Source and residence-based taxation in the Organisation for Economic Cooperation and United Nations Model Tax Convention for the avoidance of double taxation

Critique insists upon analyzing the systemic relations that exist between all the sites of cultural production and consumption. A politically effective critique of literary education would be better served now by discarding the problematic of representation for a problematic whose object is the systematic constitution and distribution of cultural capital. 

John Guillory, Cultural Capital. p.82. (italics added)

With this statement in mind, carve out your own question critiquing the dominance or hegemony of specific disciplinary or critical/methodological paradigms and practices in the study of Africa.

Please note that:

1. You are free to choose any paradigm but your essay must tie this paradigm to a specific discipline or field of study.

2. Your essay must demonstrate familiarity with a sample of the course readings so far.

Exam Essay, AXL5202F Problematising the Study of Africa, Centre for Africa Studies, University of Cape Town

Abstract

One of the dominant paradigms in the last half century has been that tax treaties and low tax rates could have a positive impact on foreign direct investment (FDI). Consequently, African countries have repeatedly accepted reduced taxing rights to income earned from sources in their territory, in favour of granting the taxing rights to the residence country of the capital exporting foreign investor. This essay adopts John Guillory’s articulation of the problematic of representation to situate the history and contextual emergence of the use of the Organisation for Economic Cooperation and Development (OECD) and United Nations (UN) Model Tax Conventions respectively in tax treaty negotiations in Africa.

Part I establishes the hegemony of the OECD model with the aim of illustrating why the latter UN model, despite granting source countries greater taxing rights, remains widely unadopted by most African countries in treaty negotiations, and ultimately fails to disrupt the skewed power relationship between developing and developed countries engaged in international trade tax treaty negotiations. In this regard, the essay uses Giorgio Agamben’s inclusive exclusion, read closely together Foucault’s governmentality, to situate the residence-source conflict with the aim of illustrating the conflictual claims of states’ juridical right and sovereignty to the taxation of income and capital in foreign trade and the limits of representation.

Part II briefly extends by adopting Guillory’s call for a problematic which critiques the systematic constitution of and distribution of cultural capital with the aim of showing its relevance through critically situating a recent study of the African Development Bank which affirmed that reduced taxes lead to increased FDI. In that regard, the essay adopts Mamdani’s reflection on South African exceptionalism to locate the coming into effect of the double tax treaty in 2013 between South Africa and the Democratic Republic of Congo. The essay presents the aggregate worldwide inflows of foreign direct investment into the DRC from 2013-2018, directly contradicting the findings of the African Development Bank study. In so doing, the essay offers a critique centred on the distribution of capital by illustrating how South Africa broadly concludes tax treaties with other African countries, and how its function in abetting profit shifting and tax evasion is the greatest of any of the African countries.

Introduction

Background

The African Development Bank (AfDB) commissioned its Working Paper Series under the Vice-Presidency for Economic Governance and Knowledge Management, focussing on five core priority areas[1]  at the heart of the bank’s mission. In January 2019, using panel data from 19 African countries[2] over the period 1990-2012, Boly, Coulibaly, & Kéré, (2019:15)  found that lowering of the corporate income tax (CIT) rate increases Foreign Direct Investment (FDI) net inflows for the country making the reduction, and also in its neighbouring countries; suggesting that a “tax competition” through lowering of CIT rate by neighbourhood countries can be beneficial to all of them in the both short and long term (Boly, Coulibaly, & Kéré, 2019:2).

The debate around the link between tax incentives and tax breaks for investors and the attraction of foreign direct investment is fairly old in the field of international taxation (Daurer, 2014; Holmes, 2007; Lang, 2010; Olivier & Honiball, 2005). This AfDB study has its historic link within the upsurge in tax treaties concluded over recent decades (Hearson, 2015; Amin, 1997). In Africa, states have been willing to impose low tax and concede their taxing rights to attract capital into less-developed countries, with the understanding that FDI is a precondition for development (Daurer, 2014:44). Hence it has been argued that tax treaties could have a positive impact on FDI.

Rationale

In The Relationship between Double Taxation Treaties and FDI, authors Barthel, Busse, Krever, & Neumayer (2010) observe that earlier studies mapping this relationship have centred on the United States of America (Barthel, et al., 2010:8). The significance of the AfDB study lies in the fact that it is the first of its kind to test the relationship between reduced taxation and foreign direct investment focussing on African counties (Boly, Coulibaly, & Kéré, 2019). Nonetheless, its approach is from a tradition where these studies have been concentrated in the west,  and at once raises a crucial point relating to the theoretical tradition and paradigm within which the AfDB’s study is undertaken (Guillory, 1993; Foucalt, 2002) because of the historic context within which the debate on the nature of the relation emerges.

