Leaking money: the tax agreement between Uganda and the Netherlands

Monday, October 5, 2020

Ahead of the next meeting of European Finance Ministers (ECOFIN) on the 6th of October, Oxfam is publishing a report which reveals how the Double Tax Agreement between Uganda and the Netherlands is denying Uganda a fair share of future oil revenues to the benefit of French oil major TOTAL and other International Oil Companies.

While the European Union will publish the update of its tax havens’ list, Oxfam reminds EU Member States that there are tax havens located in the heart of Europe, such as the Netherlands. Oxfam calls on European governments and the government of Uganda to act to effectively fight tax avoidance by multinationals. Oxfam is making several specific requests to the governments of the Netherlands, Uganda and also to oil companies.

Oxfam investigated for several months the mega project led by the French energy giant TOTAL which will allow for the exploitation of 1.4 billion barrels of oil located on the shores of Lake Albert [1]. Following discovery in 2006, the Final Investment Decision – which will unlock all final commitments by oil companies and governments is poised to be taken before the end of the year.

In its report “The Money Pipeline”, Oxfam estimates that the country could lose up to 287 million dollars in taxes for this project due to the detrimental conditions of the Double Tax Agreement (DTA) between Uganda and the Netherlands. This would actually represent 5.7% of all potential government revenues from the oil exploitation – for 1 Exploration Area only out of 4 in total, and about 2% of the annual country’s health budget.

“This amount only represents a fraction of all potential tax losses: this is only the tip of the iceberg and is the result of direct choices made by many companies investing in Uganda. Companies like TOTAL have the capacity to design their corporate structures in a way that optimizes their tax bill – this has dramatic consequences for the finances of the countries where they operate”, says Caroline Avan, Oxfam France Advocacy Officer.

In 2019, the Mauritius Leaks brought attention to the role played by the DTA between Uganda and Mauritius in facilitating tax avoidance [2]. But the small Indian Ocean Island is not the only culprit. Oxfam’s report also denounces the role played by the Netherlands, a country deemed by many in civil society including Oxfam as a tax haven [3] in the global corporate scenario, and the first investor in Uganda [4]. Home to more than 14 000 letterbox companies, the Dutch national office for statistics has estimated that 80% of all investments into the Netherlands are immediately channeled out to other countries. Researchers estimated that 95% of all Dutch investments in Uganda would actually originate from a third country. [5]

One of the perks of the agreement between the Netherlands and Uganda is indeed that dividends on profits made in Uganda – when repatriated to a Dutch company owning more than half of the shares – are simply not be taxed at all, against 15% as per the national legislation. Many including the IMF view this DTA as presenting significant risks for Uganda and a clear potential for treaty shopping. While the agreement is currently being renegotiated [6], there is no guarantee that this rate will be increased.

“The renegotiation of the DTA is a clear opportunity for the Netherlands to reduce its role in tax avoidance techniques that deprive Uganda of revenues. However, further legal reforms are required to reduce the negative fiscal impact of the Netherlands across the European Union and developing nations. The upcoming ECOFIN meeting - with discussions on the EU Blacklist of tax havens - is a good opportunity for European governments to start holding themselves to the same standards by which they judge other countries” says Henrique Alencar, Tax policy Advisor at Oxfam Novib.

Tax avoidance deprives states of essential resources to finance essential public services to fight poverty and inequality. Uganda is in dire need of these resources, in a context where its domestic finances have already dramatically suffered from the COVID-19 [7]. Oxfam and other civil society organizations in Uganda have pointed out that the health sector still remains systematically underfunded [8] while the country has one of the highest maternal mortality rate in the world [9]. According to the World Bank, which had already expressed concerns at the country’s growing fiscal deficit – the current crisis has the potential to deepen the country’s poverty rate, by 2.7 points (or to 8.2 %).

There is no cure to the budget woes of Uganda without proper domestic revenue mobilization and fair tax collection. And in the case of this project, there is no room for error as the necessity of the energy transition are driving down oil prices, which would already diminish government’s proceeds.

