INSTITUTE OF TAX AND CUSTOMS ADMINISTRAT
INSTITUTE OF TAX AND CUSTOMS ADMINISTRATION
Assignment on:
IN CASE OF ETHIO-KUWAITI BILATERIAL TAX TREATY
Group -6 members:
1. Yilkal Dilu
ID No ECSU1500354
2. Misrak Birhane
ID NoECSU1500337
3. Kelemu Amare
ID No ECSU1500360
4. Tekleweyni Weldu
ID No ECSU1500343
5. Tsegaye Kechamo
ID No ECSU1500176
6. Husen Muhamed
ID No ECSU1500368
Submitted to: - Prof.Dr.Fisseha-Tsion Mengistu
Date: -
25 January 2016
Addis Ababa, Ethiopia
Table of content
Title
Page
1.
Introduction......................................................................................................................................1
2.
Facts and situations in Ethiopia......................................................................................................2
3.
Ethio-Kuwait tax treaty article evaluation.....................................................................................3
4.
Conclusion..........................................................................................................................................5
1. Introduction
Taxes are important sources of public revenue. The existence of collective
consumption of goods and services necessitates putting some of our income into
government hands. Such public goods like roads, power, municipal services,
and other public infrastructures have favorable results on many families,
business enterprises, industries, the general public and to attract foreign direct
investment. Public goods are normally supplied by public agencies due to their
natures of non-rivalry and non-excludability. The nature of consumption of
public goods is such that consumption by one does not reduce consumption for
others. Government intervention in the supply of public goods is therefore
inevitable and can only be done if the public pays taxes for the production and
supply such goods.
Despite the fact that people need to pay taxes based on rationales of
vertical and horizontal equities, it is not always the case that tax systems
are comprehensible and transparent for tax payers especially for foreign
investors that our country Ethiopia signed and ratified tax treaties are
scientific but the way of implementing those tax treaties which reduces
tax collection in future that affects the benefits to Ethiopia. Because
Ethiopia has no foreign investors who can take the advantages signed by
the two countries.So,our government must consider this kinds of things
and should take care before and after sign and ratify any BITS ,especially
tax treaties.
It is therefore worth clarifying the Ethiopian tax system and the rationales
behind for foreign direct investors through tax policy and fiscal policy
that should be adjust the benefits of both countries investors.
2. Facts and situations in Ethiopia
Ethiopia is widely regarded as one of the fives fastest growing economies of the world. It is widely
acknowledged that it is one of the fastest growth centers in Africa if not in the world. It is believed
that this is also due to substantial flow of FDI to Ethiopia. The Ethiopian government has managed to
amend several times in order to attract foreign investors and to create and enabling climate.
Even if these situations exist in Ethiopia our prime minster wants to know some facts about some issues
and invites us to go to the Ethiopian investment commission,ERCA,MOEFD to find out the issues
especially Ethio- Kuwait bilateral tax treaty based on this we raise some questions to the commission
described below.
I.
II.
Bilateral tax treaties are effective in attracting FDI in Ethiopia?
What was the volume of Kuwait investors to Ethiopia before and after the BTT has been
signed?
III.
Explain the casual relationship between the BTTs and the flow of FDI?
o In addition to this core questions we have to mention some questions which supports
the main questions.
i.
What is the aim or purpose of Ethio- Kuwait BTT, what is the benefit of Ethiopia if
Ethiopian investors are not exist in Kuwait?
ii.
Why BTT of Ethio- Kuwait signed thirteen years in special for others?
iii.
Dispute resolution mechanism benefits Ethiopia or foreigners?
iv.
What are the benefits of BTT for Ethiopia and foreigners?
v.
Is there professional experts specialized in laws of investment in Ethiopia who challenges BTT?
vi.
One of the objectives of FDI by two contracting countries is transferring of skill but
practically it is implemented?
Based on these issues we have to collect data based on interview from the concerning bodies and compare
and contrast the theoretical and practical aspect of BTT of the two signed countries we analysis each
article one by one.
3. Ethio-Kuwait tax treaty article evaluation
Article16
DIRECTORS’ FEES
Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a
member of the board of directors or other similar organ of a company which is a resident of the other
Contracting State shall be taxable only in the first mentioned Contracting State.
