Preventing Tax Treaty Abuse – a Toolbox with Preventive Measures for Ghana, South Africa, and Nigeria

Traditionally, an extensive double tax treaty (DTT) network was considered to be an important tool for a developing country to attract foreign direct investment (FDI) and a signal for its willingness to impose taxes on foreign investors according to international accepted taxation norms. A broad network of DTTs was perceived as a sincere manifestation of a country’s desire for economic development, greater integration into the global economy, and a confirmation to provide a predictable legal framework. However, recently, evidence appeared that signing DTTs does not necessarily result in greater FDI and may even increase revenue losses, which is particularly detrimental to developing countries. The topic of abusive use of tax treaties and the negative repercussions on the tax base of developing countries has received extensive attention from international organizations, policymakers, and non-governmental organizations (NGOs). For instance, the IMF started to advice developing countries to “sign tax treaties with considerable caution” as a treaty with one country can effectively constitute a treaty with the rest of the world. Also, the OECD has developed guidance in its work on tax treaty abuse devoted to “make it easier for countries to justify their decision not to enter into tax treaties with certain low or no-tax jurisdictions” or to decide on whether to modify (or, ultimately, terminate) a treaty that was previously concluded. Against this background, the aim of this paper is to develop a policy against tax treaty abuse for Ghana, Nigeria, and South Africa (hereafter together referred to as “the Focus Countries”). This will be accomplished through first examining different possible anti-avoidance mechanisms and then reviewing the applicable framework of the Focus Countries in order to identify opportunities for improvement. All three Focus Countries have a treaty network established, however, with different global coverage. Accordingly, all of the Focus Countries have already a practice in place for negotiating tax treaties with other developing and developed countries and Ghana and Nigeria may even be eager to expand their existing but, thus far, still limited tax treaty network. Accordingly, the paper analyses different anti-avoidance mechanisms together with the applicable country practice to ultimately provide recommendations on policy improvement. The anti-avoidance mechanisms covered include (a) tax treaty policy for entering into a DTT or reviewing existing ones; (b) withholding taxes as a simple anti-tax-avoidance mechanism; (c) termination of a tax treaty; (d) tax treaty override; (e) beneficial ownership provisions; (f) BEPS recommendations on preventing treaty abuse; and, (g) a SAAR on indirect transfers of a property rich company.