“Currently one in five Ugandans live in extreme poverty with limited access to essential services such as education, health and clean water. This situation has been worsened by the COVID-19 pandemic, the measures to contain it and the ever escalating indebtedness which stands at $13.33 billion. This situation calls for urgency to address the loopholes in the Double Taxation Agreements signed by the government so as to mobilize adequate domestic revenue.” says Ms. Jane Nalunga, Executive Director at SEATINI Uganda, Oxfam’s partner in Uganda [10] “If the government wants to derive meaningful revenues from this project, it cannot let this detrimental DTA stand in the way”, says Joseph Olwenyi, Financing for Development Coordinator at Oxfam Uganda

Oxfam urges the governments of Uganda and the Netherlands to finalize the renegotiation of the DTA and increase the final tax rate on dividends, as well as the government of Uganda to ratify the OECD Multilateral Convention. The organization also calls on oil companies investing in the project to consider transferring shares to a non-Dutch subsidiary.

Oxfam also calls European Union Member States to sweep on its own doorstep and tighten its tax havens’ criteria, vote in favor of public Country by country reporting and push for an ambitious and effective minimum corporate tax rate globally.

Notes to editors: 

[1] Following the farm-down of the whole of Tullow Oil’s assets – one of the original project developer – in April 2020, and pending final approval of the transaction by the Ugandan authorities, TOTAL will hold 66.67% of the project’s shares while CNOOC will hold 33.33% of the shares. The State of Uganda has a back-in right (15%) which it has not exercised yet.

[2] Traditionally, developing countries enter into DTAs with wealthy countries as part of broader efforts to attract foreign investment and multinational companies into their countries. Due to the negotiation experience gap between wealthy and developing countries and the technical complexity of the treaty, DTAs often result in developing countries surrendering important taxation rights and generating unexpected revenue losses over the years. DTAs restrict or fully prevent the capacity of a source country to levy taxes – known as withholding taxes – on different forms of cross-border payments, including dividends, interest, royalties and technical fees. As a result, multinational companies are able to shift profit out of developing countries paying very little or no tax. Treaty shopping has now become a global issue and refers to the attempt by a person that is not a resident of one of those countries to benefit from that treaty and effectively reduce its tax rate.

[3] https://www.oxfam.org/en/research/netherlands-tax-haven

[4] According to IMF data, and as of the end 2018, the Netherlands was the top investor country in Uganda in terms of FDI stocks: $ 3.7 billion out of a total of $ 9.3 billion

[5] Hearson, Martin and Kangave, Jalia (2016) A review of Uganda's tax treaties and

recommendations for action. Working paper, 50. Institute of Development Studies, International

Centre for Tax and Development, London, UK. ISBN 9781781182956

http://eprints.lse.ac.uk/67868/1/Hearson_A_Review_of_Uganda_Tax.pdf

[6] Renegotiations started in September 2019. Oxfam and its partners met with the Dutch delegation in Kampala. See https://uganda.oxfam.org/latest/blogs/role-strategic-partnerships-fight-...

[7] Both the IMF and the World Bank have recently provided financial assistance to Uganda, for a combined total of about $ 650 million.

[8] The sector has been allocated only 6 .4% of the national budget in 2019/2020, against a 15% target as announced by the Government.

[9] 375 per 100 000 living births. Uganda ranks 157 out of 185 countries. Source: World Bank

[10] The Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI) in Uganda carries out research on policy and practices that impact people. SEATINI partners with Oxfam and others to publish the Fair Tax Monitor. See https://seatiniuganda.org/

Contact information: 

Oxfam Uganda - Winnie Kyamulabu Mukalazi, winnie.kyamulabi.mukalazi@oxfam.org

Oxfam France – Pauline Leclère, pleclere@oxfamfrance.org

Oxfam Novib - Jules van Os, jules.van.os@oxfamnovib.nl