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DOUBLE TAXATION AGREEMENTS AND THEIR RELEVANCE FOR 

DEVELOPING COUNTRIES ON THE AFRICAN CONTINENT 

 

 

 

MATTHEW KLAAS 

STUDENT NO: 1927345 

Master’s in commerce (Specialising in Taxation) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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Abstract 

Double Taxation Treaties have been developed and primarily used as a 

mechanism to remove double taxation between two independent states. 

With the onset of increased international or cross border trade it has 

become critical that governments engage in initiatives to avoid double 

taxation. African states have not been excluded from this phenomenon, 

as cross border trade and investment has been seen as a source of 

economic development for poor African states, and it is for this reason 

that the development or perhaps expansion of the tax treaty regime is a 

priority in Africa1. However, given the tax abuses that have beleaguered 

tax treaties and resulted in tax leakages, coupled with the fact that some 

tax treaties favour developed rather the developing states.  

The aim of this research report is to assess whether double taxation 

agreements are still relevant and whether these agreements provide any 

benefits for developing countries on the African continent. The research 

report will do this by reviewing the advantages and disadvantages of 

DTA’s, including the impact of DTA’s on Foreign Direct Investment and 

tax leakage on the African continent. The study will assess the different 

tax abuse’s that have beleaguered DTA’s. The research report will 

provide recommendations on how to deal with the current treaties in 

place and where there are no treaties what is the best course of action .  

The research methodology of this study will follow an analytical 

approach. This will be achieved by reviewing and analysing Secondary 

Data, such as Tax Treaties, research reports, textbooks, websites and 

opinions in articles to determine if double taxation agreements are still 

relevant and provide any benefits for developing countries on the African 

 
1 Chrisa Onyejekwe, 2018. Rebalancing Double Tax Treaties in favour of African States in Rebalancing 

International Investment Agreements in Favour of Host States. United Kingdom: Wildy, Simmons and Hill 
Publishin 



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continent. The research report will conclude by providing 

recommendations on how to deal with the current treaties in place and 

where there are no treaties what is the best course of action. This will be 

based on the analyses and interpretation of the secondary data.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key words: “double taxation agreements”, “relevance”,”delevoping” “african continent”.   

 

 

 



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1. Introduction  

 

There has been significant appropriation, of double taxation agreements. A vast 

array of literature indicates that there are about 3000 comprehensive tax treaties 

that are in effect worldwide. Quak and Timmis (2018), noted that about 1000 – 

2000 of these agreements involve at least one developing country.  

 

‘Braun and Zagler (2018) opined that a DTT between a developing and an 

industrialized economy is most likely asymmetric, having a larger flow of 

capital towards the developing and a larger opposing flow of capital revenues 

towards the industrialized economy than the other way around. In particular, 

asymmetric tax treaties inevitably reduce the tax base of developing countries, 

so that we can and should expect some form of compensation from the 

industrialized to the developing economy in case a treaty comes into effect.’  

 

Developing Countries on the African continent have been known to use tax 

treaties as a means of attracting foreign direct investment. Double taxation 

agreements have been proned to many forms of tax abuse. According to 

Hearson there is growing attention on the question of tax treaties signed by 

developing countries. The costs of tax treaties to developing countries have 

been highlighted in recent years by NGOs such as ActionAid and SOMO 

(2015). During 2014, an influential IMF paper warned that developing countries 

would be well-advised to sign treaties only with considerable caution, and the 

OECD, as part of its Base Erosion and Profit Shifting (BEPS) project, proposes 

to add text to the commentary of its model treaty to help countries decide 

whether a treaty should be concluded with a State but also, whether a State 

should seek to modify or replace an existing treaty or even, as a last resort, 

terminate a treaty. 

 



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Research Question  

It is against this backdrop that this research report seeks to asses whether 

double taxation agreements are relevant to countries in the African Continent? 

The paper will do so considering the following related questions. 

Subproblem  

1. The conceptual nature of Double Taxation agreements and model 

treaties.   

2. What are the advantages and disadvantages or the different model 

conventions    

3. Do double taxation agreements increase in foreign direct investments 

given that countries on the African Continent place a great reliance 

foreign capital ?  

4. Are double taxation agreement prone to certain tax abuses ?  

5. Have double taxation agreements resulted in tax losses/revenue 

leakage for countries on the African Continent?  

Research Methodology 

These questions will be addressed by following an analytical approach. 

Secondary data such as tax treaties, research reports, textbooks, websites and 

opinions in articles will be reviewed and analysed, to determine if double 

taxation agreements are still relevant and provide any benefits for developing 

countries on the African continent. The study will conclude by providing 

recommendations on how to deal with the current treaties in place and where 

there are no treaties what the best course of action is. 

 

International trade has long been a reality since the 5th century AD, where Asian 

silk products appeared in the European markets. True globalization and 

international trade gained momentum in the 19th century in what is known as 

the phase of the First Industrial Revolution. This wave of International cross 



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border trade often gave raise to double taxation. The OECD defined double 

taxation as the imposition of comparable taxes in two or more States on the 

same taxpayer in respect of the same subject matter for identical periods.2  

 
Bilateral Tax Treaties have been in existence for some time in different forms.  

 

In 1872, Great Britain and Switzerland (Canton of Vaud) concluded an 

Agreement (the 1872 Agreement) for the prevention of double taxation in 

respect of death duties. The 1872 Agreement holds a significant place in tax 

treaty history as, according to the records of the League of Nations and the 

United Nations, it is the first agreement between countries which solely and 

directly addresses the issue of double taxation, albeit in a limited manner.3 

 

According to Arburtunia and Kovacevic, “in 1889, the first international 

conventions on avoiding of double taxation (double taxation convention(s), 

hereinafter: DTC, DTCs) were concluded in what is now Germany, as treaties 

between certain component states of Prussia. The first Bilateral Tax Treat 

(BTT) or what is commonly referred to as Double Taxation Agreement was 

entered into by Prussia and Austria in 1899. A Double Taxation Agreement 

was concluded between Hungary and Austria in 1909. However, few Double 

Taxation Agreements were entered into from then until the 1920s, when after 

World War I Germany embarked upon forming a number of Double Taxation 

Agreements with its neighbours.”4 

 

Tax treaties have since developed and been primarily used as mechanism to 

remove double taxation between two independent states. With the onset of 

increased international or cross border trade it has become critical that 

 
2 OECD 1977. Model Double Taxation Convention of Income and Capital 
3 Sunita Jogarajan (2012). The Conclusion and Termination of the “First” Double Taxation Treaty. British 
Tax Review, Volume 3, 2012 
4  Hrvoje Arburtunia and Ntasa Zunic Kovacevic (2014). The History of double taxation conventions in 

Croatia. Financial theory and practice, 38 (2): 221-245 



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governments engage in initiatives to avoid double taxation. If this was not the 

case entities or natural person who engage in cross border trade would be taxed 

in their country of residence and by the source country, as a result of this 

additional tax burden this would negatively impact their profits and make such 

cross-border activities less attractive.  There are other purposes that double 

taxation agreements fulfil.  

 

Whilst there are many model treaties that have been developed, tax treaties are 

predominately predicated on two models the OECD model which follows a 

residence-based approach and the UN model which is underpinned by source 

based approached. This underscores the incongruency in the requirements of 

the countries, as the developed nations prefer the OECD model as this allocates 

taxing rights to the residence, whilst developing countries prefer the UN Model 

as they are mostly capital importing, rather than exporting nations. There has 

been significant growth in the number of tax treaties that have been agreed and 

signed. A vast array of literature indicates that there are about 3000 

comprehensive tax treaties that are in effect worldwide. 

 

Quak and Timmis, noted that about 1000 – 2000 of these agreements involve 

at least one developing country5. There is a school of thought that indicates that 

the international tax regime is one of inequality, where double taxation 

agreements are known to favour developed rather than developing countries. 

This holds true given two factors. 

 

1) Double Taxation Agreements allocate taxing rights to one country by 

removing the taxing rights of another state. Whist most treaties are based 

on the OECD model which is a residence-based tax model this means 

 
5 Evert- Jan Quak and Hannah Timmis (2018). Double Taxation Agreements and Developing Countries. 

K4D Helpdesk Report. Brighton, UK: Institute of Development Studies 

 



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capital importing countries will forgo their taxing rights to Capital Exporting 

countries losing much needed tax revenue.  

 

2) Double Taxation Agreements signed between country pairs with Asymmetric 

trade tend to ensure that one country is the net loser in the relationship which 

tends to be the capital importing country. This due to Foreign Direct 

Investment flowing out of the capital importer far outweighing the Foreign 

Direct Investment flowing from the same country to the capital exporter.  

 

3) This poses a challenge because due to the Double Taxation Agreements 

that has been negotiated there is a reduction in the withholding tax charged 

which developing country largely depends on.  

 

Baker6, put it this way the unbalanced Foreign Direct Investment flows 

between developed countries and LDCs, as they provide an opportunity for 

the developed country to shift tax revenue from the LDC to itself. By 

negotiating lower withholding taxes, there is a smaller foreign tax credit that 

the developed country needs to allow for against the domestic taxes levied 

on repatriated income, which increases the amount of tax that it collects. 

Even where the developed country uses an exemption mechanism over 

repatriated income, the lower withholding taxes allow for more income to be 

repatriated home, which creates the opportunity for greater tax on 

subsequent domestic income payments.      