The relevance of this in Africa cannot be overstated as the role of taxation in the continent’s development efforts is under closer scrutiny[3]. Particularly, as it relates to “tax competition”, African countries have started to engage in tax wars to attract investments and/or repatriate some economic activities that had been moved offshore[4].

Instead of seeing tax havens slowly reforming their tax systems by reinstating ‘normal’ tax rates and rules, more countries are adopting tax haven-like rules and trying to compete with secrecy jurisdictions. This is particularly illustrated with the case of South Africa and its tax policy, next to the notorious tax haven Mauritius (Markle & Robinson, 2012:23), which is one of the two countries identified as an investment hub into Africa (Drummond, 2012:4).

Civil society groups, trade unions, social movements and tax justice networks are beginning to ask whether multinational corporations are paying their fair share of tax[5]. And, that is particularly important situated against the backdrop of emerging research on the scale of illicit financial flows[6], profit shifting and tax evasion using tax treaty networks. It is estimated that at least $50 billion dollars leaves Africa annually through illicit financial flows.

Scope, aims and outline

The essay has two central aims. First, the essay aims to illustrate the limitations of the problematic of representation as an object of critique (Guillory, 1993:41) using the source and residence concepts in international taxation, and thereby locating the history and contextual emergence of the use of the Organisation for Economic Cooperation and Development (OECD) and United Nations (UN) Model Tax Conventions respectively in tax treaty negotiations in Africa, Part I establishes the hegemony of the OECD model aligned to the residence principle, with the aim of illustrating why the latter model, despite granting source countries greater taxing rights, remains widely unadopted by most African countries in treaty negotiations (Bland, 2013), and ultimately fails to disrupt the skewed power relationship between developing and developed countries engaged in international trade tax treaty negotiations.

In this regard, the essay uses Giorgio Agamben’s inclusive exclusion (Agamben, 1998:7), related and read closely with Foucault’s governmentality with an emphasis on Foucault’s discussion on mercantilism and its relation to trade in establishing sovereignty (Foucault, 2000:212; Agamben, 1998) to situate the residence-source conflict with the aim of illustrating the conflictual claims of states’ over juridical rights to tax income and capital in foreign trade earned within the territory of a country, or by a resident of another, and thereby establish the use of double taxation treaties, also known as double tax conventions or tax treaties, as a mechanism to allocate taxing rights to states with competing claims to tax, and thus also a form of capital distribution.

Therefore, part I will begin with a brief introduction to international double taxation, and to that effect, the essay locates how both the OECD and UN model tax conventions came to be used in the relation to inclusive exclusion, with the former not giving due regard to the source principle, only allowing source countries to tax business profits only through the exception of a permanent establishment (PE) as defined. To layout this context, the essay borrows from my honour’s thesis viz. Contradictions in the South Africa-Democratic Republic of Congo Double Tax Treaty and the United Nations Model Tax Convention: a case study determining if reduced taxing rights facilitates increased foreign direct investment (2018), to introduce the topic of international double taxation and situate the history of the OECD and UN model tax conventions in Africa.

Part II of the essay extends by adopting Guillory’s call for a problematic which critiques the systematic constitution of and distribution of cultural capital with the aim of showing its relevance through critically situating the African Development Bank Study’s findings. The essay turns to Mamdani (1996:27) reflection on South African exceptionalism to locate the coming into effect of the double tax treaty in 2013 between South Africa and the Democratic Republic of Congo which is largely based on the OECD model. The essay presents the aggregate worldwide inflows of foreign direct investment into the DRC from 2013-2018, directly contradicting the findings of the African Development Bank. In so doing, the essay illustrates the limits of representation and the need for a critique centred on the distribution of capital by illustrating how South Africa broadly concludes tax treaties with other African countries.

The essay will be split in two parts and structured around the aims as outlined above.

Part I. Exclusive Inclusion: Source and Residence in International Double Taxation

Juridical International Double Taxation[7]

Double taxation is the taxation of the same person with respect to the same income in two or more states or jurisdictions (Olivier & Honiball, 2005). This is also known as juridical double taxation, and is the focus of this essay. The concepts of source and residence are the two fundamental pillars which drive international juridical double taxation (UN Committee of Experts on International Cooperation in Tax Matters, 2011:15).

