) to study the administrative and practical aspects of international double
taxation and international tax evasion. In 1925, the group was enlarged to include officials
from Argentina, Germany, Japan, Poland and Venezuela. In 1927, an official from the United
States of America joined the group. In the course of sessions held from 1923 to 1927, the
group drafted Bilateral Conventions for the Prevention of Double Taxation in the Special
Matter of Direct Taxes dealing with income and property taxes, a Bilateral Convention for
the Prevention of Double Taxation in the Special Matter of Succession Duties, a Bilateral
10 | P a g e
Convention on Administrative Assistance in Matters of Taxation and a Bilateral Convention
on [Judicial] Assistance in the Collection of Taxes. The conventions, with their
commentaries, were sent to the various Governments, Members and non-members of the
League, which were invited to send representatives to discuss them at a General Meeting of
Government Experts. The latter meeting, held at Geneva in October 1928, included
representatives of 27 countries.

SCOPE OF THE STUDY AND METHODOLOGY

Scope of the Study

The paper covers the period between 1973 and 2012 onto which two fiscal regimes were
captured namely; Income Tax Act, No 33 of 1973 and Income Tax Act, Cap 332 [2004 as
may be amended] having two fiscal Regimes including the policy framework relating to
DTTs which were the Guiding tools to enter into the DTTs and the BITs. It provides the
analysis of the laws and policies as reflected in Model Conventions, statutes, cases and other
instruments (if any). It further gives analysis of the BITs as they work closely with the DTTs
to enhance FIDs Flows. The BITs extends its analytical profile with comparative analysis in
EAC and SADC Regions while highlighting in nutshell in depiction pattern.

Methodology and Data Collection

Our discussion includes local laws, foreign laws and international laws, the OECD, UN and
US Model Conventions with their commentaries relating to BITs and DTTs. Reflection to the
best practices as they are applied from different jurisdictions to which Tanzania is a Party to
the Treaty has been adopted. The previous literatures analyse the gaps that have been
explored. The case studies and decided Case Laws has been used to support the analysis of
the Performance currently in place by the URT using primary and secondary data from 1973
through 2013. The Tax Treaty Case Law, materials of academic scholars (although most of
the time they have expressed the authors opinion) have been used as illustrative and
supportive part to examine the relevant issue. Data were collected from the Ministry of
Finance, TRAT/TRAB and from the University Library.

11 | P a g e
STATEMENT OF THE PROBLEM

It is a widely held view that there is Ineffectiveness and Inefficiency on part of the
Government of URT to enter into Bilateral Treaties both BITs and DTTs thereby confiscating
the taxing rights and inadequacy for the Exchange of Information in Tax Matters as per
Article 26 and Article 27 in the Assistance in the Collection of Taxes of OECD Model and
Tanzanian Model Conventions respectively which had to curb tax avoidance, prevent fiscal
evasion and attract FDIs flows; more specifically DTTs and BITs not to be regarded as
inducing tool to attract FDIs.

BRIEF LITERATURE REVIEW

In the last 20 years or so, many studies have been made on the effects of taxation (in
particular, the tax rate) on foreign direct investment22, and in more recent years, the effects of
tax treaties on foreign direct investment have come to be examined.

The analysis by Bruce Blonigen and Ronald Davies (2002) of the impact of BTTs on FDI
activity in OECD countries from 1982 to 1992 found that DTTs are associated with larger
FDI stocks and flows. However, when older DTTs concluded many years before the period of
their study are distinguished from newer DTTs entered into during their observed time
period, they found that the newer treaties had no positive effect on FDI activity. In a
subsequent study, Blonigen and Davies (2003) investigated U.S. FDI flows from 1980 to
1999 and found that DTTs concluded by the United States during this period had no
significant effect on inward and outbound FDI.23 Peter Egger et al. (2004a) also found a
negative effect of newly implemented DTTs on outward FDI stock from OECD countries
when analyzing FDI data two years prior and two years after DTT conclusions from 1985 to
2000.

In his analysis of cross-border M&A, Di Giovanni (2005) showed that the conclusion of a tax
treaty increases foreign direct investment. Stein and Daude (2007), in their analysis of 17
OECD countries’ foreign direct investments in 58 countries, showed that the conclusion of a
tax treaty also increases foreign direct investment. On the other hand, Louie and Rousslang

22
Among survey reports concerning these types of studies are those by Gordon and Hines (2002), and de Mooij
and Ederveen (2003).
23
See supra text accompanying notes 14–17.