 

Developing Countries on the African continent have been known to use tax 

treaties as a means of attracting foreign direct investment and demonstrating to 

the international community that there is some degree of certainty in their tax 

laws, and they are evolving their strategy when comes to the international tax 

 
6 Paul. L. Baker (2014). An Analysis of Double Taxation Treaties and their Effect on Foreign Direct 

Investment. Int. J. of the Economics of Business, 2014 Vol. 21, No. 3, 341–377 



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system. There is no empirical evidence to suggest that entering into double 

taxation agreements does in fact attract foreign direct investments. A study by 

Neumayer on the impact on developing countries when they enter into Double 

Taxation Agreements with developed countries with regards to their ability to 

attract Foreign Direct Investment. The study found that by succumbing to the 

restrictions on their authority to tax corporate income from foreign investors 

typically contained in Double Taxation Agreements does have the desired 

payoff in terms of higher Foreign Direct Investment.7  

 

Whilst tax treaties are so widely proliferated worldwide, they have been 

besieged by their own set of challenges, such as treaty shopping, rounding 

tripping, tax avoidance and evasion. Given the complexity of the schemes and 

that these schemes are mostly employed by sophisticated Multinational 

Corporation within the ambit of double taxation and the international tax regime, 

it has created a challenge for tax authorities especially those in developing 

countries, resulting in tax leakage. Plowgian, Riccardi and Mueller noted that “in 

2013, the Organisation for Economic Co-operation and Development (the 

“OECD”) and G20 published an Action Plan on Base Erosion and Profit Shifting 

(the “BEPS Action Plan”) to strengthen international tax standards. 1 The BEPS 

Action Plan was driven by the perception that weaknesses in the current 

international tax rules and standards create opportunities for base erosion and 

profit shifting by multinational businesses and investors.2 Action 6 of the BEPS 

Action Plan identifies treaty abuse, and in particular treaty shopping, as one of 

the most important sources of BEPS concerns”.8 

 

 
7 Eric Neumayer (2006). Do Double Taxation Treaties Increase Foreign Direct Investment to Developing 

Countries? Journal of Development Studies, Vol. 43, No. 8, 1501–1519.  
 
8 Michael H Plowgian, Christopher A. Riccardi & Martin L. Mueller, Jr (2017) Treaty Benefits for 

Investment Vehicles in a Post-BEPS World: Part 1. Vol 14. Issue 4  

 



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Tax authorities on the African continent have struggled to counter these 

challenges and avoid tax leakages. According to Hearson “There is growing 

attention on the question of tax treaties signed by developing countries. The 

costs of tax treaties to developing countries have been highlighted in recent 

years by NGOs such as ActionAid and SOMO. During 2014, an influential IMF 

paper warned that developing countries would be well-advised to sign treaties 

only with considerable caution, and the OECD, as part of its Base Erosion and 

Profit Shifting (BEPS) project, proposes to add text to the commentary of its 

model treaty to help countries decide whether a treaty should be concluded with 

a State but also whether a State should seek to modify or replace an existing 

treaty or even, as a last resort, terminate a treaty”.9 

 

Therefore, the objective of this research paper is to assess whether double 

taxation agreements are still relevant and whether they provide any benefits for 

countries on the African continent.  

  

1.2 History of DTA’s  

As stated in the preceding paragraph, double taxation agreements have been 

in effect since 19th century, in some shape or form. The first double taxation 

agreement was concluded between Britain and Switzerland in 1872, to prevent 

the double taxation of death. According to Jogorajan the British Government 

was concerned about the treatment of British subjects who had property in the 

Canton of Vaud at the time of death and who were being made subject to legacy 

or succession duties in Vaud on all of their property, not just property located in 

Vaud. The Cantonal authorities enforced the imposition of these duties by 

placing an embargo on any property located within the Canton. In some cases, 

 
9 Martin Hearson, (2015). Tax treaties in sub-Saharan Africa: a critical review. Tax Justice Network - Africa, 

Nairobi, Kenya: 2 – 34.   

 



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this practice proved particularly problematic as the executors of an estate could 

not enter property located within the Canton to determine if there were any 

testamentary documents located in the property. In 1872, Great Britain and 

Switzerland (Canton of Vaud) concluded an Agreement (the 1872 Agreement) 

for the prevention of double taxation in respect of death duties. The 1872 

Agreement provides for relief from double taxation through co-ordinated 

exemption by both jurisdictions as the imposition of succession duties was 

limited to property situated within the jurisdiction.10  

The above mentioned Double Taxation Agreement was rather a form of what 

was to come in terms of Double Taxation Agreement as its focus was mainly on 

taxes as result of death.  

According to Arburtunia and Kovacevic, in 1889, the first international 

conventions on avoiding of double taxation (double taxation convention(s), 

hereinafter: DTC, DTCs) were concluded in what is now Germany, as treaties 

between certain component states of Prussia. The first Bilateral Tax Treat 

(BTT) or what is commonly referred to as Double Taxation Agreement was 

entered into by Prussia and Austria in 1899. A Double Taxation Agreement 

was concluded between Hungary and Austria in 1909. After World War 1, the 

League of Nations initiated a project to develop a model tax treaty that could 

be used globally11. The League of Nations predated what we know as the 

United Nations today.  

 

A group of economists, government officials and technical experts undertook a 

number of conferences to develop the model treaties. This effort resulted in the 

first model double taxation treaty in 1928. The model favored the allocation of 

taxing rights to the country of residence of the taxpayer. According to Arnold, 

these Model Conventions were not unanimously accepted, and the work of 

 
10 Jogarajan 2012: 284  
11 Arburtunia and Kovacevic (2014): 221-245 



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creating an acceptable model treaty was taken over by the OECD and, a few 

years later, the United Nations12. There were regional conferences held in the 

early 1940’s in Mexico City that conference was attended by representatives 

from North and South America. The culmination of the conference produced 

what is to be known as the Mexico draft, this was a model treaty which 

predominantly assigned the taxing rights to the source country rather than the 

tax-payers country of residence.  

 

The Mexico conference was followed by the London conference which 

produced what was called the London Draft, model convention in 1946. This 

model convention had a predisposition towards a residence-based tax 

allocation, moving the taxing rights to the resident country rather than the 

source, which was diametrically opposed to the position taken the Mexico draft.   

 

According to Holmes, the Organisation for European Economic Cooperation 

(the OEEC) established a Fiscal Committee in 1956, which worked on a draft 

model bilateral DTA, which was intended to be acceptable to all member 

countries. In 1960, the OEEC transformed into the Organisation for Economic 

Co-operation and Development (the OECD).13 Nowadays, the OECD is the 

predominant body driving international development of DTAs.  

 

 

1.3 What is DTA 

 

Double Taxation Agreements, are agreements that normally bilateral in nature 

and signed by two independent states. There are instances where double 

 
12 Brian. J Arnold 2016. International Tax Primer. Third Edition. Kluwer Law International 
13 Kevin Holmes 2014. International Tax Policy and Double Tax Treaties, An Introduction to Principles 

and Application. 2nd ed. Amsterdam: IBFD, 2014 



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taxation agreements take the form of multilateral agreements such as the East 

African Community agreement on double taxation, the parties to this specific 

agreement are Burundi, Tanzania, Uganda, Kenya and Rwanda. However, in 

the main most double taxation agreements are Bilateral in nature. Article 2 of 

the Vienna Convention on the law of Treaties states that a treaty is an 

international agreement concluded between States in written form and 

governed by international law, whether embodied in a single instrument or in 

two or more related instruments and whatever its particular designation (United 

Nations, 1969). Based on the definition as outlined in the Vienna Convention 

treaties can designated by any naming convention. Double taxation agreements 

are known as bilateral tax treaties, conventions or simply double taxation 

agreements.  

 

1.4 Purpose of double taxation agreements  

 

The primary function of tax treaties is in the case of international trade, to avoid 

the double taxation of foreign companies doing business in another jurisdiction. 

Without this intervention this will make international trade unattractive or 

uncompetitive. No company will have an incentive to trade in a foreign 

jurisdiction if this will result in the profits being eroded as result of the company 

being taxed in the residence and source country.  

 

Braun and Zagler put it this way undoubtedly, every double taxation treaty has 

a particular reason why it came into existence. The main motivations may vary, 

but typically include encouraging cross-border economic activity, preventing 

international tax avoidance and evasion, and, more generally, strengthening 

political ties with the partner country.14 This stance aligns with the view from 

 
14 Julia Braun and Martin Zagler (2014). An Economic Perspective on Double Tax Treaties with (in) 

Developing Countries. World Tax Journal: 242 – 281.  

 



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Rixen who stated that double taxation results from an overlap of jurisdiction to 

tax between a residence state, where the recipient of income lives, and a 

source state, where the income was generated. If both exert their power to tax 

to the full extent, the total burden on transborder economic activities is 

prohibitively high. In order to obtain the benefits of liberalization, governments 

have a common interest in avoiding such double taxation.15  

 

Most tax systems of developed and some developing countries are based on 

the worldwide taxation principles, hence the residence of these countries being 

juristic or natural persons, these persons would have the burden of double 

taxation. This would stifle cross border trade, it is this negative impact and the 

opposed effect that double taxation agreements are trying to address.  

 

There have been opposing opinions on the efficacy of tax treaties to encourage 

international trade.  

  According Holmes, who opined that however, this belief has always been 

questionable, even during the era of the League of Nations. For example Sir 

Percy Thompson, a member of the Fiscal Committee, submitted the following 

resolution in 1930:That the prevalent view that an undesirable economic result, 

viz., the creation of an artificial barrier which impedes the free flow of capital 

into the channels in which it can be most usefully and profitably employed, is 

produced by double taxation is fallacious: that origin taxation is solely 

responsible for this undesirable economic result which would remain 

 
15 Thomas Rixen, (2008).  The institutional design of international double taxation avoidance. WZB 

Discussion Paper, No. SP IV 2008-302, Wissenschaftszentrum Berlin für Sozialforschung (WZB), Berlin 

United Nations 1969 – Treaty Series vol 1155 p.331 

 



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unaffected if all taxes based on residence were everywhere abolished and in 

consequence double taxation ceased to exist.16 

 

This holds true in the sense that double taxation agreements alone do not 

provide relief to entities or natural persons that engage in cross border trade. A 

fair majority of countries have what is called foreign tax credits built into their tax 

legislation, these foreign tax credits allow countries to reduce their worldwide 

taxable income in their country of residence by claiming credits for foreign taxes 

already paid. This in itself mitigates the impact of being taxed twice in relation 

to the same tax revenue.  