Double taxation arises when two states assert taxing rights with respect to a taxpayer and taxable income or capital generated by that taxpayer (Olivier & Honiball, 2005:16). This leads to a contestation around two conflictual claims, in which one state makes its claim on the fact that a taxpayer is a resident of its country, while the other state makes its claim on the basis that the taxable income or capital is derived within its territory, that is, from a source within its country’s borders (Holmes, 2007:19).

Consequently, the contention manifests in double taxation, which in turn finds expression in one of three main permutations deriving from the conflict:

1. Residence – Residence conflict: two states may apply different meanings or definitions as to what constitutes a resident of that country for tax purposes, leading to a situation where a taxpayer is taxed twice by both states on the same income because the person is deemed to be a resident of both states.
2. Source – Residence conflict: the most common conflict in international taxation (Holmes, 2007:24). One state simply taxes the income on the basis that it has been derived from a source in its country, and the other invokes the residence principle and taxes the income because the person is a resident of that other state.
3. Source – Source conflict: arises where both states tax the same income on the basis that it is derived from a source within each of the two state’s borders.

Currently, there is no international tax law which adjudicates the contestation over taxing rights (Olivier & Honiball, 2005). Instead, states enter into bilateral tax treaties, one major aim which is to eliminate double taxation[8].

In Governmentality, Foucault (2000:214) describes the process by which the first rationalisation of exercise of power becomes a practice of government in international relations. For the purposes of international juridical taxation and this essay, the connection is drawn through the nexus of international trade, specifically, through mercantilism, and for Foucault “the establishment of the great territorial administrative and colonial states” (Foucault, 2000:202). Viewed from this lens, the source-residence conflict as observed in international tax could also be interpreted as a contestation of sovereignty vis-à-vis source taxation as a teritorrial claim.

Moreover, and in turn, the claim to tax a “resident” of a particular state on their worldwide income, regardless of where that income is earned, can be read as an attempt to reach the finality of government “residing in the things it manages” (Foucault, 2000:211). In this sense, the claim to tax the resident could be interpreted as govermentality extending to the population (Foucault, 2000:216):

• Population comes to appear above all alse as the ultimate end of government

Therefore, for governmentality, territory is no longer its defining feature or end, rather, the population becomes its target. We can then establish the dominance of the residence criteria in distributing taxing rights in international trade where states enter into double tax treaties. Particularly, as the West increased its colonial expansion, greater trade networks (Tandon, 2015:6) were precipitated from the beginning of the seventeeth century (Foucault, 2000:212). In this respect, mercantilism applied the “traditional weapons of sovereignty”: population, territory and wealth, accompaniedby a type of intervention in the field of economy and population i.e. political economy (Foucault, Governmentality, 2000). Where  government was not able to extend its influence into another territory, it retained control through the acts of its deemed citizens, whose merchants took as their esential objective the might of the sovereign (Foucault, 2000:214).

Thus, in negotiating the distribution of taxing rights, one finds the exclusive granting of taxing rights to the country in which that person is deemed to be a resident for tax purposes. This in turn constitues a form of capital due to how taxing rights are unequally distributed (Guillory, 1993:70). This constitution would go on to be crystalised in what became the OECD Model Tax Convention.

Situating the history of the OECD and UN Model Tax Conventions within the African context[9]

The first double tax convention was published by the Organisation for Economic Cooperation and Development (OECD) in 1963. The OECD has 36 member states[10], most of whom are from the developed world in the global north (Hearson, 2015:4). The OECD model has been widely used in negotiating bilateral tax treaties by both member and non-member states and enjoyed considerable influence in shaping international tax law (Lang, 2010:28).

However, the OECD model is particularly appropriate for bilateral tax treaties between two or more developed countries – with the emphasis on developed (Holmes, 2007:58). Double Tax Agreements or DTAs based on the OECD convention typically require the source country to give up its taxing rights. The OECD model generally grants the primary right of tax to the country of the foreign investor. Holmes (2007:57) explains:

• This results from the fact that where developing countries trade with developed countries, (net) income is usually always flowing from the developing country to the developed country. So, generally, the developing country will be the net loser

The United Nations (UN) published its own convention in 1980 following pressure from developing countries to respond to the one-sided impact of the OECD model. The UN model is based on the interests of developing countries (Lang, 2010:27). This is alluded to in the name of the convention: United Nations Model on Double Taxation Convention between Developed and Developing Countries. The UN model gives greater weighting to the source principle than the OECD model (Krause, 2015:36).