12 | P a g e
(2008) showed that the conclusion of a tax treaty does not influence foreign direct
investments by U.S. corporations. Hines (2001), Hotei (2006), and Azemar et al (2007)
focused on Japan’s "tax sparing credit system", which is a provision of tax treaties, and
examined its effect on foreign direct investment.

19 jurisdictions have been moved to the category of those jurisdictions having substantially
implemented the standards for having signed at least 12 agreements to the standards. Even
though some OFCs have signed agreements with other OFCs, the vast majority of agreements
are with countries which have an interest in obtaining information for tax purposes.

Hotei (2006) and Azemar et al (2007) focused on Japan’s "tax sparing credit system", which
is a provision of tax treaties, and examined its effect on foreign direct investment. Tajika,
Ohno, and Hotei (2007) looked at the recent trends concerning Japan’s outbound foreign
direct investments by using statistical indicators, such as the "Balance of Payments Statistics"
of the Ministry of Finance and the "Basic Survey of Overseas Business Activities" of the
Ministry of Economy, Trade and Industry. They found that Asia accounted for the highest
percentage in terms of the amount of income on foreign direct investment returned to Japan
from abroad.

Reuven Avi-Yonah (2004) provides an overview of the reasons for the rise of DTTs and their
salient features. The need to address the issue of revenue allocation between host and home
countries arose as increased international investment created a potential conflict of tax
jurisdictions, that is, two or more jurisdictions had the right to levy tax on a single event or a
single taxpayer (e.g., a company operating in several countries). Double taxation can also
occur in other situations, for instance if jurisdictions have different tax definitions, residency
requirements or income classifications. When the national tax laws of the two countries differ
significantly, the jurisdictional conflict can also lead to improper conduct by taxpayers.
Jurisdictional conflicts can be relieved unilaterally (under national tax laws) or at times
multilaterally24; on the other hand, DTTs provide the most important and most common
international measures to relieve double taxation problems.

24
The various attempts at multilateral agreements thus far have had little success. Those that have been
somewhat successful have been supplemented by bilateral treaties among the parties to the multilateral
agreement. Karl P. Sauvant and Jorg Weber, eds., International Investment Agreements: Key Issues (New York
and Geneva: United Nations, 2004), volume II, p. 204. Available at:
http://www.unctad.org/en/docs/iteiit200410v2_ en.pdf.

13 | P a g e
However, taxpayers have been allowed to do tax planning in the basis of considerations of
Economic Efficiency and Fiscal Justice where taxpayer should not be able to use legal
constitutions or transactions to avoid similar situations being subjected to the same tax
burden. In other words, taxpayer should not abuse his right to minimize his/her tax burden. In
line with the case of Gregory Vs Helvering25 in the United States, taxpayers are allowed to
avoid huge tax liabilities. The issue examined in this volume is to what extent the expansion
of the BITs and DTTs networks has directly led to the rapid growth of FDI flows that
occurred during the past decade or so. In line with the legal studies one FDIs determinant has
been distinguished in this literature part that is, the regulatory framework;

The Regulatory Framework

The number of BITs and DTTs concluded over the past couple of decades, and their pro-
investor content, is reflective of the general movement of countries toward efforts to attract
FDIs by liberalizing their FDIs regimes and creating national regulatory frameworks that are
favorable for foreign investors. The regulatory framework of a host country is a key
determinant for the location of foreign investment in so far as foreign investors simply cannot
enter into, and operate in, a country if national laws prohibit or impede foreign investment.
For over two decades, virtually all countries have been improving their investment climate by
adopting national laws and regulations, including those that open more sectors to foreign
investment, that facilitate inward FDIs.

Between 1991 and 2006, out of 2,533 national legal and regulatory changes relevant to
foreign investment, 91% were in the direction of making the host country environment more
favorable for FDIs (Table 3). However, one should also note that, while the share of
regulatory changes that are favorable to FDI remains high, the number of favorable changes
has decreased significantly since 2004; in fact, the number of regulatory changes that are less
favorable to FDIs tripled between 2002 and 2006, perhaps signaling an increased skepticism
in some countries of the benefits of FDI and a new tendency toward FDI protectionism.