 

Samantara also described and interesting methodology for tax relief outside of 

Double Taxation Agreement when she stated that Exemption involves an 

agreement in which two countries agree that incomes arising from different 

sources which are likely to be taxed in both the countries as per their respective 

income tax law should either be taxed in one of these two countries or that a 

specified portion of such incomes should be taxed by each country so that 

there is no overlapping taxation in this case. This kind of agreement results in 

a complete avoidance of double taxation of the same income in both the 

countries.17  

 

Even though these opposing views exits tax treaties are in the main still viewed 

as tool to encourage cross border trade. Double taxation agreements are also 

seen as mechanism to allocate the taxing rights between two independent 

states. In addition to the motives put forward, tax treaties are designed to 

prevent tax avoidance and evasion. Arnold states that The OECD model Double 

 
16 Holmes 2014:39 
17 Rabinarayan Samantara 2020.  International Double Taxation Relief Provisions in India: A Critical 
Analysis. VISION: Journal of Indian Taxation Vol. 7 (2), Jul-Dec 2020, pp. 45-58 doi: 
10.17492/jpi.vision.v7i2.722038 

 



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Taxation Agreement (2010) addresses this anti-avoidance and evasion 

objective primarily in four articles:18 

 

Article 7 - Business profits; 

(Article 7 of the OECD Model) stipulates that when a company is resident in 

one state generates business profits in the other DTT partner country, the 

profits are only taxable in the first state. However, in the case where there is a 

PE (i.e., a substantial business presence through a fixed place of business or 

a dependent agent) in the other signatory country, this other country has the 

right to tax profits attributable to the PE.19 

 

Article 9 - Associated enterprises; 

This article deals with transactions that may be entered into by related party 

companies such as two subsidiaries within a Group or a parent and subsidiary. 

Whereas such transactions are not entered into at arms- length, the article 

stipulates the adjustments that can be made for tax purposes. The OECD – 

Commentary) model provides that the taxation authorities of the Contracting 

States may for the purpose of calculating the tax liability of an associated 

enterprise, re-write the accounts of the enterprise, if as a result of the special 

resolutions between the enterprises, the accounts do not show the true taxable 

profits of the enterprise. 20   

  

 

Article 26 - Exchange of information; 

The (OECD 2017 – Commentary) states the article embodies the rules under 

which information may be exchanged to the widest possible extent, with a view 

of laying the proper basis for the implementation of the domestic laws of the 

 
18 Arnold 2016:6 
19 OECD 2017: C (7).1 
20 OECD 2017: C(9).1  



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Contracting states and the application of the specific provision of the 

Convention. With the increase in globalisation, it is important that there is a 

sharing of information between contracting states to ensure that the rules of 

the convention are being adhered to and more so that the domestic tax laws 

are being respected.21    

 

Article 27 - Assistance in the collection of taxes. 

The (OECD, 2017) states the contracting states shall lend assistance to each 

other in the collection of tax to the extent needed to ensure that any exemption 

or reduced rate of tax granted under this convention shall not be enjoyed by 

persons not entitled to such benefit.22   

 

Another objective which is much more subtle reason and more prevalent in 

developing countries is the Double Taxation Agreements are seen to provide 

legal certainty for foreign entities or investors looking at investing in the host 

countries. Developing countries have also been known to use Double Taxation 

Agreements as tool to attract Foreign Direct Investments this is achieved by 

including preferential tax rights in the Double Taxation Agreements.  

 

According to Kalizinje, Double Taxation Agreements are surprisingly used as 

tools of attracting Foreign Direct Investment by incorporating preferential tax 

rates and other incentives specifically applying to investors from contracting 

states. This trend is widespread among developing countries in Africa yet there 

is no tangible evidence to justify that this practice attracts Foreign Direct Invest 

and eventually lead to increase in Domestic Resource Mobilisation (DRM).23  

 
21 OECD 2017: C(26).1 
22 OECD 2017:C(29).1  
23 Frank Kalizinje,2020.The Dangers of Double Taxation Agreements in Development in Africa. Tax 
Justice Network Africa: 6 – 44 



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Samantara 2020 stated that Double Taxation Agreements also help in reducing 

harmful international tax competition from tax havens.24 These tax treaties 

include certain regulations such as the permanent establishment rule, 

provisions against treaty shopping etc. which help in limiting the number of 

beneficiaries and reducing the opportunities for channelizing incomes through 

tax havens. 

 

1.5 Conclusion  

In this Chapter we explored the history of double taxation agreement, we 

unpacked what are double taxation agreements and the objective of double 

taxation agreements. It is clear from the evidence that double taxation 

agreements have been around for a significant amount time and their 

proliferation has increased substantially since inception.  

 

Rixen articulated the objective of Double Taxation Agreements as follows 

Double taxation results from an overlap of jurisdiction to tax between a 

residence state, where the recipient of income lives, and a source state, where 

the income was generated. If both exert their power to tax to the full extent, the 

total burden on transborder economic activities is prohibitively high.25  

 

In the following chapter we will explore the model treaties, contents and 

objectives.  

 

 

 

 

 

 

 
24 Samantara 2020:51 
25 Rixen 2008:6 



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2. Model Treaties      

 

Model treaties have been developed as a framework on which bilateral model 

treaties are based and have been used as starting point to negotiate bilateral 

tax treaty agreements. According to Holmes, there are two primary factors that 

led to the development of the model double taxation agreements. First, there 

was disagreement between countries as to the appropriate provisions to be 

inserted in bilateral double taxation agreements as a policy matter. Second, 

there was ambiguity of language selected in bilateral double taxation 

agreements to achieve the desired result.26   

 

Countries are not bound to use all of the clauses or articles in the model treaties 

but can opt to select the points which are most pertinent. The important point 

about Model treaties is that they are not prescriptive and are not designed to 

interfere or override the domestic tax law. The most commonly used model 

treaties are the OECD and the UN Model treaty. There have been other tax 

treaties that have been developed across the world, as Benshalom (2010), 

opined in Africa alone, SADC (the Southern African Development Community), 

COMESA (the Common Market for Eastern and Southern Africa) and the EAC 

(the East African Community) have each developed their own model tax 

treaties.27  

 

The OCED model treaty has been largely seen to favour capital exporting 

countries. This model is based on the residence tax system, whereby it assigns 

 
26 Holmes 2014:65 
27 Ilan Benshalom (2010). The new poor at our gates: Global justice implications for international trade and 

Tax law. New York University Law Review: 85: 1-82 

 

 



19 
 

the taxing rights to the resident country and requiring the source country to forgo 

their taxing rights. The OCED consists of predominately capital exporting 

countries. There are currently only 38 countries who are members of the OECD, 

the majority of which are developed countries. These countries being mostly 

comparable in terms of their development status and largely capital exporting in 

nature, thus the predisposition towards residence rather than source. There are 

not many developing countries in the OECD, therefore they did not adequately 

participate in the drafting of the OECD. 

 

Arnold, opined that the OECD Model Convention favours capital-exporting 

countries over capital-importing countries. Often it eliminates or mitigates 

double taxation by requiring the source country to give up some or all of its tax 

on certain categories of income earned by residents of the other treaty country. 

This feature of the OECD Model Convention is appropriate if the flow of trade 

and investment between the two countries is reasonably equal and the 

residence country taxes any income exempted by the source country. 

However, the OECD Model Convention may not be appropriate for treaties 

entered into by net capital-importing countries.28  

 

This can also be aligned to Braun & Fuentes who stated that with respect to 

active business income, the double taxation treaty business profits provision 

(Article 7 of the OECD Model) stipulates that when a company resident in one 

state generates business profits in the other double taxation treaty partner 

country, the profits are only taxable in the first state. However, in the case where 

there is a PE (i.e. a substantial business presence through a fixed place of 

business or a dependent agent) in the other signatory country, this other country 

has the right to tax profits attributable to the PE. 29 

 
28 Arnold 2016:4 
29 Julia Braun and Daniel Fuentes 2016.The effects of double tax treaties for Developing countries. A 

case of Austria’s double tax treaty network Public Finance and Management Volume 16, Number 4, pp. 
383-433 2016 



20 
 

 

This is also the case when comes to passive income where the OECD Model 

Convention is clear that the residence country has the right to tax all forms of 

passive income. Royalties are taxable in the residence state the source state is 

granted limited taxing rights on elements such as dividends and interest 

payments. This will negatively impact developing countries who are so reliant 

on charging withholding taxes on these elements, as the Multinationals will 

expatriate their funds from developed countries via these methods of passive 

income.   

 

This demonstrates the position of the OECD model highly leaning towards a 

residence rather than source form of taxation. This diminishes the taxing rights 

and results in revenue tax loss for the capital importing countries as the trade is 

mostly asymmetric between the developed and developing country.  

 

Owing to the framework of the OECD model and its predisposition towards the 

residence tax, developing countries approached the United Nations to draft a 

model treaty that would take the source countries interest into account and not 

excessively limit the source countries taxing rights. The United Nations model 

treaty framework is based on the OECD model but deviates from the model as 

its premise is to allocate the taxing rights to the source country, rather them 

limiting these rights as with the OECD model. This allocation of taxing rights to 

the source countries bodes well for capital importing countries such as 

developing nations.  

 

Quak and Timmis noted that the important difference between the Models is 

the process by which they are revised. The decision on changes in the OECD 

 
 



21 
 

Model and Commentary are taken by a sub – committee called Working Party 

1 This Group consists of senior tax officials from member countries.30  

 

In contrast the UN Model and its Commentaries are revised and maintained by 

the UN’s Committee of Experts on International Cooperation in Tax Matters.31 

The UN Committee of Experts are made up of tax officials nominated by their 

respective Governments and appointed by the Secretary General. A small 

majority of members are from the developing countries.32  

 

Again Quak and Timmis opined that although the UN Model is more 

advantageous for developing countries than the OECD Model, negotiations to 

date using the UN Model have not been too successful. Furthermore, despite 

being in a majority, developing countries lack influence in the UN’s Committee 

of Experts, while the OECD’s Committee of Fiscal Affairs has considerably 

more resources and technical capacity than the UN Committee.33  

 

Rixen, summed up this conflict well when he opined that despite these 

successes in confronting the issue of double tax avoidance, the development 

was not without conflict. The most important conflict among governments is 

that between the residence and source principle of taxation (see below)34.  

 

The above view was supported by Fitzgerald who stated that Developing 

countries would benefit most from a multilateral tax treaty based on the source 

principle for two reasons. First, the gains from taxing income of foreign investors 

would be greater than the loss from not taxing income from their own residents’ 

assets held abroad, because a developing country has a net external liability 

 
30 Arnold 2016: 4 
31 Quak & Timmis 2018:7  
32 Arnold 2016: 5 
33 Ibid: 2 
34 Rixen 2008:7 



22 
 

position. Second, even the full taxation of those assets held abroad by residents 

of developing countries by the authorities in the destination country would make 

capital light much less attractive.35 

 

Resident based  

In general, developed countries are in favour of the residence principle, whereas 

developing countries prefer the source principle because it allocates a larger 

share of the transnational tax base to them. This form of taxation is linked to the 

residency of the taxpayer and they will be taxed based on all the income 

irrespective of where that income was earned.  