In Africa, there are approximately 300 treaties currently in force (International Bureau of Fiscal Documentation, 2018).  Nearly half of these treaties have arisen since 2000. Many of these treaties are with South Africa and Mauritius (Hearson, 2015:9) currently viewed as the main portals to channel investment into Africa. The remaining which were signed before the UN model predominantly involve Western European countries, mirroring sources of FDI aid and patterns of relations imposed by colonialism (Chakrabarty, 1992; Diawara, 1998; Chatterjee, 2014), further entrenching the disparities inherent in the OECD model (Hearson, 2015:11).

Defining a resident for tax purposes

The definition of a resident serves a crucial function in determining the tax consequences of a natural or legal person; rates of tax applicable and from which type of income or capital tax will be levied (Lang, 2010). The exact definition of a resident, including related terms such as ‘income’ or capital’ differs per jurisdiction as each country adopts its own rules. Despite the hegemonic hold of the concept residence in driving taxation regimes across the globe, the fact that each country adopts different residence tests and definitions conforms to the observation Foucault makes in The Archaeology of Knowledge, highlighting that there are differences which occur as the discipline is dispersed (Foucault, The Archaeology of Knowledge, 1972). However, two general principles remain consistent (Olivier & Honiball, 2005):

• If you are a resident of a state, and if that state uses a residence-based tax regime, then you will be taxed on your worldwide income by that state;
• If you are not a resident as defined, you may be taxed on income from a source within that country

One of the primary functions of tax treaties is to arrive upon an agreeable definition of “residence” and what country of residence means (Lang, 2010). In this regard, there are two generally accepted principles:

1. For a natural person, the place of residence is where such an individual is “ordinarily resident”, OR;
2. Failing this, a physical presence test may be applied, with the effect of deeming one to be a resident for tax purposes based on physical presence, regardless of the individual’s intentions.

For a company, the place of residence is where that company is incorporated or registered, OR where it has its place of effective management[11].

By way of example, the essay uses South Africa ‘s domestic tax law to illustrate some of these meanings.

Ordinarily resident

In the case a natural person, section 1(1) of the Income Tax Act No. 58 of 1962, defines a resident as a person who is ordinarily resident in South Africa. The Act does not give the precise meaning of the term “ordinarily resident”. Therefore, where there have been disputes which arose between the revenue authority and a taxpayer, the issue was heard in court. Over the years, certain legal precedents have come to be formed and have constituted the base of interpreting the legislation as promulgated in the Act[12].

These legal precedents came to establish principles to help interpret the meaning of “ordinarily resident. In the case of the Commissioner of Inland Revenue (CIR) v Kuttel it was established that ordinary residence is where you are habitually and normally resident. For instance, where you have a job, go to school, have a house and family. In another case, CIR v Cohen, the principle established was that your place of residence is where you “return from wanderings”.

These two cases in the South African tax practice form the fundamental backbone of a body of case law that both SARS and taxpayers rely on in enforcing tax obligations.  

Physical Presence Test

If a taxpayer does not meet the definition above, a physical presence test (PPT) is applied, and regardless of the considerations above, an individual will be deemed to be a resident and thus taxed on their worldwide income[13]. The PPT can only be applied if the individual at any point in the year of assessment was not “ordinarily resident”. There are three criteria of days present, and all must be met:

• More than 91 days in the current year of assessment i.e. tax year beginning on 1 March ending on 28 February for natural persons, and;
• More than 91 days in each of the preceding five years of assessment, and;
• More than 915 days in aggregate in the preceding five years

If the above conditions are satisfied, then an individual will be deemed to be a resident for the tax year, with the consequence of being taxed on their worldwide income.

Residence for persons other than natural persons

For a company, the place of residence is where that company is incorporated or registered, OR where it has its place of effective management[14].

Section 1(1) of South Africa’s Income Tax Act defines the “place of effective management” as the definition contained in the OECD Model Tax Convention for the Avoidance of Double Taxation.

For this essay; it is not necessary to go into the specifics of that definition; except to highlight the substantive idea under the OECD model, as set out in paragraph 3 of Article 4 (Organisation for Economic Cooperation and Development, 2003) is that the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made[15]. This means that, the country of residence is not defined with reference to real economic activity; the site of production and operation or where goods or services are consumed (Guillory, 1993); thus, denying the source country taxing rights.