International investment agreements are part of the regulatory framework of a host country
and can affect aspects of it directly. Most importantly, BITs establish certain standards of
treatment that become parameters for national regulations in the investment area, and DTTs

25
Gregory Vs Helvering, Commissioner of Internal Revenue (1934) 6469 F 2 nd 809 at 810; It was held inter
alia that anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose
that pattern which will best pay the treasury; there is not even a patriotic duty to increase one‘s taxes‖

14 | P a g e
establish or clarify tax treatment for foreign investors. Investment agreements may also
provide for the opening of certain sectors of the host country economy. Finally, if a country
has concluded a BIT with the home country of an investor that grants investors from that
home country certain enforceable rights, the investor typically have access to international
arbitration.

In this context, then, BITs and DTTs can help improve the regulatory framework by
complementing host-country policies related to FDI, guaranteeing certain investor rights,
making the legal and tax frameworks more transparent and stable for investors, and
mitigating the potential impacts of political or economic instability by establishing certain
enforcement procedures. If BITs and DTTs help improve the regulatory determinants for
FDIs, they then allow the key economic determinants—if present—to prevail. Despite
difficulties with respect to identifying the specific impact of treaties on investment flows
(given the wide range of other variables that need to be considered), as well as cause and
effect relationships between the existence of BITs and DTTs and FDIs flows, a number of
scholars have attempted to assess the impact of such agreements on FDIs flows.

Bilateral Investment Treaties and Foreign Direct Investment

Jeswald Salacuse and Nicholas Sullivan (2005) and Tim Buthe and Helen Milner (2008) both
determined that concluding BITs does have a positive effect on FDIs inflows and that the
effect is larger when developing countries conclude these agreements with economically
more important countries.

Eric Neumayer and Laura Spess (2005), looking at 119 developing countries between 1970
and 2001, found that developing countries that signed more BITs with developed countries
that were major source countries of FDIs received a higher share of FDIs flowing to
developing countries. Robert Grosse and Len Trevino (2005) and Kevin Gallagher and
Melissa Birch (2006) also found a strong positive relationship between the total numbers of
BITs concluded by a country and FDIs inflows to that country in studies that focused on
Central and Eastern Europe and Latin America, respectively.26 Susan Rose-Ackerman (2005)
took a global view, finding that, as the total worldwide coverage of BITs goes up; overall FDI

26
The six states that voted in opposition were Belgium, Denmark, the Federal Republic of Germany,
Luxembourg, the United Kingdom and the United States. The ten states that abstained were Austria, Canada,
France, Ireland, Israel, Italy, Japan, the Netherlands, Norway, and Spain. Charter of Economic Rights and
Duties of States, G.A. Res. 3281 (XXIX), UN GAOR, 29th Sess., 2315th plen. mtg., UN Doc.
A/RES/3281(XXIX) (Dec. 12, 1974), reprinted in 14 I.L.M. 251 (1975).

15 | P a g e
flows to developing countries may increase, though the marginal benefit to any one country
of signing BITs will decrease. Unlike Neumayer and Spess, Rose-Ackerman (2005) found
that ―the marginal impact of BITs is greater in countries that already have relatively effective
legal regimes and favorable economic environments.‖

Deborah Swenson (2009) also found that countries were more likely to sign BITs if they
already had high levels of FDIs, suggesting that ―the interest of existing foreign investors
drove the signing of BITs, at least in part‖; but she maintained that signing these BITs may
have helped these countries retain existing levels of FDIs.

Double Taxation Treaties and Foreign Direct Investments

There are considerably fewer studies of the impact of DTTs on FDI flows than there are of
the effect of BITs. On the one hand, this may not be surprising since one of the declared
principal objectives of BITs is to promote FDIs flows, and this objective invites a test
whether it is indeed achieved; in addition, BITs are politically more sensitive because they
directly influence the regulatory space of host countries across a range of important policy
areas. On the other hand, DTTs (highly technical treaties) should be important for the
locational decision of firms as they can directly affect the ―bottom line‖ of a company’s
performance.

Moreover, the incidence of DTTs treaty shopping suggests that they influence the routing of
investment flows. A well-known example is the fact that a good part of FDIs into India is
routed through Mauritius, as the latter has more favorable DTTs with India than those
concluded between India and the original residence countries of investors.27 In any event,
most of the difficulties that afflict the analysis of the impact of BITs on FDIs flows also are
relevant to the impact of DTTs on FDIs flows and hence need not be rehearsed.

