Taxation in a globalizing world: a tax treaty-consistent alternative for taxing foreign direct investment in sub-Saharan Africa

Abstract

Compared to the other main sources of external development finance, such as international bank loans and Official Development Assistance, foreign direct investment (FDI) is viewed by Sub-Saharan African countries as being more supportive of their long-term economic development objectives. For this reason, they have implemented, and continue to adopt, a broad range of measures designed to enhance their attraction to foreign investors and thereby increase the levels of FDI they receive. However, emerging questions about the trade-offs of such measures have brought to the fore the question of what ought to be done to ensure that they continue to attract FDI and at the same time realize tangible benefits from such investment. This thesis argues for a tax treaty concepts and principles-based approach to the taxation of FDI. Specifically, it argues that sub-Saharan African countries can realize their objectives in relation to FDI by incorporating tax treaty concepts and principles into their domestic tax laws. The central argument and the conclusions from our analyses in the thesis are as follows: The desire by Sub-Saharan African countries to increase the levels of FDI they attract could be realized if they involve the removal of tax barriers to such investment. In seeking to attract increased levels of FDI, priority should be given to the objective of raising tax revenue compared to other nontax economic benefits. The removal of tax barriers and the revenue-raising objective can be achieved by basing the taxation of all FDI on tax treaty concepts and principles. The most appropriate mechanism for adopting a tax treaty concepts and principles-based approach to the taxation of FDI is to incorporate such concepts and principles into domestic tax laws.