 

Source  

Whilst most countries, more so developed countries make use of the resident-

based system to tax their taxpayers. As this will tax both the local and worldwide 

income of their tax residents, this becomes of lesser importance to developing 

countries who tax residents do not have significant investments offshore. Most 

of the tax revenue for developing countries is derived from inward bound 

investments as these countries are mostly capital importing. The tax 

administration of developing countries is also not as sophisticated in order to 

trace and locate their tax residents, foreign income. Therefore, most developing 

countries opt for the source base form of taxation. This type of taxation is based 

on the concept that there is link between the country where the tax was 

generated versus where this income will be taxed. It is thus very important that 

the definition of Permanent Establishment is clear in the double taxation 

agreement as this impacts the source country’s ability to tax. 

 

  

 

 
35 Valpy Fitzgerald 2002: International Tax Co-operation and Capital Mobility; Oxford Studies Volume 30, 
No 2  



23 
 

2.1 Differences in the UN and OECD model.  

The Canadian tax journal 2013 outlined some key distinguishing features 

between OECD model and the UN model convention the features are as follows: 

 

First, the role of the UN model is to help countries, especially developing 

countries, "make informed sovereign decisions regarding tax policy and 

administration based on: (1) their development plans, an understanding of the 

Likely consequences of different decisions on the revenue financing public 

aspects of development; and (2) the impact on that private investment that may 

also find development.  

 

“Second, unlike the OECD model and commentaries that represent the work of 

the OECD, the UN model is a project undertaken by the committee of experts 

in their personal capacity and therefore does not represent the views of any 

particular country or tax administration. There is no mechanism for UN member 

countries to register their views on the commentaries 

Third, omissions of OECD text in the UN model may mean different things. In 

general, provisions of the OECD model that were found to be particularly 

relevant for developing countries are included in the UN model. When the text 

is incorporated from the OECD model, the commentaries on the UN model 

explicitly highlight any differing views held by the committee; alternatively, in 

some cases they exclude certain text. 

Fourth, the UN model reflects the philosophy that the developmental role of tax 

treaties is often best achieved when, on balance, source country taxation rights 

are preserved under a tax treaty.36 

 

Whilst the OECD and UN Model convention are the mostly widely used model 

conventions, there are other regional or localised model tax conventions.  The 

 
36 Canadian Tax Journal 2013: The UN Model (2011) Special Issue Vol 61:1 



24 
 

United States has their own US Model Convention and on the African continent, 

we have a regional Multilateral treaty in the East African Community Double 

Taxation agreement. The parties to this treaty are Burundi, Tanzania, Kenya 

and Rwanda. Birungyi Barata & Associates noted that the treaty seeks to 

eliminate double taxation among the states by imposing an obligation on the 

resident state to give credit for the source state tax against the resident state 

tax on income or exempt the income from tax. This Double Taxation Agreement 

is based on the source model whereas amounts will be taxed where the activity 

takes place37. In addition we have the COMESA the Common Market for 

Eastern and Southern Africa) model treaty which has a far wider country 

representation than EAC model.  

 

2.1. Content of Model Treaties  

Model treaties were developed to create framework of the contents tax treaties, 

model treaties are often used as starting point in bilateral negotiations. Model 

Conventions are non -binding therefore when countries use the model treaties, 

they do not have to use each and every article which is contained in the model 

treaty, parties to the negotiations are at liberty to choose which articles will be 

included and excluded. It is therefore important to understand the articles 

contained in the model treaties. These articles include the following; 

 

Definitions  

• Articles 3 General Definitions  

• Articles 4 Resident  

• Articles 5 Permanent Establishment  

 

Taxation of Income  

• Articles 6 Income from Immovable property  

 
37 Birungyi Barata & Associates (2015). The EAC Double Taxation Treaty explained. International 

Financial Law Review. 1/5/2015, p1-1 



25 
 

• Articles 7 Business Profits  

• Articles 8 Shipping, inland waterways transport and air transport  

• Articles 9 Associated enterprises  

• Articles 10 Dividends  

• Articles 11 Interest   

• Articles 12 Royalties  

• Articles 13 Capital Gains  

• Article 15 Income from employment  

• Article 16 Director’s fees   

• Article 17 Artistes and sportsmen 

• Article 18 Pensions  

• Article 19 Government Services  

• Article 20 Students  

• Article 21 Other Income  

 

Taxation of Capital  

• Article 22 Capital  

Methods for elimination for double taxation  

• Article 23A Exemption Method  

• Article 23B Credit Method  

Special provision  

• Article 24 Non- discrimination  

• Article 25 Mutual agreement procedure  

• Article 26 Exchange of information  

• Article 27 Assistance in collection of fees  

• Articles 28 Members of diplomatic missions and consular posts  

• Articles 29 Territorial extensions  

 

 



26 
 

Final Provisions  

• Articles 30 Entry into force  

• Articles 31 Termination  

 

 

2.3 Negotiating Treaties  

The process of negotiating a tax treaty begins with the two parties (countries) 

considering factors such as the level of investments and benefits of entering into 

a tax treaty. Once the benefits of entering into a tax treaty have been identified, 

the countries will commence with the process of entering into the negotiations. 

The process will normally begin by the countries exchanging the model treaties 

of their choice, this will form the basis of the negotiations. The parties will review 

the model treaties on a clause-by-clause basis and removing those clauses 

which will not be applicable in the current contracting requirements.  

 

  According to Arnold after presentations by both sides about their domestic tax 

systems, the negotiations proceed on an article-by-article basis. Aspects of the 

text that cannot be agreed on are usually placed in square brackets, to be dealt 

with later. Once the wording of the treaty is agreed on, the parties initial it. After 

such agreement has been reached, arrangements will be made for the treaty 

to be signed by an authorized official (often an ambassador or government 

official). After signature, each State must ratify the treaty in accordance with 

its own ratification procedures. The treaty is generally concluded when the 

countries exchange instruments of ratification. The treaty enters into force in 

accordance with the specific rules in the treaty (Article 29).38  

 

Given this process one can only but imagine that there are significant costs, 

complexities and time involved when negotiating these tax treaties. As there 

 
38 Arnold 2016: 3 



27 
 

would be officials from both government revenue authorities involved, 

international attorneys and other government authorities involved in the 

process. Once this process has been concluded and consensus has been 

reached. Each country would need to follow their internal process of having the 

double taxation agreement adopted by their relevant authorities.  

 

 

2.4 Impact of Treaties on Domestic Law  

 

Double taxation agreement in them of themselves do not override the domestic 

law. As stated above once a Double taxation agreement is negotiated there is 

an internal process that must be followed to ensure that the Double taxation 

agreement is approved and can form part of the domestic legislation. There are 

two prominent opinions in terms of how double taxation agreement will form part 

of domestic law as du Plessis put it is important to determine the method by 

which DTAs are incorporated into South African law.39 For example, if DTAs are 

self-executing, taxpayers and the relevant revenue authorities will be able to 

rely on the relevant DTA as soon as it has been approved by both houses of 

Parliament and they would not have to wait for its enactment into law by national 

legislation DTAs are incorporated into South African law through section 108(2) 

of the Income Tax Act40.  

 

 

 

 

 

 

 
39 Izelle du Plessis, I. (2015). The Incorporation of Double Taxation Agreements into the South African 
Domestic Law. P.E.R volume 18 No 4 
40 Income Tax Act Section 108  



28 
 

Section 108 of the Income Tax Act No 58. Of 1962 states41.  

 

1)  The National Executive may enter into an agreement with the 

government of any other country, whereby arrangements are made with 

such government with a view to the prevention, mitigation or 

discontinuance of the levying, under the laws of the Republic and of 

such other country, of tax in respect of the same income, profits or 

gains, or tax imposed in respect of the same donation, or to the 

rendering of reciprocal assistance in the administration of and the 

collection of taxes under the said laws of the Republic and of such other 

country.  

2)  As soon as may be after the approval by Parliament of any such 

agreement, as contemplated in section 231 of the Constitution, the 

arrangements thereby made shall be notified by publication in the 

Gazette and the arrangements so notified shall thereupon have effect as 

if enacted in this Act. 

 

Section 231 of the South African Constitution provides that International 

agreements become binding only after they have been approved by the National 

Assembly the National Council of provinces.42 Once the approval takes place 

on both these houses of parliament and the DTA is published in the Government 

Gazette then this DTA will be enacted as part of the law. Oliver and Honiball, 

agrees with the view that once a treaty is published in the Government Gazette, 

the provision have the same force as domestic law in South Africa. 43    

 

 
41 Ibid: 108  
42 South African Constitution Section 231 
43 Lynette Olivier and Michael Honiball. International Tax a South African Perspective (5 th edition) Siber 

Ink: Cape Town (2011)   

  



29 
 

Therefore, DTA’s do not override the domestic legislation but rather should be 

negotiated in such a manner as to align to the legislation or if there is a 

willingness by local authorities to allow for change in certain elements of the 

legislation as result of the new DTA this can be negotiated in the process and 

forming part of the DTA, which will override elements of the current legislation. 

It is important to note that Model DTA are not prescriptive but rather a guideline 

and the rest remains negotiated by the parties.  There have been some 

conflicting views in courts on the status of DTA’s in terms of domestic law and 

which of the two takes precedence when there is a conflict.  

 

According to Bloem O, 2017 In the matter of the AM Moolla Group Ltd v The 

Commissioner of the South African Revenue Service the court held that in the 

case of conflict between an Act and the Treaty the Act must prevail. In the matter 

of the Commissioner of the South African Revenue Service v Tradehold the 

court held a view that the treaty modifies the domestic law and must prevail over 

the domestic law. In the matter of Glenister v the President of the Republic of 

South Africa the minority expressed the view that in the case of conflict between 

treaty and domestic law, “the conflict must be resolved by the application of the 

principles statutory interpretation and superseding of legislation.44    

 

Interpretation issues and conflict between DTA’s and domestic law remains a 

challenge. According to Janse Van Rensburg 2019 the OECD MTC defines 

only a few of the terms used therein and, in respect of the interpretation of 

undefined terms, includes the general renvoi clause, article 3(2). All South 

African DTAs also include a version of this clause.2  

Article 3(2) currently reads as follows:3  

As regards the application of the Convention at any time by a Contracting State, any term 

not defined therein shall, unless the context otherwise requires or the competent authorities 

 
44 Ockert Johannes Blom 2017. The legal status of tax treaties in South Africa, University of Pretoria   

 



30 
 

agree to a different meaning pursuant to the provisions of Article 25, have the meaning that it 

has at that time under the law of that State for the purposes of the taxes to which the 

Convention applies, any meaning under the applicable tax laws of that State prevailing over 

a meaning given to the term under other laws of that State.  

