As noted in Part 1 and Part 2, the agreed fiscal regime of the EACOP project takes the approach of a head office entity in Uganda and a PE treatment for the operations in Tanzania and the inbuilt mechanism seeks to split profits between the two parts of the entity using a 40:60 ratio as noted above.

Uganda and Tanzania do not have a treaty between themselves. However, both domestic tax laws embody provisions relating to profit attribution and adopt mainly international tax principles. Therefore, it is appropriate to ‘stress test’ and evaluate the agreed fiscal regime provisions against these long established taxation principles as they are tried and tested principles that uphold Adam Smith’s maxims of certainty and efficiency.

It is important to note as indicated earlier that the domestic tax laws are ordinarily part of the agreed fiscal regime owing to section 44 of the EACOP Act but apply subject to and lower in rank to modifications under the agreed tax provisions in the IGA and HGAs. The modifications under the agreed tax provisions as further noted earlier create a whole new profit attribution mechanism parallel to the one contained in the domestic tax laws.

1. Evaluation based on Tanzania’s tax principles on chargeable income (profit allocable to) of a PE in Tanzania.

Section 4(1)(a) of the Tanzania Income Tax Act (TITA) provides that income tax is charged and payable for each year of income by every person with total income for a year of income with section 6 providing that the chargeable income for a non-resident person is the person’s total income (from employment, business or investment), but only to the extent that the income has a source in the United Republic of Tanzania (Tanzania).

Sections 68 and 69 provide for the determination of amounts directly included in calculating income and payments with a source in Tanzania as well as corresponding deductions. Under sections 68(1), 68(2) and 69 of the TITA, an income or deduction shall be considered sourced from Tanzania only to the extent to which a domestic asset or domestic liability was involved to generate the income, gains and amounts (collectively business income), and deductions only to the extent to which they relate to domestic assets or payments that have a source in Tanzania. (EACOP system and assets in Tanzania are considered as Tanzania domestic assets).

Section 70 provides that the income tax liability under section 4(1)(a) of a person with a domestic or foreign permanent establishment shall be calculated as if the person and the permanent establishment were independent but associated persons and the permanent establishment were resident in the country in which it is situated (Tanzania).

Section 33(1) provides that in any arrangement between persons who are associates, the persons shall quantify, apportion and allocate amounts to be included or deducted in calculating income between the persons as is necessary to reflect the total income or tax payable that would have arisen for them if the arrangement had been conducted at arm’s length.

1. Evaluation based on Uganda’s tax principles on chargeable income (profit allocable to) of a resident entity with a PE outside Uganda

Section 4(1) of the Uganda Income Tax Act (UITA) imposes income tax on every person who has chargeable income for a year of income and section 15 defines chargeable income as gross income of the person for the year, less total deductions allowed under the Act.

Section 17(2)(a) provides that the gross income of a resident person includes income derived from all geographical sources. However, section 78(a)(i) provides that to the extent a resident person derives business income attributable to a branch (PE) outside Uganda, then that income is considered foreign source income.

By expressly labelling income derived by EACOP Ltd attributable to its Tanzanian PE as foreign source, section 78(a)(i) of the UITA acknowledges that this income is sourced and taxable in Tanzania with the Tanzanian domestic tax laws providing the corresponding provisions that ensure so.

Therefore, the above is further vindication that, in domesticating international taxation principles, the Uganda and Tanzania domestic tax laws achieve synchronization as far as international tax is concerned.

• Congruence of Uganda and Tanzania tax laws on the application of the arm’s length mechanism in determining profit

In determining the profits between the head office and the PE, the UITA also provides that where there are dealings between the PE and the head office, then the two are associates and profits between the PE and the head office are determined using the arm’s length principle as provided for under section 116.

With regard to the common tariff and common expenses of EACOP Ltd head office and PE, section 116 of the UITA provides that in any transaction between associates, the Commissioner may distribute, apportion, or allocate income, deductions, or credits between the associates as is necessary to reflect the chargeable income realized by the taxpayer in an arm’s length transaction. This aligns with section 33(1) of the TITA highlighted above.

The UITA further expounds on its application of the arm’s length principle under section 116 by application of the Income Tax (Transfer Pricing) Regulations, 2011 (the Uganda TP Regulations), which apply to transactions between associates (associates include a cross border PE and its head office).

Regulation 6 of the Uganda TP Regulations provides that the regulations are to be applied in a manner consistent with the arm’s length principle in Article 9 of the OECD MTC and the OECD Transfer Pricing Guidelines for Multi-National Enterprises and Tax Administrations (OECD TPG).

The TITA also expounds on its application of the arm’s length principle under section 33 through the Tax Administration (Transfer Pricing) Regulations, 2018, which also align with the arm’s length principle in Article 9 of the OECD MTC and adopt the OECD TPG.

Therefore, as far as profit attribution is concerned, even in the absence of a tax treaty, the principles of international taxation are perfectly interwoven within the Tanzania and Uganda domestic tax laws and a natural application of the two codes would seamlessly achieve similar and efficient results.

Under international tax, the arm’s length standard and the profit attribution mechanism between a head office and a PE are contained under Article 7 of the OECD MTC. Paragraph 2 of Article 7 attributes to a PE profits that it might be expected to make in each contracting state, in particular in its dealings with other parts of the enterprise, if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the enterprise through the PE and through the other parts of the enterprise.

The above rule reflects and is based on the Authorized OECD Approach (AOA) developed in the 2008 report and later the 2010 report entitled Attribution of Profits to Permanent Establishments (‘2010 report’).

The approach first hypothesizes the head office and PE relations as different entities, then delineates transactions from the hypothesized relations and through a comparability analysis and application of the OECD TPG determines whether they were undertaken at arm’s length. This article does not delve into a detailed comparability analysis to determine the arm’s length results of EACOP Ltd.’s profits received in common and dealings between the head office and PE.

In spite of the above, EACOP’s predetermined 40:60 apportionment basis automatically invalidates the application of the arm’s length principle, because a comparability analysis, which is critical to determining arm’s length results, is only possible after the transaction. The Uganda and Tanzania tax laws, aligned with international tax principles in adopting a proven and tested arm’s length principle as the apportionment basis, stand in sharp contrast to the predetermined formulary ratio in the agreed fiscal regime, which demonstrates the width of the gap between the agreed fiscal regime and the existing tax principles.