When the Kuwait resident company makes a Directors’ fees and other similar payments to the member of
the board of directors of a company which is a resident of the other Contracting State (Ethiopia) may be
taxed in Ethiopia. This article supposes, unless it is limited by other articles, the tax can be deducted in
Ethiopia and this can raise the revenue of Ethiopia from such a sector. Especially, if there is many
companies of Kuwait in Ethiopia which are administer under the board, the more tax revenue can be
generated from this.
Article17
ARTIST AND SPORTSMEN
1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a
Contracting State as an entertainer, such as a theatre, motion picture, radio or television
artiste, or a musician, or as a sportsman, from his personal activities as such exercised in
the other Contracting State, may be taxed in that other Contracting State.
When the Kuwait resident earns income in Ethiopia as an entertainer, such as a theater, motion
picture, radio or television artiste, or a musician, or as a sportsman, from his personal activities
as such exercised, the revenue can be taxed in Ethiopia. Even if it is not common when the
Kuwait are making a business as an entertainer, it may be a future potential advantage whenever
they make a business . Because the number of Kuwait people’s are increasing in Ethiopia as an
investor and expatriate, there may be time in future that the entertaining group from Kuwait may
come. If it is the case, Ethiopia can be benefited from the revenue earned from such activity.
Article7
BUSINESS PROFITS
1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting
State unless the enterprise carries on business in the other Contracting state through a
permanent establishment situated in that other Contracting State. If the enterprise carries on
or has carried on business in that manner, the profits of the enterprise may be taxed in the
other Contracting State but only so much of them as is attributable to that permanent
establishment. However, payments of any kind received as a consideration for the use of, or
the right to use, industrial, commercial or scientific equipment shall be deemed to be profits
of an enterprise to which the provisions of this Article shall apply.
This article more serves the interest of Kuwait than Ethiopia in practice because it provides that
Ethiopia can impose tax on the profit enterprise of a Contracting State (Kuwait) when the
enterprise has a permanent establishment in Ethiopia. This creates loopholes for Kuwait investors
to evade tax or transfers taxable profit from Ethiopia to Kuwait. This is because in order to avoid
tax in Ethiopia, Kuwait investors may not create a permanent establishment in Ethiopia. They
come here only to get more profit than they get in their country but not to pay tax in Ethiopia and
as a result as much as possible they try to avoid tax.
3. In determining the profits of a permanent establishment, there shall be allowed as deductions
those deductible expenses which are incurred for the purposes of the permanent
establishment, including executive and general administrative expenses so incurred, whether
in the Contracting State in which the permanent establishment is situated or elsewhere. This
provision shall apply subject to limitations under the domestic law.
This is the case that foreign investors frequently used it for the transfer pricing. This article on the
agreement gives recognition for the documents of transaction undertaken elsewhere in the world which
are incurred for the purposes of the business of the permanent establishment, including executive and
general administrative expenses. But in reality multinationals have businesses everywhere in the world
and they can get either overstated or under stated purchase documents in order to avoid tax or transfer a
price. When they undertake investment purchase from the outside, factory installment, technical services
and consultancy services, they can bring a fictitious invoice price that can transfer profit from the host
country to the country of origin.
Article14
Independent personal services
1. Income derived by an individual who is a resident of a Contracting State in respect of
professional services or other activities of an independent character shall be taxable only in
that Contracting State unless he has a fixed base regularly available to him in the other
Contracting State for the purpose of performing his activities. If he has or had such a fixed
base, the income may be taxed in the other Contracting State but only so much of it as is
attributable to that fixed base.
2. The term "professional services" includes especially independent scientific, literary, artistic,
educational or teaching activities, as well as the independent activities of physicians,
lawyers, engineers, architects, dentists and accountants.
In undertaking professional services or other activities of an independent character by the Kuwait resident
can only be taxable when he has a fixed base regularly available to him in the Ethiopia for the purpose of
performing his activities. But big multinationals don't want to be taxed and as a result, they seek
loopholes to avoid tax. There are many foreign organizations which are undertaking technical service in
industries and other related activities. In order to avoid tax, they don't want to have a fixed base.
Otherwise, they send their workers back before a fixed base regularly in Ethiopia and bring other workers
to start. In this way they can avoid tax and this article enables them to do such an avoidance.
4. Conclusion
On the case of bilateral tax treaty are effective to attract foreign domestic investment in
Ethiopia, even if the respondent says BTT by itself not the only factor to attract foreign
domestic investment, when we look or observe the theoretical and practical aspect of
Kuwait and Ethiopia, there is a continuous flow of foreign investors after BIT signed so
we have to understand from the data BTT are effective to attract FDI even if it have some
limitations.