Therefore, this point serves as a marker to begin drawing towards the conclusion of part 1: to highlight the hegemony of the OECD model in influencing tax policy, specifically through the conception of residence-based taxation as opposed to source based tax regimes. To further highlight this, the essay uses one further example from South Africa’s domestic tax law.

Section 108(1),(2) of the Income Tax Act allow for any provision that binds South Africa to an international tax law, to overall domestic tax legislation. This has the effect of making that international treaty provision appear as if it had been promulgated and ratified in South Africa’s domestic tax legislation. For instance, if a company meets the criteria and definition of a resident as outlined section1(1) of the Act, but in terms of a tax treaty that company is an exclusive tax resident of the other state, then South Africa may not tax that resident company as defined on its worldwide income.

This is important because, as a consequence of wanting to provide a stable environment and maintain certainty for investors, domestic tax legislation (at least in South Africa) is difficult to change by design (Drummond, 2012). International precedents on the other hand with the pace of globalisation and international trade, occur rapidly, thus changes in international tax law often outpace the relevant domestic legislation. And, the significance of this boils down to the question of and threat to sovereignty.

The OECD functions as a tool in the arena of geopolitics propagating the interests of the global north through the instruments of political economy (Amin, 1997; Foucault, Governmentality, 2000), specifically relating to international trade (Tandon, 2015).

The effect of the OECD and residence principle is to ensure that its scope of influence is not bound by territory, and that de facto government can reach its ends through its population irrespective of where its geographical borders and jurisdiction ends.  This is particularly pronounced in the case multinational companies who are mostly embroiled within the source-residence conflict both as persons engaged in international trade (Crown, 1974), often having parent and subsidiary companies in different territories and tax jurisdictions.

The essay thus far has focussed on the constitution of the residence principle; the essay now turns towards instances where the source principle may be activated. The inclusion of the source concept as a legal form in international tax, as seen through the emergence of the UN Model Tax Convention, was by exclusion (Agamben, 1998). In this respect, the essay borrows from the paradox of sovereignty to illustrate the limitation of its inclusion.

Limitations of source inclusion and representation in international model tax treaties

As of 1980, the UN Model Tax Convention was introduced as an alternative basis to conclude tax treaty negotiations, particularly between developing and developed countries. The UN Model gives greater weighting to the source principle; where the economic activity of a company occurs, in order to determine which state retains taxing rights (Krause, 2015; Lang, 2010). This essay suggests that the reason the United Nations model has failed to gain traction is that it’s distributive articles in allocating the right to tax are based on the same normative framework with the OECD model (Foucault, The Archaeology of Knowledge, 1972), namely: a development trajectory and paradigm premised on attracting foreign direct investment (United Nations, 2001).

In fact, despite the existence of a model tax convention granting source taxing rights, member states of the Southern African Development Community (SADC) still wanted to generate their own model tax convention (SADC, 2002) which would take into account the “particular socio-economic development needs of the member states” (SADC, 2002:8) as stipulated in the Memorandum of Understanding in Co-Operation in Taxation and Related Matters (SADC, 2002:4). Part II will further illustrate the limits of this approach by SADC of what we can call ‘representation’ as seen in the contradictions in the relationship between South Africa and the Democratic Republic of Congo.

The first draft of a common SADC Model Tax Convention was published in 2001 (Krause, 2015:11) and finalised in 2011 (International Bureau of Fiscal Documentation, 2018), noting that the SADC model is yet to be adopted by member states entering treaty negotiations.

The SADC model is caught in a similar quagmire to the UN model: as long as adopting increased taxing rights poses the risk of capital flight, African states have been willing to give up source taxing rights in exchange for anticipated foreign direct investment (Bland, 2013; Daurer, 2014). To this effect, the OECD model remains superior. More than that, as part II illustrates, SADC member states, particularly South Africa, have been willing to act against the commitments espoused in the memorandum of understanding vis-à-vis harmful tax competition (SADC, 2002:4). This in turn illustrates how model tax conventions themselves are components of social reproduction; with the allocation and distribution of taxing rights establishing forms of relations between countries (Guillory, 1993:56).

