Malawi should tread carefully on the recently signed Double Taxation Agreement (DTA) with Seychelles, among others, if it is to reap maximum benefits.
Malawi in September 2012 signed a DTA with Seychelles and has an existing agreement with the Netherlands, which, according to the Ministry of Finance, is due for review soon.
In principle, in the absence of a DTA, a business or an individual resident in one country but with origins from another would be obliged to pay tax twice, both in the local and resident countries.
Thus nations make bilateral DTAs requiring that tax be paid in the country of residence and be exempted or pay the difference in the country in which it arises.
System prone to abuse
However, Umodzi business consultant Tione Kaonga, in an interview on Thursday, said although DTAs attract investment and facilitate international trade, people may abuse the system where it is slack and there is lack of transparency.
“People will, of course, be attracted to invest into Malawi because they will not be taxed twice on their income profits or other gains and, therefore, will enjoy better incomes. However, businesses may abuse the agreements through initiatives such as transfer pricing where foreign companies over-price their goods and, therefore, transfer profits in form of sales margins,” said Kaonga.
He noted that other companies may also undervalue their profits using accounting techniques.
Kaonga has called upon the Malawi Government to be vigilant on these malpractices by ensuring that companies are transparent through declaration of real prices and profits.
However, government is optimistic that the signed agreements will improve the flow of investment from the partner countries into Malawi.
In an e-mailed response to a questionnaire last week, Ministry of Finance spokesperson Nations Msowoya said the DTAs will work against tax evasion.
“These agreements will protect tax payers against double taxation with a view to improving flow of investment and transfer of technology. They will also prevent certain types of discrimination between foreign and local investors.
“The DTAs also seek to improve cooperation between taxing authorities in carrying out their functions, including exchange of information with a view to preventing avoidance or evasion of taxes and assistance in the collection of taxes,” he said.
He said that the DTAs will provide a reasonable element of legal and fiscal certainty as a framework within which international operations can be transacted.
Msowoya said the government will renegotiate DTAs with South Africa, Botswana and Mauritius to align them with the current Malawi draft DTA model, which was amended following the development of the Sadc DTA model.
The ministry said DTAs with United Kingdom, Portugal, Norway, Zambia and Zimbabwe were initiated, but awaits signing by the responsible ministers in both countries.
“As soon as arrangements are made with our counterparts, the DTAs will be signed. The process requires vetting by the Justice Ministry before we sign these DTAs on the part of Malawi and different countries follow different procedures depending on their legislation,” said Msowoya.