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UK bleeds Malawi taxes through treaty

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For a staggering 60 years, some United Kingdom government enterprises in Malawi have not been paying taxes following a double taxation avoidance treaty which the two governments signed in 1955, Malawi News has learnt.

The agreement, a piece of colonial legacy which was signed almost 10 years before Malawi became independent from British rule, has since become subject of a campaign by anti-poverty charity Action Aid International which is urging the UK to end the agreement.

Action Aid describes the treaty as unfair and suggests it is part of the reasons for Malawi’s underdevelopment arising from the country’s perpetual struggle to finance essential public social and economic services due to inadequate funding.

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The phrasing of the treaty essentially means that both governments should have been benefiting.

But Malawi is apparently the loser in the treaty as compared to its heavily-industrialised former colonial power which has investments in agriculture, mining and financial sectors, among others, in the country. Malawi does not have any investments of note in the United Kingdom.

The treaty “for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income” applies on income tax, profits tax and excess profits levy in both countries.

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Article III, for example, provides that “industrial or commercial profits of a United Kingdom enterprise shall not be subject to Malawi tax unless the enterprise is engaged in trade or business in Malawi through a permanent establishment situated therein.”

According to the agreement, a permanent establishment means “a branch, management, mine, farm or other fixed place of business”.

It says an enterprise of one of the territories shall not be deemed to have a permanent establishment in the other territory merely because it carries on business dealings in that other territory through a bona fide broker or general commission agent.

“The fact that a company which is a resident of one of the territories has a subsidiary company which is a resident of the other territory or which is engaged in trade or business in that other territory (whether through a permanent establishment or otherwise) shall not of itself constitute that subsidiary company a permanent establishment of its parent company,” reads the document.

The article also provides that “Remuneration (other than pensions) paid by one of the Contracting Governments to any individual for services rendered to that Contracting Government in the discharge of governmental functions shall be exempt from tax in the territory of the other Contracting Government if the individual is not ordinarily resident in that territory or is ordinarily resident in that territory solely for the purpose of rendering those services.”

Action Aid says in preventing Malawi from collecting withholding tax, among other taxes, from British investments here, the treaty is effectively depriving Malawi the resources that it needs to fund its public services such as health.

Writing in The Guardian UK, Action Aid Country Director for Malawi, Martha Khonje, said under the provisions of the treaty, British multinational firms “can move money out of Malawi freely –via interest of management fee payments, dividends or royalties –without paying tax in Malawi on that money.”

Khonje said companies from the UK are the third largest investor in Malawi but as a result of this treaty, they can get away with paying little or no corporate tax here.

“Action Aid is calling on the UK government to put the fight against poverty at the heart of its tax policy and negotiate a new, more equitable treaty that ensures UK companies pay a fair amount of tax in Malawi,” she said.

The treaty was signed in London on November 25, 1955 with a R.A Butte representing the United Kingdom government and a G.McC. Rennie representing the Malawi Government. Rennie was a British governor in the Rhodesia and Nyasaland federation.

British High Commissioner to Malawi, Michael Nevin, said the UK had already been in contact with the government of Malawi on the revision of the agreement well before Action Aid raised it.

“The UK operates a rolling programme of re-negotiation for its international tax treaties to ensure that they remain fit for purpose. Negotiations on a new tax treaty between the UK and Malawi are on-going with the Government of Malawi,” he said.

Nevin said in all of its tax treaty negotiations with developing countries, the UK is committed to ensuring that UK companies pay a fair share of tax in the countries in which they are operating.

“It has long been UK practice to include robust anti-abuse provisions in all revised Double Taxation Agreements,” he said.

Government spokesperson Jappie Mhango said it was true that discussions were underway to review the treaty.

“In between, a lot of things have changed and the treaty cannot continue to be in the current form. So, yes the treaty is under microscope. The Ministry of Finance is handling that,” said Mhango, Minister of Information and Civic Education.

Some global debt and aid policy experts have argued that while Western governments claim to be supporting developing countries to get out poverty, they are actually worsening that poverty and enriching themselves in the process by getting out of those countries more financial resources than they give through illicit transactions.

A December 2014 report by the Global Financial Integrity (GFI) revealed that Malawi lost a whopping US$5.8 billion (about K4.3 trillion at current exchange rates) between 2003 and 2012 through illicit financial flows.

According to GFI, a research and advisory organisation, illicit financial flows include tax evasion, corruption, money laundering techniques and use of shell companies for the transfer of dirty money.

It said beyond the damaging economic impact of the overall capital outflows, illicit financial flows have “a terrible, subversive impact on governments, victims of crime, and society”.

“They facilitate transnational organised crime, foster corruption, undermine governance, and decrease tax revenues,” it said.

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