Each country has its own sovereign right to raise taxes, and own set of rules with regards to who is taxed, on what and at what rate. The right of a state to tax income, profits or gains sourced within its territory is commonly referred to as “source taxation”. Unfortunately, the jurisdiction to tax is not limited by the geographical limits of the state - other factors such as “residence” of a person determines whether a person is liable to tax in a particular jurisdiction.
Generally, residents of a particular jurisdiction are taxed on their worldwide income. That is to say, profits derived from Tanzania will be taxed in Tanzania on the basis of “source taxation”, and if such profits are derived by a person that is a resident of another jurisdiction then the same will also be taxed in that other jurisdiction on the basis of “residence taxation”. This results in juridical double taxation. This needs to be distinguished from economic double taxation, which is not the subject matter of this article.
Inward investments by Multinational Enterprises (“MNEs”) is a key driver of economic growth. It is therefore important to attract more inward investments. However, there is often a conflict between the interest of multi-national taxpayers who are mostly concerned about minimizing their global tax cost by way of reducing exposure to juridical double taxation and the interest of tax authorities which are more concerned about eliminating double non-taxation, tax evasion or aggressive tax avoidance.