This brings to fruition Guillory’s (1993:53) statement analogous to his prediction of how different curricular for different constituencies will produce the same effects of social stratification, in the same was as different schools for different classes do. In this, both the UN and SADC models reproduce in varied degrees the relations inherent in the OECD model: double tax treaty negotiations are premised on bargaining with respect to the same fundamental issues of trade associated with the formation of the OECD model, that is to say, they have a specific relation to that model (Guillory, 1993:57) in so far as tax competition was ‘cannonised’ as universality of the international tax system (OECD, 1998) premised on maintaiing juridical rights. The trading away of taxing rights is part of the treaty formation reproduced by concomitant ideas of sovereignty (Agamben, 1998). In this regard, some countries will be in weaker positions economically, whilst the other will aim to maintain sovereignty. Tax treaties, like the canon, then belong to the process of reproducing social relations (Guillory, 1993:77). In part, this inherent uneven distribution of taxing rights as a form of capital (Guillory, 1993:66) might partly explain the reluctance by member states to adopt the SADC model.

Therefore, the addition of other tax treaty models in addition to the dominant and hegemonic OECD model, does not fundamentally alter the skewed distribution of taxing rights between states which end up negotiating into a tax treaty. The essay now briefly turns to situate a problematic which critiques the “distribution of capital” through the lens of the South Africa-DRC double tax treaty, juxtaposed against the findings of the study commissioned by the African Development Bank.

Part II. Reduced Taxing Rights and Foregone Tax Revenue in Anticipation of Attracting FDI

Distribution of capital: The South Africa-Democratic Republic of Congo experience

Global Finance magazine ranked the Democratic Republic of Congo (DRC) as the second poorest country in the world[16]. At the time of concluding the double tax treaty with South Africa (SA) in 2013 (IBFD, 2005), the DRC had just one other treaty in force, with Belgium (Pwc Africa Desk, 2013), its former colonial power.

Therefore, in a sense, the tax treaty with DRC and South Africa can be symbolically seen as an attempt to break away from the colonial mould of relation (Hearson, 2015), in light of the commitment by SADC member states (2002), whilst still aiming to attract FDI into the country. South Africa is also the only African and developing country with an effective treaty with the DRC. The treaty thus positions itself within a critical and decisive role for assessing whether tax treaties in which the DRC enters in future will lead to increased FDI flows, or, enable harmful tax competition and treaty shopping (OECD, 1998:32). And for this essay, whether it reproduces social relation of inequality in how it distributes taxing rights if we read the tax treaty and the source-residence concepts as forms of cultural capital (Guillory, 1993).

The first section of this part of the essay draws on a previous study viz Contradictions in the South Africa-Democratic Republic of Congo Double Tax Treaty and the United Nations Model Tax Convention: a case study determining if reduced taxing rights facilitates increased foreign direct investment (2018), which primarily sought to determine whether the treaty leaned towards the OECD residence principle or the source principle allowing the DRC to retain taxing rights, and if the former, whether there was increased flow of foreign direct investment into the DRC. This study is offered to problematise the findings of the commissioned study by the African Development seeking to answer the same question vis-à-vis reduced taxing rights and attracting FDI. But perhaps more importantly, drawing from Mamdani (1996:31), the essay aims to illustrate the need for a problematic of distribution by showing South Africa as a “dramatic” illustration of how inequality and stratification is reproduced through and via tax-treaty negotiations.

The analysis suggests that the SA-DRC double tax treaty has greater application of the OECD model as opposed to the UN model. Using a legal doctrinal comparative analysis, Articles 7–18 of the SA-DRC treaty which distributes the types of income earned in international investment, mirrors the central tenets around which the UN and OECD models are in fundamental conflict revolving around the Source or Residence principle. With the exception of Article 12 on Royalties and Article 14 Income from employment – which do not particularly lean towards either model – the analysis showed, that, for the most part: where there is conflict in the UN and OECD models, the SA-DRC tax treaty leans closer to the OECD model with respect to either limiting the source right to tax, or granting exclusive right to tax to the resident country.

These findings are consistent with other tax treaties conducted in SADC. Overall, SADC countries do not make extensive use of the provisions of the UN model but appear to adopt the provisions of the OECD model in the majority of their tax treaties (Bland, 2013). A possible reason for this, suggested by Daurer (2014), is a reluctance to adopt provisions which may negatively impact FDI.

The quantitative aspect assessed the flow of FDI into the DRC for the five-year period the SA-DRC treaty has been effective.

A steady decline of FDI flows into DRC was observed; however, this decline is present immediately before the treaty came into effect and thereafter. The decline in FDI flows from 2013–2017 has been just shy of US$895 million. Apart from the FDI flow in the 2017 year, the results predominantly point to a negative correlation, suggesting that perhaps the presence of the treaty does not lead to increased FDI and that the SA-DRC tax treaty has not had a positive effect on FDI. Refer to figure 1 below.