The inclusion of a provision in a treaty that deals with the interpretation of 

undefined terms is somewhat unusual, but there are a number of reasons for 

including such a provision in treaties aiming to grant relief against international 

juridical double taxation. There is, namely, a need for DTAs to closely interact 

with the contracting states' domestic tax laws, since DTAs place a restriction on 

the contracting states' right to levy taxes under these domestic tax laws. 45 

Basically, the general Renvoi doctrine is where one country applies the laws of 

another country in resolving a legal dispute. However there may arise a further 

challenge in Private International Law when the law of country A as rule of 

dispute points to country B’s laws and in terms of the law of country B, country 

B refers the dispute back to the laws of country A.  There have been some 

interesting legal cases that have been presented before the courts to explore 

the issue of interpretation of the DTA’s. I will make reference to two specific 

matters.  

 

Krok Case   

Gauteng High Court had previously granted a preservation order under a 

double taxation agreement in respect of debt owed by Australia by a South 

African expatriate M Krok.  

 South Africa and Australia concluded a double taxation agreement (the DTA) 

for the avoidance of double taxation and the prevention of fiscal evasion with 

respect to taxes on income on 1 July 1999.  

 The Australian Tax Office (ATO) made requests to SARS under the 

agreement in January 2012 and February 2013 for the collection of income 

 
45 Enelia Jansen van Rensburg The Application and Interpretation by South African Courts of General 

Renvoi Clauses in South African Double Taxation Agreements" PER / PELJ 2019(22) - DOI 
http://dx.doi.org/10.17159/1727-3781/2019/v22i0a4402 



31 
 

taxes in the sum of Australian $25 361 875.79 (approximately R235 705 

169.19) plus interest, which were allegedly due by Mr Krok to the Australian 

Commissioner of Taxation for the income period from 30 June 2004 to 30 June 

2009. 

 

Acting on the request received from the ATO, SARS approached the Gauteng 

Division of the High Court, Pretoria on an ex parte basis. It sought a 

preservation order coupled with an order for the appointment of a curator bonis 

in terms of sections 163 and 185 of the Tax Administration Act 28 of 2011 read 

with the DTA and the protocol for the preservation of Mr Krok’s assets situated 

in South Africa in order to meet his tax liability to Australia. The High Court 

granted the preservation order and ancillary relief and subsequently confirmed 

the order  Mr Krok had inherited considerable capital assets valued at R71 713 

807 as at February 2003. The saga began when he emigrated to Australia in 

April 2002. Prior his departure, he had sought professional advice on the tax 

implications relating to his assets which eventually led to him setting up an 

elaborate scheme to avoid adverse exchange control implications. The 

scheme involved him, inter alia, vesting the beneficial interests in both the 

assets and the income in a British Virgin Islands company through a series of 

agreements. In consequence to all his transactional activity, according to Mr 

Krok, he ceded all his South African income and assets to a company except 

for the bare ownership thereof, and he had no income or capital gains on which 

he could be taxed by the ATO under the agreements. On 29 December 2008, 

Mr Krok again emigrated from Australia to the United Kingdom. He set up a 

similar tax avoidance scheme in respect of which he purported to transfer to 

the second appellant, Jucool Enterprises Inc. (Jucool), a company 

incorporated in the British Virgin Islands, his assets situated in South Africa. In 

2009, the ATO launched an audit of Mr Krok’s taxation affairs as part of a 

government initiative investigating participation by Australians in 

internationally promoted tax arrangements to identify taxpayers involved in 



32 
 

significant offshore transactions or large transfers of funds to or from Australia. 

Resultantly, the ATO held Mr Krok liable for $25 361 875.79 plus interest. The 

SCA rejected the arguments made on behalf of Mr Krok and Jucool that: (a) 

that the relevant provisions of the DTA can only be invoked if the taxes claimed 

by the ATO arose on or after 1 July 2009 – after the protocol came into effect 

and (b) that Jucool was the beneficial owner of Mr Krok’s South African assets. 

The court was clear that they are no times limits on the new article 25 and 

once a DTA is enacted by section 108 of the income tax, approved by the 

legislator and published in the government gazette it become part of the 

domestic legislation.46  

 

Another interesting case is the is Tradehold case v the Commissioner of the 

South African Revenue Services The respondent, an investment holding 

company incorporated in South Africa andlisted on the Johannesburg Stock 

Exchange, successfully appealed to the Tax Court against an additional 

assessment raised by the Commissioner based on a taxable capital gain. The 

Commissioner averred that this tax arose as a result of a deemed disposal by 

the respondent of its shares in Tradegro Holdings Ltd, a holding company of 

the respondent, in terms of para 12(1) of the Eighth Schedule to the Income 

Tax Act 58 of 1962 (the Act). In 2002, it was decided by the respondent’s board 

of directors that all further meetings of the respondent, would be held in 

Luxembourg. This essentially entailed that the respondent would be effectively 

managed in Luxembourg, the respondent nevertheless remained a ‘resident’ 

of the Republic of South Africa, in terms of the Act. Subsequently, the Act was 

amended in 2003 and the respondent ceased to be a resident. The 

respondent’s only relevant asset was its 100 per cent shareholding in Tradegro 

Holdings. The Commissioner contended that when the appellant relocated its 

seat of effective management to Luxembourg and when it ceased being a 

 
46 Krok v CSARS (20230/2014 and 20232/2014) [2015] ZASCA 107 (20 August 2015) 



33 
 

resident in terms of the Act, it was deemed to have disposed of its only relevant 

asset, namely its 100 per cent shareholding in Tradegro Holdings. This 

resulted in a capital gain being realised in an amount of R405 039 083 during 

the 2003 financial year. 

 

On appeal to the Tax Court, the respondent contended that if there was a 

deemed disposal of the investment, the capital gain that resulted from that 

disposal was not taxable in South Africa but in Luxembourg due to the fact that 

at the time the capital gain arose, the respondent was deemed to be a resident 

of Luxembourg in terms of Article 4(3) of the Double Tax Agreement (DTA) 

entered into between South Africa and Luxembourg. The issue before the SCA 

was whether the term ‘alienation’ as used in the DTA, included within its ambit 

gains arising from a deemed disposal of assets. The SCA held that the term is 

widely cast and includes capital gains derived from the alienation of all 

property, and does not have a restricted meaning. It encompassed both actual 

and deemed disposals of assets giving rise to taxable gains. The SCA 

however, held that when the respondent relocated its seat of effective 

management to Luxembourg, and taking into account that the respondent 

ceased being a resident of the Republic during the salient taxable year of the 

capital gain, the provisions of the DTA became applicable and Luxembourg 

had exclusive taxing rights in respect of the respondent’s capital gains. The 

appeal by the Commissioner herefore fell to be dismissed.47 This is yet another 

clear example of interpretation of the DTA, in place.  

 

2.5 Conclusion  

In this Chapter we explored the different Model treaties especially the two that 

are predominately in use being the OECD and the UN Model convention. It is 

clear that there has been need and rationale for establishing model conventions 

 
47 Commissioner for the South African Revenue Service v Tradehold Ltd 

(132/11) [2012] ZASCA (8 May 2012) 



34 
 

however, these conventions are a starting point for negotiations are not 

prescriptive to the contracting parties. We also looked at the process of 

negotiating model conventions and established that this is a long drawn out and 

costly process. Finally we explored the impact that DTA’s will have on the 

domestic law and do the provisions of the treaty if there is a conflict override the 

domestic law. It was interesting to note that even in our court systems and 

amongst tax scholars there is disagreements in terms do DTA’s override the 

domestic legislation.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



35 
 

 

 

3. Tax Evasion and Tax Avoidance   

There is difference between tax evasion and tax avoidance. Tax evasion is the 

effort by taxpayers, be they companies, individuals or any other taxpayer 

employing illegal schemes to pay less or no tax. Whilst tax avoidance (tax 

planning) be it moderate or aggressive tax planning is the organization or 

arranging of one’s tax affairs in legal manner to reduce the overall tax liability. 

Tax avoidance is not illegal as long as it done within the ambit of the law. Tax 

avoidance is not favoured by revenue authorities around the world. De Koker 

and Williams defined it as follows ‘Tax avoidance’4 connotes stratagems which 

are prima facie lawful, that is to say, which are lawful unless proscribed by the 

Act. By contrast, ‘tax evasion’ connotes inherently unlawful methods, such as 

incorrect statements in income tax returns (such as the non-disclosure of 

income or the exaggeration of expenditure claimed as a deduction) and sham 

or disguised transactions.48  

 

In Court case, which often used to illustrate Tax planning Lord Tomlin famously 

remarked. 

(Inland Revenue Commissioners v The Duke of Westminister [1936] AC 1 at 

19):‘Every man is entitled if he can to order his affairs so that the tax attaching 

under the appropriate Act is less than it otherwise would be. If he succeeds 

in ordering them so as to secure this result, then, however unappreciative the 

Commissioner of Inland Revenue or his fellow taxpayers may be of his 

ingenuity, he cannot be compelled to pay increased tax.   

 
48 Alwyn de Koker & RC Williams Silke on South African Income Tax 70th ed (Durban: LexisNexis 2021) 
 



36 
 

Therefore, tax avoidance cannot be treated as tax evasion, even though these 

terms are at times used interchangeably.  

