“Tax treaties can be powerful tools for Africa’s development – but only if they are designed to protect the continent’s taxing rights and promote investment.”
For too long, poorly drafted tax treaties have enabled profit shifting, double non taxation and treaty shopping, eroding the very revenue that African countries need to fund their own priorities.
In recognising both the promise and the perils of tax treaties, African Tax Administration Forum is stepping up its support to member states by developing an ATAF Model Agreement and detailed commentaries. These tools are designed to equip African negotiators with a coherent, Africa centred blueprint when they sit down at the treaty table.
Tax treaties are often presented as technical instruments that quietly support trade and investment by removing double taxation and providing certainty to cross border investors.
Across Africa, governments have signed dozens of treaties in the hope of attracting foreign capital and deepening economic ties, yet the same instruments have too often been used against African interests.
Much like the African Continental Free Trade Area on the trade side, these agreements are intended to remove or reduce barriers to doing business, from customs duties to overlapping domestic taxes.
The tax treaties sit at the heart of the struggle over who gets to tax what, where, and how much in a globalised economy dominated by multinational enterprises.
Treaties with narrow or outdated definitions, low withholding tax rates and weak anti abuse rules have facilitated aggressive tax planning structures that strip profits out of source countries.
“The result is a deepening perception that tax treaties, instead of being balanced, have sometimes become conduits for base erosion and profit shifting rather than genuine vehicles for mutually beneficial economic cooperation.”
Rapid growth of cross border trade, digitalisation and new business models has made it easier for multinational enterprises to operate across many countries while remaining light on the ground in any one jurisdiction.
Firms exposed to different tax rules have been quick to exploit gaps and mismatches between domestic laws and treaty provisions.
In this context, certain treaty features have created unintended advantages for taxpayers that were never meant to benefit from them.
Treaty shopping is a visible example, where investments are routed through intermediary jurisdictions purely to access lower withholding tax rates, broader exemptions or more favourable definitions of taxable presence.
This behaviour takes many forms.
Tax treaties have been used to create opportunities for non taxation or significantly reduced taxation of certain income streams.
In other cases, multinational groups engineer multiple tax residency in order to secure multiple layers of relief.
It is now common to see operations structured specifically to avoid forming a taxable permanent establishment in the source state, even where there is significant economic activity and value creation.
Shareholding levels are at times increased just enough to qualify for reduced dividend withholding tax rates, often timed immediately before large profit distributions.
Financing structures frequently rely on hybrid instruments that are treated as debt in one state and equity in another, creating deduction–exemption mismatches.
Companies also organise transactions so that capital gains on assets located in African countries escape taxation in those jurisdictions entirely.
“Each of these arrangements translates into foregone revenue for African treasuries and, over time, they undermine the fairness and credibility of the tax system, fuel public scepticism and weaken the social contract.”
To reverse this pattern, African countries need tax treaty policies that put source based taxing rights back at the centre.
Domestic laws in many jurisdictions already confer broad powers to tax income arising from activities carried out within their borders; it is often at the treaty table that these rights are diluted or surrendered.
If properly designed, treaties can reduce juridical and economic double taxation, tackle tax discrimination, provide predictable platforms for dispute resolution and enhance investor confidence.
“An effective African tax treaty policy should ensure that treaties support international trade and investment without sacrificing critical revenue.”
This begins with a clear approach to capital and wealth.
Treaties should explicitly cover capital taxes where relevant, especially for countries introducing or strengthening wealth taxation, so that treaty networks do not hollow out these reforms.
Permanent establishment rules in treaties should be strengthened and brought into line with domestic law, at a minimum.
That means ensuring that definitions of permanent establishment capture commissionaire arrangements, dependent agents, and the artificial fragmentation of activities designed to avoid a taxable presence.
Where a permanent establishment exists, a broader “force of attraction” concept can help ensure that profits from closely connected sales and activities are properly attributed to and taxed in the source jurisdiction.
Another crucial area is the taxation of offshore indirect transfers.
To prevent the erosion of capital gains tax on high value assets, treaties should retain taxing rights over gains from the alienation of offshore shares that derive their value from property located in the source state.