Figure 1: Aggregate worldwide flows of FDI into the DRC for the period 2012-2017

Data obtained from UNCTAD at http://unctadstat.unctad.org/wds/TableViewer/tableView.aspx  and presented in the graphical form by the author

Indirect costs of “tax competition” and foregone tax revenue

The DRC as the source country hoping to attract FDI accepted reduced taxing rights in its tax convention with South Africa. Without this tax treaty, the DRC government would have been able to tax South African resident companies as much as their national legislation would permit (Daurer & Krever, 2012:6).

To critically review existence of the double tax treaty not correlating with a positive effect on FDI (Agamben, 1998:21) perhaps offers a useful point of reflection in the analysis of how the rule to the norm no longer applies to the exception. Despite the fact that “no clear evidence for the correlation between the existence of a tax treaty and FDI flows has yet been found”, this ‘rule’ as it were still gains hegemony and traction, giving it a seemingly transcendental quality, beyond itself (Agamben, 1998:21).

As early as 1998 the OECD has acknowledged that access to a wide network of tax treaties enables treaty shopping and harmful tax competition. (OECD, 1998, p. 33). For the purpose of this essay, this access is tied to Guillory’s analysis of how social relations are reproduced; how the distribution of capital in unequal. From this vantage point, South African resident investors have benefited from not being taxed in the DRC, but the DRC has not gained the benefit anticipated as increased FDI. And the DRC still retains its rank as the second poorest country as per the United Nations Conference on Trade and Development (2018).

The indirect cost comes to bear in the form of illicit financial flows and tax avoidance. Companies “shop around” for a combination of double tax agreements which will give it tax benefits by setting up a conduit company in a jurisdiction which has a DTA with another country in which the company wants to avoid paying tax (Markle & Robinson, 2012:30). In fact, South Africa was reported by the Global Financial Secrecy Index as the largest facilitator of illicit financial flows on the continent.

In anticipating expected flows of FDI, it may be unlikely that these costs of illicit financial flows were accounted for by the DRC quantitatively. In addition to traceable costs of illicit financial flows and profit shifting, the costs of foregone tax revenue and lost development efforts that could have been undertaken by the state, such as investing in infrastructure or public services, may not yet be quantifiable.

Conclusion

The essay had two central aims. First, the essay illustrated the limitations of the problematic of representation as an object of critique (Guillory, 1993:41) using the source and residence concepts in international taxation, and thereby locating the history and contextual emergence of the use of the Organisation for Economic Cooperation and Development (OECD) and United Nations (UN) Model Tax Conventions respectively in tax treaty negotiations in Africa. Part I establishes the hegemony of the OECD model aligned to the residence principle, with the aim of illustrating why the latter model espoused by the UN, despite granting source countries greater taxing rights, remains widely unadopted by most African countries in treaty negotiations (Bland, 2013), and ultimately fails to disrupt the skewed power relationship between developing and developed countries engaged in international trade tax treaty negotiations.

In this regard, the essay used Giorgio Agamben’s inclusive exclusion (Agamben, 1998:7), related and read closely with Foucault’s governmentality with an emphasis on Foucault’s discussion on mercantilism and its relation to trade in establishing sovereignty (Foucault, 2000:212; Agamben, 1998) to situate the residence-source conflict with the aim of illustrating the conflictual claims of states’ over juridical rights to tax income and capital in foreign trade earned within the territory of a country, or by a resident of another, and thereby established the use of double taxation treaties, also known as double tax conventions or tax treaties, as a mechanism to allocate taxing rights to states with competing claims to tax and thus a semblance of a distribution of capital.

Part II of the essay extended by adopting Guillory’s call for a problematic which critiques the systematic constitution of and distribution of cultural capital with the aim of showing its relevance through critically situating the African Development Bank Study’s findings. The essay specifically turned to Mamdani (1996:27) reflection on South African exceptionalism to locate the coming into effect of the double tax treaty in 2013 between South Africa and the Democratic Republic of Congo which is largely based on the OECD model. The essay presents the aggregate worldwide inflows of foreign direct investment into the DRC from 2013-2018, directly contradicting the findings of the African Development Bank. In so doing, the essay illustrates the limits of representation and the need for a critique centred on the distribution of capital by dramatically illustrating how South Africa broadly concludes tax treaties with other African countries as representative of the general model reproduced by tax treaty negotiations.