Tax evasion on the other hand as mentioned above, is the process of employing 

illegal schemes that result in the paying of no to minimum tax. The OECD has 

been working on different methodologies in order to combat this scourge. In the 

current model convention treaties the information exchange article (Article 26 

OECD Model)  is one such method that this used to curb  tax evasion.  According 

to Arnold Governments have sought to challenge tax evasion in the international 

arena with information exchange agreements for a very long time.49  The OECD 

has been working hard in the development of rules for administrative assistance 

in tax collection and information exchange, and in 2003 included a whole new 

article 27 in the Model dealing with assistance in tax collection. Basically, this 

article stipulates that the contracting states should lend assistance to each other 

in the collection of revenue claims.50  

 

3.1 Treaty Abuse  

Whilst the primary objective of tax treaties has been to encourage cross border 

trade by removing the burden of double taxation of those involved in these 

exploits. Tax treaties have other secondary objectives such as preventing 

international tax avoidance and evasion, and, more generally, strengthening 

political ties with the partner country. Not to say that whilst the intention of policy 

makers, international organisations, revenue authorities and governments in 

establishing these tax treaties has been good,  these tax conventions have been 

prone to a number of abuses. (Beer and Loeperick 2018) opined that while DTTs 

serve more purposes and often also come with a range of complementary 

political objectives, the avoidance of double taxation is at their core51. However, 

 
49 Arnold 2016: 10 
50 OECD 2003 
51 Sebastian Beer and Jan Loeperick 2018. The Cost and Benefits of Tax Treaties with Investment Hubs: 
Findings from Sub-Saharan Africa. IMF Working Paper Fiscal Department.  



37 
 

these bilaterally negotiated agreements can, by restricting taxing rights and 

through the abuse of treaty networks using shell companies, also contribute to 

the loss of a country’s tax base and facilitate tax avoidance.   

 

With all the noble intentions with which Tax treaties have been established for, 

these treaties have been prone to a number of abuses such as.  

 

1) Treaty shopping, the OECD (2019) defines Treaty shopping as the 

attempt by a person to indirectly access the benefits of a tax treaty 

between two jurisdictions without being a resident of one of those 

jurisdictions52.  

According to SEATINI – Uganda and ActionAid International routing 

financial flows through a number of different tax jurisdictions allows 

companies to avoid withholding tax on cross-border transfers whether 

or not there is a bilateral treaty between the country in which the income 

is generated and the final destination country; this is known as treaty 

shopping page 9 ActionAid’s exposé of tax avoidance by the 

international food giant Associated British Foods (ABF) demonstrates 

treaty shopping in practice (ActionAid, 2013a). Zambia Sugar, ABF 

Zambian subsidiary, took a loan from a UK bank to finance their 

operations. Under normal circumstances, interest payments of 17% 

would have been subject to 10% WHT on leaving Zambia for the UK. 

However, on paper, the loan was routed through an Irish subsidiary, 

which meant that, under the terms of the Zambia-Ireland DTT, no WHT 

was liable. ActionAid estimates that the strategy of routing the loan 

through Ireland may have deprived the Zambian exchequer of up to 

US$3 million (ZK13.5 billion) in withholding taxes.53 

 
 
52 OECD 2019. Action 6 Prevention of tax treaty abuse. 
53 SEATINI – Uganda and ActionAid International. 2014. Double Taxation Treaties in Uganda Impact and 

Policy Implications. SEATINI – Uganda and ActionAid International. 5- 28 



38 
 

 

2) Round Tripping –  

A report by SEATINI – Uganda and ActionAid International (2014), 

noted that another common strategy is for domestic companies to avoid 

tax by re-registering in the jurisdiction of a treaty partner, presenting 

themselves as if they are external investors; this is known as round 

tripping. These investors can benefit from advantageous treaty terms, 

e.g. exclusion of source taxation on capital gains from the alienation of 

shares. This is particularly appealing if the other country has a low tax 

regime. For, the period 2008 to 2013, Mauritius contributed just above 

40% all inward FDI to India. Far more than traditional sources such as 

Singapore, UK, US, Japan and the Netherlands, whose combined FDI 

contribution still only amounted to 35%; lower than what Mauritius 

channelled to India54.  

 

The India-Mauritius DTT provides for taxation of capital gains arising 

from alienation of shares only in the country of residence of the investor. 

Since capital gains are fully exempt from taxation in Mauritius, an investor 

routing his investment through Mauritius into India does not pay capital 

gains tax either in India or Mauritius.  

 

Many commentators believe that this high level of investment from 

Mauritius is not FDI but rather domestic Indian investment which is routed 

through Mauritius (round tripping) to avoid capital gains tax on the 

alienation of shares and to benefit from Indian tax incentives only 

available to foreign investment, and not to domestic investment 

 

 
54 SEATINI and ActionAid International. 2014: 10 

 



39 
 

 

3) Tax Avoidance or evasion  

Musviba defines these abuses as tax avoidance involves using tax 

deductions, changing one's business structure through incorporation or 

establishing an offshore company in a tax haven.55  

By contrast tax evasion is the general term for efforts by individuals, 

firms, trusts and other entities to evade the payment of taxes by illegal 

means. 

 

4) Alienation of Shares  

The UN model and, since 2003, the OECD model also include a 

provision that covers the sale of shares in property rich companies that 

have been formed as vehicles to own real property. This is excluded by 

the Uganda-Mauritius treaty. Without this provision, it is quite easy to 

structure the ownership of, say, a mine or large business in such a way 

as to avoid capital gains tax entirely when it is sold. The Uganda-

Mauritius treaty also omits a provision found in the UN model, article 

13(5), which permits a country to levy CGT on sale of shares when a 

foreign resident sells its stake in a domestic company if that stake 

exceeds a certain threshold. Without this provision, investors are free 

to structure FDI so as to be immune from CGT if they pull out . 56

 
55 Nayasha Musivia n.d: Tax Avoidance vs Tax Evasion – the differences South African Tax Guide 
https://www.sataxguide.co.za/tax-avoidance-and-tax-evasion-the-differences/ 
56 SEATINI and ActionAid International. 2014: 10 



40 
 

 

These abuses have been proliferated by well-resourced Multinationals Corporations   

who have employed sophisticated schemes and methodology’s largely assisted by, 

armies of technically astute tax consultants/attorney’s. The Global Financial Integrity 

(GFI) in Washington show that developing countries lose on average $542 billion every 

year through illicit financial flows, and trade mis invoicing makes up 80 percent of this 

at or $424 billion. 57   

According to Hearson there is growing attention on the question of tax treaties signed 

by developing countries. The costs of tax treaties to developing countries have been 

highlighted in recent years by NGOs such as ActionAid and SOMO.58  

The Uganda and ActionAid International (2014), sited an example of such abuses 

whereas they stated following the network of double taxation treaties is one of the 

mechanisms used by companies to avoid paying taxes, leading to illicit financial flows 

and tax losses for Uganda.59  

 

During 2014, an influential IMF paper warned that developing countries would be well-

advised to sign treaties only with considerable caution, and the OECD, as part of its 

Base Erosion and Profit Shifting (BEPS) project, proposes to add text to the 

commentary of its model treaty to help countries decide whether a treaty should be 

concluded with a State but also, whether a State should seek to modify or replace an 

existing treaty or even, as a last resort, terminate a treaty. 

 

The issue of tax treaty abuse is not new and has been identified by the OECD as early 

as 1977. According to the OECD (2019) in 1977, the Commentary on Article 1 of the 

OECD Model was also updated to include a section on the improper use of tax 

agreements.60 Onyejekwe the use of these schemes is detrimental to both the home 

and host country because of the reduced tax revenues and distorted investment 

 
57 Global Financial Integrity (2014): Hiding in plain sight Trade Misinvoicing and the impact of revenue loss in 

Ghana, Kenya, Tanzania, Mozambique and Uganda 2002:2011, May 2014  

 
58 Martin Hearson (2015). Tax treaties in sub-Saharan Africa: a critical review. Tax Justice Network - Africa, 

Nairobi, Kenya: 2 – 34 
59 SEATINI and ActionAid International. 2014: 24 
 
60 OECD 1977: 45 



41 
 

inflows. Most schemes are created by more developed countries and as such, a higher 

percentage of investment profits are remitted to them, to the detriment of the 

underdeveloped or developing source country.61  

 

The risk of entering into DTA’s and the resulting revenue leakages need to be carefully 

considered before countries enter into DTA’s. The tax abuses that DTA’s are prone to 

can result in significant tax losses for the developing countries. South Africa has not 

been sparred this fate Mosupa opined the South African Revenue Service (SARS) has 

in the past attacked many schemes regarded as constituting ‘abuse’ of DTAs. Our 

courts have not had an opportunity to decide a case involving the ‘abuse’ of a tax 

treaty; only once has the Supreme Court of Appeal considered the interpretation of a 

tax treaty (Secretary for Inland Revenue v Downing 1975 (4) SA 518 (A)).62 But SARS 

could rely on two measures to counteract these schemes: the fraus legis doctrine, and 

now repealed section 103 replaced the new General Anti Avoidance Rule (GAAR) of 

the Income Tax Act.  

 

The Fraus legis doctrine derived from Roman Dutch law which basically means that 

one will be committing fraud against the law but this act will be committed indirectly 

rather than directly. Thereby disguising the substance of the transaction based on the 

current form.   

 

The combating and prevention of treaty shopping has remained top of mind for policy 

makers, as this has been identified as one of the most important sources. This is 

evident on the Action Plan on Base Erosion and Profit Shifting report that was 

published OECD and G20 in 2013. BEPS Action plan was initiated to mitigate the 

weaknesses and strengthen international tax rules that create opportunities for base 

erosion and profit shifting by multi-national corporations and investors.   

 

 
61 Chrisa Onyejekwe, 2018. Rebalancing Double Tax Treaties in favour of African States in Rebalancing 

International Investment Agreements in Favour of Host States. United Kingdom: Wildy, Simmons and Hill 

Publishing 

 
62 Mosupa F. nd A introduction to double taxation agreements. The quarterly law review for people in business 
Vol 11 part 3.  

 



42 
 

  According Plowgian, Riccardi & Mueller The BEPS Action 6 2015 Final Report 

recommends three basic approaches to combat treaty shopping: First, a clear 

statement that the States that enter into a tax treaty intend to avoid creating 

opportunities for non- taxation or reduced taxation through tax evasion or avoidance, 

including through treaty shopping arrangements will be included in tax treaties. 

