By Johan Nel, Director, AJM
When I speak to international investors, one of the key points of discussion is the impact of withholding taxes. The next question is almost always whether these rates can be reduced under a Double Taxation Agreement (“DTA”). While the answer is yes, it ultimately depends on whether Namibia actually has a DTA in place with the jurisdiction in which the investor is situated.
Unfortunately, Namibia currently has only 11 DTAs in force. These are with Botswana, France, Germany, India, Malaysia, Mauritius, Romania, the Russian Federation, South Africa, Sweden, and the United Kingdom. Although a tax treaty has been signed with Canada, it has not been ratified by Namibia and is therefore not yet in effect.
When compared to our regional and international peers, it is clear that Namibia still has significant ground to cover. Zambia and Botswana both have more than 20 in place, Mauritius has more than 40, and South Africa has concluded over 70 tax treaties.
The cost of withholding taxes, coupled with the inability to claim foreign tax credits in the investor’s home country due to the absence of a DTA, can complicate investment decisions. In many cases, this results in investors considering alternative jurisdictions where these treaty benefits are already available.
Why Tax Treaties Matter for Foreign Investment
Although a DTA is not the only factor to consider, it plays an essential role in attracting foreign investment into developing countries by mitigating double taxation. Its effectiveness, however, depends largely on the treaty design and the broader investment climate.
- Avoidance of Double Taxation: Tax treaties ensure that the same income is not taxed both in the investor’s home country and in Namibia. This reduces the overall tax burden and lowers the cost of doing business – making investment in Namibia more appealing.
- Certainty & Stability: Tax treaties provide clear rules on the taxation of cross-border income, including dividends, interest, royalties, and services. This certainty offers comfort to investors who may otherwise be concerned about arbitrary or excessive taxation.
- Reduction of Withholding Taxes: Many tax treaties reduce withholding tax rates on outbound payments. This directly improves after-tax returns and can materially enhance the commercial viability of an investment.
- Signal of Commitment to International Cooperation: Entering tax treaties sends a strong signal that a country is committed to international cooperation and investor protection, which can improve perceptions of the country’s investment climate.
OECD vs UN Tax Treaties
Namibia’s existing tax treaties are largely based on the OECD Model, with certain UN clauses incorporated. One example is the services permanent establishment clause, which allows Namibia increased taxing rights where services are rendered locally. Such clauses are currently included in six of Namibia’s 11 DTAs.
Broadly speaking, the OECD Model Tax Convention favours residence countries, being the jurisdiction where the investor is based, while the UN Model Tax Convention allocates more taxing rights to source countries (where the income is generated, i.e Namibia).
It has long been on the Ministry of Finance’s agenda to renegotiate some of Namibia’s tax treaties. However, this process is complex and has been delayed for several years.
Namibia became a member of the OECD’s Base Erosion and Profit Shifting (“BEPS”) Inclusive Framework in August 2020 and signed the Multilateral Convention to implement tax treaty-related measures (MLI) in September 2021.The MLI allows countries to update existing tax treaties with BEPS-related measures without having to renegotiate each treaty individually, provided both contracting states are signatories and the treaty is identified as a covered agreement.
For these changes to take effect, Namibia must first ratify the BEPS MLI, something that has not happened to date.
Potential Pitfalls of Tax Treaties
While tax treaties can stimulate investment, they can also restrict a developing country’s ability to raise revenue through taxation. Treaty provisions are often relied upon by investors to challenge domestic tax measures, which underscores the importance of ensuring that treaty negotiations are supported by appropriate technical expertise.
In my view, Namibia should not rely solely on the MLI, as its provisions are more closely aligned with the OECD framework. As a developing country, Namibia should instead prioritise o negotiating treaties that preserve UN-style source-country rights. This approach will be particularly important Namibia enters a new phase of economic development and engages with trading partners in jurisdictions where no DTA currently exists.
The Way Forward
Although tax treaties can contribute to a more favourable investment environment, they should not be viewed in isolation. They must be complemented by robust domestic tax policies and effective safeguards against abuse.
When carefully designed, tax treaties can be powerful tools for attracting investment while still protecting national revenue. Namibia should proactively identify key trading partners with a strategic interest in Namibia and initiate negotiations to conclude new DTAs.
We currently have the golden opportunity to shape future tax treaties in a balanced way that will enhance investment opportunities in Namibia, whilst safeguarding our taxing rights.