Henry Louie and Donald Rousslang (2008) investigated how both the quality of host-country
governance and having a bilateral income tax treaty with the United States affect the rates of
return that U.S. companies expect from their foreign investment. They found that poor
governance causes U.S. companies to require significantly higher rates of return, thereby
27
Even before the adoption of the UN Charter, the use of force to collect debts had become increasingly
controversial. For example, Article I of the Hague Convention of 1907 had outlawed the use of force to collect
contract debts owed to private citizens of one state by the government of another state unless the debtor state
refused to submit the dispute to arbitration. Pacific Settlement of International Disputes (Hague, I), Oct. 18,
1907, T.S. No. 536, 1 Bevans 577. The American delegation to the conference that drafted the convention had
supported this provision. See 6 Green Hackworth, Digest of International Law 152 (1943).

16 | P a g e
discouraging inward FDIs, and that, after accounting for the quality of host-country
governance; a tax treaty does not have an effect on the required rates of return. Similarly,
Allison Christians (2005) used a case study of a hypothetical tax treaty between Ghana and
the United States to demonstrate that a typical tax treaty with a low-income developing
country does ―not provide major tax benefits to the private sector [so] even if concluded,
these treaties would not have a significant impact on cross-border investment and trade.‖

Pursuant to the ―Principle of freedom of contract‖ the point of departure generally is that
taxpayers are free to arrange their affairs as they wish in order to save taxes; this is in line
with the case of CIR Vs Ayrshire Pullman Motor Services & Ritchie and CIR Vs Duke of
Westminster28 For Australia the same argument was made in the case of Jacques Vs Federal
Commissioner of Taxation29

EMPIRICAL FINDINGS

Trend Analysis of DTTs and BITS between Developed and Developing Countries

The steady rise of DTTs (Figure 4) began nearly four decades ago (while the sharp rise in
BITs began in the early 1990s). By the end of 2006, 2,651 DTTs had been signed.45 Unlike
BITs, which were initially concluded largely between developing and developed countries,
DTTs were initially signed primarily between developed countries, as these were traditionally
the main capital exporting and capital importing countries and thus faced the greatest double
taxation challenges. Starting in the late 1960s, as emerging markets increasingly became host
countries for FDI, and gradually also became home countries, the number of those countries
that signed DTTs with both developed countries and other developing countries also began to
rise rapidly (Figure 5).

Developed countries still top the list of the countries with the largest number of DTTs, led by
the United States, the United Kingdom and France (Figure 6) which coordinate their efforts
on international tax matters in the Fiscal Committee of the OECD. In 1963, these countries

28
CIR Vs Ayrshire Pullman Motor Services & Ritchie and CIR Vs Duke of Westminster (1936) 19 TC 490; Lord
Tomlin stated; ―Every man is entitled, if he can to order his affairs so that the tax attaching under the
appropriate acts is less than it otherwise would be‖
29
Jacques Vs Federal Commissioner of Taxation (1924) 34 C.L.R 328 at 362; Starke J. wrote ―There is
nothing wrong in companies and shareholders entering, if they can into transaction for the purpose of arriving
or relieving them of taxation(……)‖

17 | P a g e
issued a draft model DTT,30 which is updated periodically and has become the model for
most DTTs concluded since its conception. In addition, a Committee of Experts on
International Cooperation in Tax Matters, convened by the Secretary-General of the United
Nations, issued a ―Manual for the Negotiation of BTTs between Developed and Developing
Countries,‖ as well as the ―UN Model Double Taxation Convention between Developed and
Developing Countries‖ in 1979, which are also updated periodically.31 The UN model was
drafted specifically because of concerns that the OECD model was not appropriate for tax
treaties between developed and developing countries, which involve non-reciprocal cross
border activity. Nevertheless, the OECD and UN models share many common features. Most
DTTs are based on one of these two models, with exceptions and variations depending on the
specific relationship between the two contracting states. One other model DTT is that of the
United States first published.

Up to the G20 Washington Summit on 15 November 2008 a total of 44 Tax Information

Exchange Agreements (TIEAs) had been signed. Very few of the jurisdictions identified as
not having substantially implemented the internationally agreed tax standard in the Progress
Report issued in conjunction with the G20 Summit in London on 2 April had signed any
DTCs that met the standard. The 23 TIEAs agreed in 2008 were double the total number of
agreements that had been signed since the Global Forum began in 2000. Following the G20
summit in Washington and in the run-up to the London Summit in April 2009 TIEA signings
skyrocketed, as well as the negotiation of new DTCs or protocols to existing DTCs that
incorporated the standard on exchange. A further 21 TIEAs/DTCs were agreed in just four
months, and between the London Summit and the G20 meeting in Pittsburgh in September
164 more agreements were in place. The pace continued and by the end of the year a total of
jurisdictions working to substantially implement the standard had signed 195 TIEAs and
upgraded 110 DTCs (Figure 7).