The volume of Kuwait investors before BTT and after BTT:-when we summarize this
idea, even the respondents says like there is no significant variation the volume of Kuwait
investors before and after BTT and we observe from the secondary data BIT plays a vital
role to increase the volume of investors in Ethiopia.
The causal relationship between BTT and the flow of FDI:-the response of the respondent
based on this idea is that bilateral tax treaty and foreign direct investment are not directly
related or one is not depend on the other, when we see the raw data and refer different bilateral treaties from different foreign countries, for example china, Germany, France and
Kuwait even if the respondent explain in this way the casual relationship between bilateral tax treaty and the flow of foreign domestic investment they are inter related one the
other.
The other issue is the aim or purpose of Ethio-Kuwait BTT, what is the benefit of
Ethiopia if Ethiopian investors are not exist in Kuwait:-the respondent try to explain
about this issue specially the purpose of BTT logically bilateral tax treaty equally benefit
the two contracting states, because when foreign investors come to the host country,
transfer know-how, technology and provide hard currency to the host country. On the
other hand foreigners establish capital gain from the host country. Even if this advantages exists there is unbalance treaty b/n developing and developed countries. Because
most of developing countries do not have skilled man power and know-how in this area
because of this foreigners/developed countries/ are over ride in case of capital, skill,
technology and information developing countries like our home land country Ethiopia
we could not recommend this idea because the respondents idea accepts us. .
Is there professional experts specialized in laws of tax in Ethiopia who challenges BTT:the respondent describes this issue there is no specialized expert particularly in laws of
investment ,and we have to do activities we obtained from short term training and experience sharing from foreigners because of this there is in balance foreign investment
treaty between foreigners and our home land country Ethiopia based on this idea we advise Ethiopian government foreigners come to our home land Ethiopia not to alleviate
the citizens from poverty, but they calculate their cost benefit analysis ratio and by using
an advantage the weak side /loophole/of developing countries to explore
resources ,therefore the government be wise before sign BTT
•
Give a chance for independent intellectual persons like professor doctor FesehaTsiyon Mengistu and others who have full knowledge and experience to advise
specially in investment area.
Assignment on:
IN CASE OF ETHIO-KUWAITI BILATERIAL TAX TREATY
Group -6 members:
1. Yilkal Dilu
ID No ECSU1500354
2. Misrak Birhane
ID NoECSU1500337
3. Kelemu Amare
ID No ECSU1500360
4. Tekleweyni Weldu
ID No ECSU1500343
5. Tsegaye Kechamo
ID No ECSU1500176
6. Husen Muhamed
ID No ECSU1500368
Submitted to: - Prof.Dr.Fisseha-Tsion Mengistu
Date: -
25 January 2016
Addis Ababa, Ethiopia
Table of content
Title
Page
1.
Introduction......................................................................................................................................1
2.
Facts and situations in Ethiopia......................................................................................................2
3.
Ethio-Kuwait tax treaty article evaluation.....................................................................................3
4.
Conclusion..........................................................................................................................................5
1. Introduction
Taxes are important sources of public revenue. The existence of collective
consumption of goods and services necessitates putting some of our income into
government hands. Such public goods like roads, power, municipal services,
and other public infrastructures have favorable results on many families,
business enterprises, industries, the general public and to attract foreign direct
investment. Public goods are normally supplied by public agencies due to their
natures of non-rivalry and non-excludability. The nature of consumption of
public goods is such that consumption by one does not reduce consumption for
others. Government intervention in the supply of public goods is therefore
inevitable and can only be done if the public pays taxes for the production and
supply such goods.
Despite the fact that people need to pay taxes based on rationales of
vertical and horizontal equities, it is not always the case that tax systems
are comprehensible and transparent for tax payers especially for foreign
investors that our country Ethiopia signed and ratified tax treaties are
scientific but the way of implementing those tax treaties which reduces
tax collection in future that affects the benefits to Ethiopia. Because
Ethiopia has no foreign investors who can take the advantages signed by
the two countries.So,our government must consider this kinds of things
and should take care before and after sign and ratify any BITS ,especially
tax treaties.
It is therefore worth clarifying the Ethiopian tax system and the rationales
behind for foreign direct investors through tax policy and fiscal policy
that should be adjust the benefits of both countries investors.