Second, a specific anti-abuse rule, the LOBs rule, which limits the availability of treaty 

benefits to entities that meet certain conditions will be included in the OECD Model 

Tax Convention. These conditions, which are based on the legal nature, ownership 

in and general activities of the entity, seek to ensure that there is a sufficient link 

between the entity and its State of residence. Such limitation-on-benefits provisions 

are currently found in treaties concluded by a few countries and have proven to be 

effective in preventing many forms of treaty shopping strategies. Third, in order to 

address other forms of treaty abuse, including treaty shopping situations that would 

not be covered by the LOB rule described above, a more general anti-abuse rule 

based on the principal purposes of transactions or arrangements (the principal 

purposes test or PPT rule) will be included in the OECD Model Tax Convention. 

Under that rule, if one of the principal purposes of transactions or arrangements is to 

obtain treaty benefits, these benefits would be denied unless it is established that 

granting these benefits would be in accordance with the object and purpose of the 

provisions of the treaty.63 

 

3.2 Conclusion 

In this Chapter we explored the difference between tax avoidance and tax evasion. 

Where we noted that the former is legal means of organizing ones tax affairs in such 

manner as to pay less tax. The latter is illegal form of tax avoidance, governments and 

international institutes have been grappling with this for a long time. These schemes 

both on tax avoidance and evasions have impacted the tax treaty networks, as tax 

treaties whilst noble in their intentions to prevent double taxation and promote trade 

have been plagued by treaty abuse. The improper use of treaties was raised by the 

OECD as early as 1977. Such treaty abuse includes treaty shopping and round 

tripping. The OECD has attempted address this treaty abuses by the commentary on 

 
63 Plowgian, Riccardi & Mueller 2017:46 



43 
 

Article 1 of the OCED model and Article 26 and Article 27 the exchange of information 

and Assistance in the collection of taxes.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



44 
 

4. History of Tax Treaties in Africa  

The world saw extensive growth in the tax treaties after the conclusion of the OECD 

Model convention and this trajectory was further catapulted as result of the 

liberalization of the world markets.  

 

Rixen opined that the growth rate of bilateral treaties increased strongly after the 

OECD MC was concluded. In 1958, 263 treaties were in force, gradually increasing 

to 333 by 1963 and 600 as of 1978. After the conclusion of the 1977 MC — and with 

the further liberalization of capital markets and increasing tax ratios in industrialized 

countries, which made the problem of double taxation more prevalent — the number 

of treaties increased rapidly to 1582 in 1998.64   

 

Despite this proliferation there still remained a sense of disenfranchisement amongst 

the developing nations as the OECD model was based on the premise of resident-

based taxing rights, which favored capital exporting countries. Hence the developing 

countries approached the United Nations and devised the own model convention 

under the auspicious of the UN. With the development of UN Model treaty which is 

similar in many aspects to the OECD model convention, with key difference being that 

this UN model convention is significantly skewed towards source based taxation, the 

growth rate of tax treaties has grown exponentially.  

 

Based on various literature sources it is has been said that there are about 3000 tax 

treaties that are in force. Quak and Timmis noted that Between 1,000 and 2,000 of 

these agreements involve at least one developing country. Most of these were 

concluded within the last 20 years, while DTAs between advanced economies mostly 

date from before 1990.65 What is interesting to note is that although the preference for 

developing countries to apply the UN Model, as basis for negotiations when entering 

to tax treaties, most of the provisions applied in the final agreed treaties for developing 

countries is OECD model.  

 

 
64 Rixen 2008: 7 
65 Quak and Timmis 2018: 2 



45 
 

Specially in the African context, post the African States achieving independence, many 

African countries embarked on process to renegotiate their previous tax treaties that 

were concluded during the colonial eras. Some of these treaties were concluded with 

the Colonising states, which would of course favour such states. According to Hearson 

African countries such as Kenya and Nigeria, kept their old agreements in place until 

they were ready to renegotiate in the 1970s, perhaps fearing a negative effect on 

investment if they cancelled.66 In some others, such as Zambia and (until very recently) 

Malawi, a few colonial-era agreements stayed in force where renegotiations were not 

completed.  

 

The International tax regime is complicated to say the least, with some African 

countries tax administration and capabilities, including their tax treaty negotiate 

capacity not being of the requisite calibre to deal with these complexities. This has 

resulted in poor negotiation and abuses of tax treaties, revenue losses as result of tax 

avoidance and evasion. The majority of international trade is dominated by 

Multinational Corporations, who generally lobby their resident country governments to 

inter into double taxation agreements, in additional these Multinational Corporations 

have the resources to employ tax advisors and legal practitioners to assist them with 

organising their tax affairs to reduce their tax burdens. According to Global Finance 

Integrity (2011) report DTTs have benefited developed countries more than developing 

countries because cross-border trade and investments are predominated by Multi-

National Companies (MNCs) which are largely from developed countries and control 

more than 60%-65% of global trade. 67 

 

Developing countries and especially on the African continent have a heavy reliance 

on donor funding and more importantly Foreign Direct Investment, to stimulate growth 

and provide much need prosperity for its citizens. This is important, as many 

developing countries are capital importing countries, that are rich in mineral and other 

natural resources but in the main most of the items are imported. There is however no 

 
66 Hearson 2015: 11 
67 Global Financial Integrity (2011): Illicit financial flows from developing countries 2000-2009, January 2011 

 



46 
 

empirical evidence to suggest that entering to Double taxation agreements is a catalyst 

for attracting Foreign Direct Investment.  

 

Kalizinje (2020) opined that despite its importance, Domestic Resource Mobilisation 

is marred with numerous challenges ranging from tax evasion and tax avoidance 

which are exacerbated by incoherent international tax regimes, weak tax systems as 

well as lack of clear nexus between tax policy and administration. These problems 

are bleeding Africa of a lot revenue which would have otherwise been used to finance 

its development. For example, illicit financial flows largely comprised of tax 

avoidance, tax evasion, and trade mis-invoicing is estimated to be bleeding Africa 

USD 100 billion annually.68 

 

As mentioned in the preceding chapter it was noted that as noble as the intentions for 

drafting and entering into tax treaties, such as the avoidance of double taxation and 

stimulating cross border trade. Double taxation treaties have been besieged by a fair 

number of challenges and developing countries have not been spared of these 

challenges. During 2014 the IMF has issued a warning that developing countries would 

be well-advised to sign treaties only with considerable caution. It is against this 

backdrop that this chapter is written, to assess why African countries enter into double 

taxation agreements and do these agreements really attract FDI and finally assessing 

the tax losses that have experienced in the continent due to DTA’s.  

 

4.1 Foreign Direct Investments and Tax Incentives  

 

Given the above reality the question needs to be asked as to why countries, more so 

developing countries would enter into Double taxation agreements, if the same has 

been fraught with such abuses. Developing countries are in much need to of Foreign 

Direct Investments to sustain and grow their economies. The growth of Foreign Direct 

Investments has been on upward trend since the 1990’s, Dunning opined that by the 

early 1990s, the sales of worldwide exports would be eclipsed by the sales of foreign 

 
68 Frank Kalizinje 2020.The Dangers of Double Taxation Agreements in Development in Africa. Tax Justice Network 

Africa: 6 – 44. 

 



47 
 

affiliates of MNCs. There is school of thought that holds the view that Double taxation 

agreement, are catalyst for attracting that much needed Foreign Direct Investments. 

69 

 

Developing countries tend to rely on Foreign Direct Investments to foster economic 

growth and bolster the governments revenue inflows to better the fortunes of their 

citizens. According to the OECD 2002 FDI can boost capital accumulation, create job 

opportunities, increase integration into the international economy and contribute to the 

formalization of the host economy by extending value chains. As a result, also tax 

revenues may rise. Developed countries have traditionally received and dispersed the 

share lion’s Foreign Direct Investment, this trend is evolving, according to a UNCTAD 

(2004) Although the developed countries remain both the dominating source and the 

major recipient of FDI, their dominance has decreased over time with developing 

countries in 2003 receiving almost 31 per cent of FDI as opposed to only about 20% 

in the 1980s 

 

Some scholars, politicians and technocrats believe that double taxation agreements 

assist in attracting Foreign Direct Investment. According to Onyejekwe (2020) 

Economists and legal researchers indicate that low income and developing countries 

tend to enter into tax treaties in order to make their economy more sustainable by 

attracting Foreign Direct Investments.  Even with the mirade of benefits for the host 

there is no empirical evidence that supports the view, that double taxation 

agreements attract Foreign Direct Investment, and some do not support this view. A 

study by Baker (2014) found that there was no empirical evidence to support the 

notion that DTA attract Foreign Direct Investment.  

 

Baker (2014) in his conclusion noted the following This analysis shows that home 

countries unilaterally eliminate double taxation. This removes the key economic 

benefit of DTTs as it relates to the MNE decision-making process for FDI location. 

From the host countries’ perspective, the analysis also indicates the trend for them 

 
69 John Henry Dunning, (1998) The changing geography of foreign direct investment, in: N. Kumar (ed.) 
Globalization, Foreign Direct Investment and Technology Transfers: Impacts On and Prospects for Developing 
Countries (New York: Routledge), pp. 43 – 89 

 



48 
 

to reduce their non-treaty withholding tax rates unilaterally. This removes the other 

potential benefit that a DTT would have in attracting FDI. The qualitative analysis 

also shows that DTTs should not have a disincentive effect on an MNE’s FDI location. 

The DTT’s inclusion of transfer pricing and exchange of information clauses is 

already provided for at the domestic level and applies regardless of any DTT. 

Furthermore, anti-treaty shopping clauses only restrict access to the benefits of a 

DTT which makes it irrelevant to the MNE that cannot take advantage of it. 

 

This is contrary to a study by Nuemayer70 which found that Developing countries with 

more DTTs with major capital exporting developed countries benefit from a higher 

overall FDI stock and share of stock and receive more FDI inflows as well as a higher 

share of inflows. The message to developing countries therefore is that succumbing 

to the restrictions on their authority to tax corporate income from foreign investors 

typically contained in DTTs does have the desired payoff in terms of higher FDI. To 

our knowledge, this is the first study to provide robust empirical evidence that DTTs 

increase FDI to developing countries. The study went on further to find that if one were 

to split the sample of developing countries between low income and middle income, 

Double Taxation agreements are more effective in the middle income countries.  

Clearly from the conflicting studies there is no guarantee that entering into a Double 

Taxation Agreements will translate into additional investments inflows by way of 

Foreign Direct Investments. Another issue to note that it is costly to negotiate and 

enter into double taxation agreements.  