30
The ―OECD Model Convention on Income and on Capital‖ (MTC) is available at:
http://www.oecd.org/document/17/0,3343,en_2649_33747_35035793_1_1_1_1,00.html The electronic version
of the MTC is based on the text as it was updated in January, 2003, but includes the 1963 and 1977 texts.
31
The ―Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries‖ is
available at: http://unpan1.un.org/intradoc/groups/public/documents/ un/unpan008579.pdf; the ―United Nations
Model Double Taxation Convention between Developed and Developing Countries‖ is available at:
http://unpan1.un.org/ intradoc/groups/public/documents/UN/UNPAN002084.pdf.

18 | P a g e
Trend Analysis of DTTs and BITs in Tanzania

In 1973, the Government of the United Republic of Tanzania (URT) enacted the ITA No 33
of 1973, to which the country of Italy entered into agreement for DTTs. The performance has
not been good as depicted in Figure 1, but this has profoundly been caused by the exercise of
tax reform thereby retarding the effort for DTTs negotiation.

There was an accelerated trend in negotiation during the period of 1974 through 1979 due to
the tax reform made in 1973 by enacting ITA No 33 0f 1973 . In that period four DTTs were
negotiated, signed but nor ratified which include Denmark, Finland, Norway and Sweden.
There was a deceleration of the negotiation of DTTs from year 1980 through year 1985
caused by the war between Uganda under President Idd Amin Dada and Tanzania under
President Mwalimu Julius Nyerere; hence political instability, low level of economic growth
and belief of peace disappearance distorted confidence to investors’ and business community
in general. After economic reform of 1986 under the President Ali Hassan Mwinyi, Tanzania
had only one DTT with Sultanate Republic of Oman which was signed on 9th November,
1991 leading to the positive performance because the Agreement was fully concluded and
signed. However, actual performance seems to be inadequate because for the period of five
years only one Agreement was in place.

In the period 1992 through 1997 the performance was almost the same as in the previous five
years two DTTs were negotiated i.e. Canada and EAC, the DTT for the EAC has not been
ratified as it has a provision requiring the Agreement to be ratified at the Parliament and the
process is lagging. Following investment policy of 1997 which preserved room for the
Tanzania Investment Act, 1997, various agreements for the reciprocal protection and
promotion for investments were made in place. Taking into consideration that these
agreements have to be made in tandem with DTTs three Agreements were negotiated i.e.
Egypt, India and Korea. However, the performance registered only two DTTs i.e. Egyptian
and Indian because the DTT with Korea has been negotiated, partially concluded but has not
been signed.

With respect to Tax Reform of year 2004 the new ITA, 2004 came into being replacing the
ITA, No 33 of 1973. In this period DTTs for the Republic of South Africa was concluded and
signed and had approval of the Cabinet of the Minister and DTT for the Republic of
Botswana was concluded, negotiated but not signed. However, as various DTTs fall under the

19 | P a g e
ITA No 33, of 1973 and the time for expiry has been elapsed as majority were valid for three,
five or six years; all DTTs are subject for review and replacement in order to be compatible
with the ITA, 2004 (ITA Cap 332) and globalization policy. The DTTs that have already
been touched for review adoption include, India which requests for the protocol to make good
for the adequate interpretation of some Articles, Sultanate of Oman which also requests for
the protocol, the Qatar, UAE, Algeria, Canada, Mozambique, Malawi, EAC, Iran, Russia,
Vietnam, Seychelles and Mauritius. The total performance delivery is fourteen DTTs out of
twenty five within which actual performance under ITA, No 33 of 1973 entails eight DTTs to
have been concluded and under ITA, 2004 entails nine DTTs subject for review to have been
initiated but not concluded.

CONCLUSION

Tanzania should not only consider enhancing speed in negotiating Bilateral treaties both
DTTs and BITS but also updating its Bilateral treaty provisions and better reflecting some
innovative practices in its future bilateral treaties (BITs). Speed to update treaties that were
entered under the ITA No 33 of 1973 or negotiated thereat, should be re-negotiated to reflect
the real legal, economic and environmental factors that could impact on the investment
strategies. While, BITs should go into further detail on issues such as investor-state dispute
settlement (ISDS), or guarantee against unlawful expropriation, the DTTs should focus on the
curbing of transfer pricing and other factors that could erode the tax base when inducing
investors to come to invest to Tanzania. In that regard, taking into account that, objective
relating to the Promotion is not fulfilled, Tanzania should perhaps consider alternative
instruments to attract foreign investors rather than relying on the BITs so as to ensure that the
integrity to sign the DTTs is preserved.