References

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Barthel, F., Busse, M., Krever, R., & Neumayer, E. (2010). The Relationship between Double Taxation Treaties and Foreign Direct Investment. In P. P. Michael Lang, & C. S. J. Schuch (Eds.), Tax Treaties: Building Bridges between Law and Economics (pp. 3-18). Amsterdam: IBFD.

Bland, T. (2013). Use of and Variance of the from the United Nations Model Tax Treaty Clause for Tax Treaties Concluded by a Group of SADC Countries. M.Com. Thesis. : University of Cape Town.

Boly, A., Coulibaly, S., & Kéré, E. N. (2019, January). Tax Policy, Foreign Direct Investment and Spillover Effects, Working Paper Series N° 310. Ivory Coast: African Development Bank.

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Diawara, M. (1998). Towards a Regional Imaginary in Africa. In F. Jameson, & M. (. Miyoshi, The Cultures of Globalisation (pp. 103-124). Durham: Duke University Press.

Drummond, E. L. (2012). The Effectiveness of the South African Double Taxation Relief Provisions for South African Companies Investing in other African States. MCom. Thesis. Pretoria: University of Pretoria.

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Foucault, M. (1972). The Archaeology of Knowledge. Great Britain: Tavistock.

Foucault, M. (2000). Governmentality. In M. Foucault, Power: Essential Works of Foucault 1954-1984 (pp. 201-222). New York: The New Press.

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[1] List of countries: Botswana, Cameroon, Côte d’Ivoire, Egypt, Gabon, Ghana, Kenya, Malawi, Mauritius, Morocco, Nigeria, Senegal, South Africa, Sudan, Swaziland, Tanzania, Togo, Tunisia, Uganda

[2] The five focus areas/objectives are, to: Power Africa, Feed Africa, Industrialize Africa, Integrate Africa and Improve Living Conditions of Africans

[3] OECD (2008) Investment Policy Reviews. China: Encouraging Responsible Business Conduct, OECD Investment Policy Reviews, OECD Publishing, Paris, https://doi-org.ezproxy.uct.ac.za/10.1787/9789264053717-en

[4] Tørsløv, T, L Wier, and G Zucman (2018), “The Missing Profits of Nations”, NBER Working Paper 24701. 

[5] Investigations into corporations involved in illicit financial flows through transfer pricing mechanisms include the Alternative Information and Development Centre (2012) investigation into Lonmin following the Marikana Massacre in the Bermuda Connection: http://aidc.org.za/download/Illicit-capital-flows/BermudaLonmin04low.pdf

[6] From the AIDC (2019) Tax and Wage Evasion Guide: The High-Level Panel on Illicit Financial Flows (Mbeki panel) has estimated the cost of IFFs between 2000-2008 on the African continent to be in the region of US$450bn – US$500bn. This aggregate figure from the Mbeki panel confirms estimates generated by both Global Financial Integrity index and Oxfam International which have estimated the annual loss to IFFs in Africa to be in the range of US$50 – US$80 billion per year.

[7] The text in the first third of this page is reproduced from my honours thesis as flagged in the introduction to the essay

[8] UN Committee of Experts on International Cooperation in Tax Matters, 2011. Revision of the Manual for the Negotiation of Bilateral Tax Treaties, Geneva: United Nations.
Available at: http://www.un.org/esa/ffd/tax/seventhsession/CRP11_Introduction_2011.pdf

[9] Ibid.

[10] Organisation for Economic Cooperation and Development, 2018. OECD.org. [Online]
Available at: http://www.oecd.org/about/membersandpartners/list-oecd-member-countries.htm

[11] As defined in section 1(1) of the Income Tax Act No. 58 of 1962

[12] See the South African Revenue Service (SARS) Interpretation Notes 3 and 4 which set out how SARS approaches the definition and case law with respect to the ordinarily resident and physical presence criteria
https://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-03%20-%20Resident%20definition%20natural%20person%20ordinarily%20resident.pdf

Click to access LAPD-IntR-IN-2012-04%20-%20Resident%20definition%20natural%20person%20physical%20presence.pdf

[13] Definition of ‘resident’ in section 1(1) of the Income Tax Act No. 58 of 1962

[14] Ibid.

[15] See the SARS Interpretation Note No. 6 on the place of effective management for companies

Click to access LAPD-IntR-IN-2012-06%20-%20IN%206%20Resident%20-%20Place%20of%20effective%20management%20(companies).pdf

[16] Gregson, J. 2018. Gfmag. https://www.gfmag.com/global-data/economic-data/the-poorest-countries-in-the-world?page=10