What is a double taxation agreement?

A tax treaty (double taxation agreement or “DTA”) is an international agreement which protects taxpayers against paying double taxation on the same income which two or more countries wish to tax.

A tax treaty only applies when countries tax the same income for a specific taxpayer. When no tax treaty exists between countries, and both countries are taxing the same income for a taxpayer, it means that the taxpayer will have to pay tax in two countries on the same income.

A DTA determines which country will have the right to tax income, to avoid the potential double taxation. The taxing right is normally determined by considering the nature of the income, the source of the income and the specific circumstances.

In addition to protecting residents against double taxation, treaties provide for cooperation in tax matters between the countries.

DTAs provide crucial benefits for multinational groups of companies. Some of these are:

• double tax treaties often give relief in the form of lower withholding taxes;

• it allocates profit to a permanent establishment in a way that does not create double tax on branch profits; and

• provide procedural frameworks to apply double tax relief and resolve disputes.

Namibia currently has DTA’s with the following countries:

• Botswana

• France

• Germany

• India

• Malaysia

• Mauritius

• Romania

• Russian Federation

• South Africa

• Sweden

• United Kingdom

It is crucial to consider DTA benefits when concluding transactions between Namibian and foreign entities as the implications should be factored into the planning of the Namibian entity in terms of tax due under a different jurisdiction.

It is important that any structure that makes use of DTA relief has a commercial basis. If a transaction is only structured through a treaty country to obtain a tax benefit, the transaction may be disregarded for tax purposes by the Revenue Authorities. This is commonly referred to as “anti-treaty shopping”.

A tax treaty cannot create a tax charge – i.e. if no tax is due in the country, the tax treaty cannot impose a tax. There must first be a determination of whether tax is due. Once that has been established, the taxing rights will be allocated in terms of the agreement.

For example, Namibia may be able to tax interest paid to non-residents at 10%. If there is no tax due under domestic law, the treaty itself will not create a tax charge.

*Johan Nel is a partner: corporate tax service at PwC Namibia. His column will be published in Market Watch bi-monthly on a Monday.