2. Facts and situations in Ethiopia
Ethiopia is widely regarded as one of the fives fastest growing economies of the world. It is widely
acknowledged that it is one of the fastest growth centers in Africa if not in the world. It is believed
that this is also due to substantial flow of FDI to Ethiopia. The Ethiopian government has managed to
amend several times in order to attract foreign investors and to create and enabling climate.
Even if these situations exist in Ethiopia our prime minster wants to know some facts about some issues
and invites us to go to the Ethiopian investment commission,ERCA,MOEFD to find out the issues
especially Ethio- Kuwait bilateral tax treaty based on this we raise some questions to the commission
described below.
I.
II.
Bilateral tax treaties are effective in attracting FDI in Ethiopia?
What was the volume of Kuwait investors to Ethiopia before and after the BTT has been
signed?
III.
Explain the casual relationship between the BTTs and the flow of FDI?
o In addition to this core questions we have to mention some questions which supports
the main questions.
i.
What is the aim or purpose of Ethio- Kuwait BTT, what is the benefit of Ethiopia if
Ethiopian investors are not exist in Kuwait?
ii.
Why BTT of Ethio- Kuwait signed thirteen years in special for others?
iii.
Dispute resolution mechanism benefits Ethiopia or foreigners?
iv.
What are the benefits of BTT for Ethiopia and foreigners?
v.
Is there professional experts specialized in laws of investment in Ethiopia who challenges BTT?
vi.
One of the objectives of FDI by two contracting countries is transferring of skill but
practically it is implemented?
Based on these issues we have to collect data based on interview from the concerning bodies and compare
and contrast the theoretical and practical aspect of BTT of the two signed countries we analysis each
article one by one.
3. Ethio-Kuwait tax treaty article evaluation
Article16
DIRECTORS’ FEES
Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a
member of the board of directors or other similar organ of a company which is a resident of the other
Contracting State shall be taxable only in the first mentioned Contracting State.
When the Kuwait resident company makes a Directors’ fees and other similar payments to the member of
the board of directors of a company which is a resident of the other Contracting State (Ethiopia) may be
taxed in Ethiopia. This article supposes, unless it is limited by other articles, the tax can be deducted in
Ethiopia and this can raise the revenue of Ethiopia from such a sector. Especially, if there is many
companies of Kuwait in Ethiopia which are administer under the board, the more tax revenue can be
generated from this.
Article17
ARTIST AND SPORTSMEN
1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a
Contracting State as an entertainer, such as a theatre, motion picture, radio or television
artiste, or a musician, or as a sportsman, from his personal activities as such exercised in
the other Contracting State, may be taxed in that other Contracting State.
When the Kuwait resident earns income in Ethiopia as an entertainer, such as a theater, motion
picture, radio or television artiste, or a musician, or as a sportsman, from his personal activities
as such exercised, the revenue can be taxed in Ethiopia. Even if it is not common when the
Kuwait are making a business as an entertainer, it may be a future potential advantage whenever
they make a business . Because the number of Kuwait people’s are increasing in Ethiopia as an
investor and expatriate, there may be time in future that the entertaining group from Kuwait may
come. If it is the case, Ethiopia can be benefited from the revenue earned from such activity.
Article7
BUSINESS PROFITS
1) The profits of an enterprise of a Contracting State shall be taxable only in that Contracting
State unless the enterprise carries on business in the other Contracting state through a
permanent establishment situated in that other Contracting State. If the enterprise carries on
or has carried on business in that manner, the profits of the enterprise may be taxed in the
other Contracting State but only so much of them as is attributable to that permanent
establishment. However, payments of any kind received as a consideration for the use of, or
the right to use, industrial, commercial or scientific equipment shall be deemed to be profits
of an enterprise to which the provisions of this Article shall apply.
This article more serves the interest of Kuwait than Ethiopia in practice because it provides that
Ethiopia can impose tax on the profit enterprise of a Contracting State (Kuwait) when the
enterprise has a permanent establishment in Ethiopia. This creates loopholes for Kuwait investors
to evade tax or transfers taxable profit from Ethiopia to Kuwait. This is because in order to avoid
tax in Ethiopia, Kuwait investors may not create a permanent establishment in Ethiopia. They
come here only to get more profit than they get in their country but not to pay tax in Ethiopia and
as a result as much as possible they try to avoid tax.