Without such rules, it becomes easy for investors to sell interests in valuable African assets via offshore holding companies, realising large gains that escape taxation in the country where the underlying value is generated.
“These are not mere technical refinements; they are practical safeguards for governments seeking to capture a fair share of the value generated within their economies.”
Natural resource rich countries face particular risks when treaty policy does not adequately protect their position.
States endowed with oil, gas and mineral resources need explicit treaty provisions that reserve taxing rights over income from exploration and exploitation.
Without such provisions, significant gains can accrue entirely outside the source country’s tax net.
The same logic applies to services and the digital economy.
Given the scale of cross border services and their tax deductible nature in the paying jurisdiction, African countries should preserve their right to tax relevant service payments, including those delivered remotely through digital platforms or over the internet.
Many African jurisdictions also tax certain insurance activities and employment income in ways that reflect local labour markets and business models, and treaties should be drafted to preserve these approaches, including provisions that allow gross taxation of insurance premiums and ensure that mobile employees are taxed where real value is created.
Alongside stronger source rules, a modern African tax treaty policy must close the door to treaty abuse through robust anti avoidance provisions.
“Experience has shown that broad objectives and good intentions in a preamble are not enough; the treaty text must contain clear tests and limitations that prevent it from being used in circumstances that the contracting states never intended to cover.”
Beneficial ownership requirements and economic substance tests should be a precondition for any exemption or reduced rate.
It should not be sufficient for an entity simply to be resident in a treaty partner; it should also be the true beneficial owner of the income and possess real economic substance in that jurisdiction.
Treaties should also include limitation of benefits type provisions or other targeted rules that restrict access to treaty relief to genuinely qualified persons.
This is essential to keep shell companies and conduit arrangements from accessing benefits that were meant for active businesses and genuine investors.
Where dual-resident entities are concerned, rules must clarify how cases are to be resolved when traditional place-of-effective-management tie-breakers do not apply, to prevent entities from opportunistically choosing their residence for tax purposes.
As the use of fiscally transparent entities grows, treaties need clear language on when and how residents can claim treaty benefits for income derived through such vehicles.
To tackle double non taxation, African countries should push for provisions that limit treaty benefits where the other contracting state subjects the relevant income to low or no taxation.
At the same time, preambles should be updated to state explicitly that the purpose of the treaty is to eliminate double taxation without creating opportunities for tax evasion, avoidance or double non taxation.
Specific anti-abuse rules targeting the avoidance of permanent establishment status, including through the artificial splitting of contracts or the fragmentation of activities, are equally important.
“Together, these measures recalibrate treaties so that they support genuine cross border economic activity while making it harder for aggressive tax planning structures to hide behind formal language.”
Despite their risks, tax treaties remain important instruments for fostering cross border economic relationships.
The question is not whether African countries should have treaties, but how they should design them, renegotiate them and, where necessary, exit agreements that are clearly not in the public interest.
Well crafted treaties can protect foreign investments by reducing the risk of unrelieved double taxation and arbitrary discrimination.
They can provide a stable framework and forum for resolving cross border tax disputes, for example, through mutual agreement procedures that help avoid double taxation and reduce uncertainty.
They can also enable administrative cooperation, including assistance in tax collection and exchange of information, which is increasingly vital for enforcing tax laws in an economy where capital, services and data move across borders at speed.
“Ultimately, effective tax treaty policy is a critical instrument in stamping out base erosion and profit shifting in Africa.”
It is also a test of whether international tax rules can be reshaped to support, rather than undermine, African countries’ efforts to mobilise domestic resources for their own development.
The ATAF Model will embed strong source based taxing rights that reflect the structural position of many African economies as capital importers and primary commodity exporters.
It will integrate modern anti-avoidance standards tailored to African realities, including digitalisation and the prevalence of informality, and provide practical drafting options and explanatory commentary that revenue authorities can draw on to improve both new treaties and the renegotiation of legacy agreements.
“By anchoring treaty negotiations in a clear policy framework and using tools such as the ATAF Model Agreement, African countries can move from being rule takers to rule shapers in the global tax system.”