 

The costs associated with this are the actual negotiation and concluding the 

agreement. In some sense it appears that there is believe amongst developing 

countries that concluding double taxation agreements somehow creates the 

perception, that the developing country in question has elevated it’s status in the 

international tax arena, thereby attracting Foreign Direct Investments. Given the fact 

that there is a limited pool of Foreign Direct Investments, there is bound to be some 

sort of competition to attract the Foreign Direct Investment.  

 

 
70Eric Neumayer. (2006). Do Double Taxation Treaties Increase Foreign Direct Investment to Developing 
Countries? Journal of Development Studies, Vol. 43, No. 8, 1501–1519, November 2007 

 



49 
 

According to Barthel and Neumayer, the strong positive target contagion 

interdependence can explain why developing countries sign DTTs with OECD 

member countries, even though the treaties “systematically favour a distribution of 

the taxes generated from MNCs [Multinational Corporations] to the advantage of the 

capital-exporting residence country”. The position developing countries find 

themselves in can be regarded as a classical prisoners’ dilemma: Due to international 

competition for FDI, a country still can have an incentive to conclude such a tax 

treaty, because its own situation without a treaty deteriorates if other focal countries 

enter such treaties themselves and thereby gain a competitive edge Capital-

importing countries are caught in a classical prisoners’ dilemma: Each country would 

be better off refusing to sign a DTT, but signing a DTT is the dominant strategy given 

that the highest payoff occurs if one signed a DTT, but the others do not. The initiative 

used by developing countries to attract the much needed Foreign Direct Investments 

is signing Double Taxation Agreement and offering tax incentives to these 

countries.71  

 

The tax incentives will range from special economic zones, tax breaks for certain 

Foreign Direct Investments and other types programs. This does unfortunately create 

a race to zero amongst developing countries tax regimes. In study by Seatini – Uganda 

Action Aid 2014 when assessing Uganda as case study in lowering taxes as part of a 

bid by developing countries to attract Foreign Direct Investment. 

Seatini – Uganda Action Aid 2014, noted Uganda as an LDC is placed in this 

precarious situation, needing to attract FDI to raise tax revenues, but at the same 

time offering such generous incentives in a misinformed attempt to attract FDI while 

it can end up losing the same in tax revenues. Some of the countries with the highest 

inward FDI to Uganda in 2011, including USA, Canada, Turkey, Sri Lanka and Iran 

have no DTT with Uganda. Uganda needs to make an objective analysis to establish 

the impact of DTTs on both FDI and revenue mobilisation.72  

 

 
71 Fabian Barthel and Eric Neumayer, (2012). Competing for Scarce Foreign Capital: Spatial Dependence in the 

Diffusion of Double Taxation Treaties, international Studies Quarterly, Volume 56, Issue 4, December 2012, 
Pages 645–660 
72 SEATINI and ActionAid International. 2014: 20 



50 
 

To take part in a race to the bottom, simply lowering taxes to compete with other 

developing countries also in need of revenue, will only benefit the investors, with the 

competing countries, and their citizens, losing out. A study by Awasthi contradicts, the 

notion that double taxation agreements, tax incentives attract Foreign Direct 

Investments to developing countries. The study found that out of 683 cases, over 92% 

of them responded they were not motivated by tax and other fiscal incentives to invest 

in a jurisdiction.73 Hearson concluded all in all, we cannot say with certainty that tax 

treaties have generated new investment into their developing country signatories, nor 

can we say that there is a compelling legal rationale to motivate the conclusion of tax 

treaties given their costs.74 

 

 

4.2 Tax Losses  

Entering into and concluded Double Taxation Agreements can result in revenue losses 

for the developing country as the trade between developed and developing country is 

not asymmetric. Meaning that the developing country will risk losing tax revenue as 

result of having given up certain taxing rights, which are not always recovered from 

the Foreign Direct Investment.  The forfeiting of tax revenues stems from the reduction 

and limitations of taxing rights, including withholding taxes that the developed country 

will be allowed to charge.  The Actionaid 2015 report put it this way tax treaties narrow 

the ability of source countries to levy taxation in two ways. First by narrowing the class 

of activities taxable at source. For example, the definition of “permanent 

establishment” determines the breadth of source based taxing rights on business 

profits. Source country capital gains taxing rights are also narrowed in tax treaties. 

Second, treaties cap taxation rates on certain source based (withholding) taxes.75 

These countries really heavily on these tax revenue streams.  There have been 

incidents noted where the signing of tax treaties removes the host countries right to 

collect tax when Multinational Corporations pay out dividends, this was specifically the 

 
73 Rajul Awasthi 2012. Investor Motivation Surveys in East Africa. Investment Climate. World Bank Group 
74 Martin Hearson 2018. When do developing countries negotiate away their corporate tax base? Journal of 
International Development J. Int. Dev. 30, 233–255 
75 ActionAid UK 2015. Taxation Rights Slipping through the cracks: How developing countries can get a better 
deal on their taxing right 



51 
 

with the tax treaty between Uganda and the Netherlands, this was noted by Onyejekwe 

. 76 

 

Tax loses have also been known to arise out of the restriction of taxes of capital gains, 

these restrictions are prevalent in the tax treaties signed by countries with Mauritius. 

This effectively means that companies that sell their shares, property or any other 

capital assets, if they have a permanent establishment in Mauritius will effectively pay 

lower taxes to the host countries. This results in significant revenue losses for the host 

countries which can go into the millions of dollars. A report by Actionaid. UK found that 

in 2013 an Italian Oil company was required to pay the Mozambique government 

$400million in capital gains tax. The below diagram from a Deloitte document 

highlighted the risk of revenue losses to host countries as result of signing double 

taxation agreements with Mauritius.77  

 

 

 

 

 

 

 

 

 

 

 

 

 

 
76 Onyejekwe 2018; 181 
77ActionAid UK .2013; Deloitte in Africa – Advising big businesses on how to avoid tax in some of the world’s 

poorest countries 



52 
 

Investing Directly in Mozambique  

 

                        ActionAid UK 2013 

 

 

 

 

 

 

 

 

 

 

 

 



53 
 

Investing in Mozambique through Mauritius  

                             ActionAid UK 2013 

 

According to Quak and Timmis 2018 studies show that treaties with the Netherlands 

led to foregone revenue for developing countries of at least EUR 770 million in 2011.78 

Similar, calculations suggest that US tax treaties cost their non-OECD country 

counterparts perhaps $1.6 billion in 2010.  

 

Hearson 2016 noted that the biggest study of tax treaty content to date compared 

1,811 treaties on the basis of 30 standardised variations that affect how constrained 

a developing country is in its ability to tax inward investors (Wijnen and de Goede 

2013).79  

For almost all these possible variations, the majority of treaties between developed 

and developing countries included versions of clauses that were at the more restrictive 

end of the available options, imposing bigger curbs on developing countries’ taxing 

rights.  

 
78 Quak & Timmis 2018:2 
79 Martin Hearson 2016: Measuring Tax Treaty Negotiation Outcomes: the ActionAid Tax Treaties Dataset ICTD 
Working Paper 47 First published by the Institute of Development Studies in February 2016. pp 3- 40 



54 
 

 

 

 

4.3 Conclusion  

In this chapter we explored the notion whether double taxation agreements attract 

foreign direct investment. There does seem to be consensus in the literature in this 

regard nor is the empirical evidence support the notion. Further to this we uncovered 

that some developing countries implement tax incentive programs to lure the much 

need to foreign direct investment. This can result in tax competition amongst host 

countries and forgone tax revenues which are not always compensated by foreign 

direct investment. The concluding of double taxation agreements and the incentive 

programs does result in significant tax losses for the host countries. Therefore Chapter 

5 will seek to answer the questions given all the evidence should developing countries 

enter in double taxation agreements and do the provide any benefit. In addition to the 

answer the questions recommendation will also be provided.  

 

 

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 



55 
 

 

 

5. Recommendations and Conclusions   

The international tax regime is complicated at best and difficult to navigate. This is 

more prevalent if as a country your tax administration, systems and management is 

not adequately geared for this. This tends to be the case with developing countries 

who need to contend with this reality. International trade has long been a fixture in the 

advancement of commerce even before the advent of globalization. No country 

operates in a vacuum, in order to grow, businesses have sought opportunities abroad. 

Double taxation can become an impediment to international trade, hence government 

and regulators have had to find a way to curb the impact of double taxation.  

 

Whilst some countries have internal relief mechanisms built into their domestic tax 

legislation to curb the impact of double taxation such is known as unilateral relief which 

can consists of rebates and tax credits. An example of such in our domestic legislation 

as noted by De Koker & Williams where they state that the domestic law relief consists, 

amongst others, of a special rebate, or unilateral tax credit, for foreign taxes payable 

by residents (natural persons and legal entities; see §§ 5.2 and 5.2E) in respect of 

income from non-Republic sources. The rebate is available for set-off against the 

normal tax otherwise payable. Where a foreign country levies tax on income derived 

from a source in South Africa, relief is available not as a rebate but in the form of a 

deduction for the foreign taxes paid exemption method.80  

 

Bilateral relief on the other hand is where there is an agreement between the two 

countries, by way of double taxation agreement.  

 

Where Samantara described this as follows this method involves an agreement in 

which two countries agree that incomes arising from different sources which are likely 

to be taxed in both the countries as per their respective income tax law should either 

be taxed in one of these two countries or that a specified portion of such incomes 

 
80 De Koker & Williams 2021: 179 



56 
 

should be taxed by each country so that there is no overlapping taxation in this 

case.81  

This kind of agreement results in a complete avoidance of double taxation of the same 

income in both the countries.  

 

Whilst the intentions of double taxation agreement are noble at their core, they have 

been besieged by the own challenges. These challenges have unequally, negatively 

impacted developing countries versus developed countries. Firstly, when countries 

that have asymmetric vs symmetric investment flows enter into double taxation 

agreements, the country that is capital importing stands the risk of forfeiting tax 

revenue.  

Braun and Zagler’s opined that asymmetric tax treaties inevitably reduce the tax base 

of developing countries, so that we can and should expect some form of 

compensation from the industrialized to the developing economy in case a treaty 

comes into effect. This form of compensation is foreign direct investments to