3. In determining the profits of a permanent establishment, there shall be allowed as deductions
those deductible expenses which are incurred for the purposes of the permanent
establishment, including executive and general administrative expenses so incurred, whether
in the Contracting State in which the permanent establishment is situated or elsewhere. This
provision shall apply subject to limitations under the domestic law.
This is the case that foreign investors frequently used it for the transfer pricing. This article on the
agreement gives recognition for the documents of transaction undertaken elsewhere in the world which
are incurred for the purposes of the business of the permanent establishment, including executive and
general administrative expenses. But in reality multinationals have businesses everywhere in the world
and they can get either overstated or under stated purchase documents in order to avoid tax or transfer a
price. When they undertake investment purchase from the outside, factory installment, technical services
and consultancy services, they can bring a fictitious invoice price that can transfer profit from the host
country to the country of origin.
Article14
Independent personal services
1. Income derived by an individual who is a resident of a Contracting State in respect of
professional services or other activities of an independent character shall be taxable only in
that Contracting State unless he has a fixed base regularly available to him in the other
Contracting State for the purpose of performing his activities. If he has or had such a fixed
base, the income may be taxed in the other Contracting State but only so much of it as is
attributable to that fixed base.
2. The term "professional services" includes especially independent scientific, literary, artistic,
educational or teaching activities, as well as the independent activities of physicians,
lawyers, engineers, architects, dentists and accountants.
In undertaking professional services or other activities of an independent character by the Kuwait resident
can only be taxable when he has a fixed base regularly available to him in the Ethiopia for the purpose of
performing his activities. But big multinationals don't want to be taxed and as a result, they seek
loopholes to avoid tax. There are many foreign organizations which are undertaking technical service in
industries and other related activities. In order to avoid tax, they don't want to have a fixed base.
Otherwise, they send their workers back before a fixed base regularly in Ethiopia and bring other workers
to start. In this way they can avoid tax and this article enables them to do such an avoidance.
4. Conclusion
On the case of bilateral tax treaty are effective to attract foreign domestic investment in
Ethiopia, even if the respondent says BTT by itself not the only factor to attract foreign
domestic investment, when we look or observe the theoretical and practical aspect of
Kuwait and Ethiopia, there is a continuous flow of foreign investors after BIT signed so
we have to understand from the data BTT are effective to attract FDI even if it have some
limitations.
The volume of Kuwait investors before BTT and after BTT:-when we summarize this
idea, even the respondents says like there is no significant variation the volume of Kuwait
investors before and after BTT and we observe from the secondary data BIT plays a vital
role to increase the volume of investors in Ethiopia.
The causal relationship between BTT and the flow of FDI:-the response of the respondent
based on this idea is that bilateral tax treaty and foreign direct investment are not directly
related or one is not depend on the other, when we see the raw data and refer different bilateral treaties from different foreign countries, for example china, Germany, France and
Kuwait even if the respondent explain in this way the casual relationship between bilateral tax treaty and the flow of foreign domestic investment they are inter related one the
other.
The other issue is the aim or purpose of Ethio-Kuwait BTT, what is the benefit of
Ethiopia if Ethiopian investors are not exist in Kuwait:-the respondent try to explain
about this issue specially the purpose of BTT logically bilateral tax treaty equally benefit
the two contracting states, because when foreign investors come to the host country,
transfer know-how, technology and provide hard currency to the host country. On the
other hand foreigners establish capital gain from the host country. Even if this advantages exists there is unbalance treaty b/n developing and developed countries. Because
most of developing countries do not have skilled man power and know-how in this area
because of this foreigners/developed countries/ are over ride in case of capital, skill,
technology and information developing countries like our home land country Ethiopia
we could not recommend this idea because the respondents idea accepts us. .
Is there professional experts specialized in laws of tax in Ethiopia who challenges BTT:the respondent describes this issue there is no specialized expert particularly in laws of
investment ,and we have to do activities we obtained from short term training and experience sharing from foreigners because of this there is in balance foreign investment
treaty between foreigners and our home land country Ethiopia based on this idea we advise Ethiopian government foreigners come to our home land Ethiopia not to alleviate
the citizens from poverty, but they calculate their cost benefit analysis ratio and by using
an advantage the weak side /loophole/of developing countries to explore
resources ,therefore the government be wise before sign BTT
•
Give a chance for independent intellectual persons like professor doctor FesehaTsiyon Mengistu and others who have full knowledge and experience to advise
specially in investment area.