More comprehensively, our study has found that, major determinants of FDI could not be
DTTs and BITS but rather macro-economic and political stability, having a large and
growing GDP, or being in proximity to a country with a large and growing GDP that can be
exported to; coupled with effective legal framework could be taken as major with primacy.
Therefore, DTTs and BITs may help but without a stable and growing economy (or the
ability to serve as an export platform to a stable and growing economy) and effective legal
framework under Tax Justice Measures, DTTs and BITs are of little help.

20 | P a g e
 LIST OF TABLE AND FIGURES

Table 2: Performance of the DTTS Negotiation under ITA, 1973 and ITA, 2004
Contracting Party Current Status Status under ITA,1973/ITA,2004 Remarks

Algeria Initiated but not Negotiated November, 2007 Under Negotiation

Botswana Concluded but not signed September, 2005 To be signed
Canada Initiated but not Negotiated signed on 15th December, 1995 To be reviewed
Denmark Signed and Concluded Signed on 6th May, 1976 To be reviewed
Egypt Signed and Concluded signed on 8th December, 2001 To be reviewed
England Signed and Concluded Date not clearly found To be reviewed
EAC signed and Concluded signed on 28th April, 1997 To be reviewed
Finland signed but not ratified signed on 12th, May 1976 To be reviewed
Italy Signed but not ratified signed 7th March, 1973 To be reviewed
India Negotiated but not signed on 1st April, 1999 To be reviewed
Concluded
Korea Negotiated but not signed on 1st April, 1999 To be reviewed
Concluded
Mauritius Initiated but not Negotiated Date not clearly found Under Negotiation
Mozambique Initiated but not Negotiated July, 2005 Under Negotiation
Norway Signed and Concluded signed on 28th April, 1976 To be reviewed
Qatar Initiated but not Negotiated October, 2006 To be reviewed
Sweden signed and concluded 2nd May, 1976 To be reviewed
South Africa Signed and Concluded 19th October, 2004 Approved by Cabinet
Sultanate of Oman signed and concluded 9th November, 1991 To be reviewed
Switzerland Terminated 20th August, 1963 To be reviewed
United Arab Emirates Initiated but not Negotiated March, 2006 To be reviewed
Zambia signed and concluded 2nd March, 1968 To be reviewed
Zimbabwe Negotiated but not Feb, 2004 Under Negotiation
Concluded
Islamic Republic of Initiated but not Negotiated Date not clearly found Under Negotiation
Iran
Russia Initiated but not Negotiated Date not clearly found Under Negotiation
Vietnam Initiated but not Negotiated Date not clearly found Under Negotiation
Seychelles Negotiated but not signed Feb, 2004 To be signed
Source: Ministry of Finance (2008)

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 Figure 1 Performance of DTT‘s Negotiation under ITA, 1973 and ITA, 2004

Figure 2: The BITs and IIAs in Tanzania

SOURCE: UNCTAD Report (2012)

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Figure 3: The FDIs Flow and Greenfield FDI Projects

SOURCE: BOT and UNCTAD Reports (2012)

Figure 4: The Growth in the Number of BITs and DTTs (1960-2006)-(Number)

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Figure 5: DTTs Concluded as of End 2006 by Country Group (Percent)

Figure 6: The Ten Countries with the Highest Number of DTTs, End 2006

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Figure 7: DTTs Signed Between G20 Summits

SOURCE: www.unctad.org/iia

Figure 8: Comparative Analysis of BITs and IIAs for EAC Countries

Source: Ministry of Finance-Policy Analysis Department (2014)

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Figure 9: SADC Comparative Analysis of BITs and IIAs
60
55
NUMBER OF BITS & IIAs

50 46
45

39
40 36

30 30 BITS
30
23 24 23 Other
21 IIAs
20 17 16 TOTA
15 14 15 14 15 15 14
13 12
10 98 9 9 9 9 9
10 87 8 8 7 8 8 78 7
6 6 6 5
3

SADC MEMBER COUNTRIES

Source: UNCTAD Report (2014)

Figure 10: SADC Regional Comparative Analysis of the FDIs Flows and Greenfield FDI Projects

Source: UNCTAD Report (2014)

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