Within the framework of the OECD Convention on Mutual Administrative Assistance relating to Taxation, Senegal has signed the Multilateral Convention called MLI.
The purpose of the MLI is to modify existing bilateral tax treaties so as to implement the BEPS measures by “preventing the abusive use of treaties, improving dispute resolution, preventing the artificial avoidance of permanent establishment status, neutralising the effects of hybrid mismatch arrangements”, reducing the possibilities of tax avoidance.
Based on the flexibility guaranteed by the MLI and which makes it possible to consider the specific tax policies relating to tax treaties, Senegal, when signing the MLI, has expressed some reservations and adopted a position on a certain number of provisions of the said MLI.
For the purposes of this newsletter, we outline the ones we consider to have a significant impact on the current international tax rules applicable in Senegal.
The DTTs notified by Senegal as covered tax agreements
In accordance with Article 2 of the MLI, Senegal has informed the OECD of the below-mentioned DTT it has signed as the covered tax agreements.
We split the DTTs in two parts:
- First category: the DTTs currently in force that Senegal has concluded with Mauritania, France, Tunisia, Belgium, Norway, Qatar, Italy, Canada, Lebanon, Morocco, Spain, Malaysia, Portugal, the United Kingdom and the Grand Duchy of Luxembourg.
- Second category: the DTTs concluded with Egypt, Kuwait, the United Arab Emirates and Turkey, which have not yet been ratified until now.
It should be noted that Senegal, being aware that the DDT it has signed with Mauritius is not in its favour and the tax provisions are disadvantageous for the country, has decided to end said DTT which was among the covered tax agreements it had notified the OECD about.
The method for elimination of double taxation chosen by Senegal
In its Article 5, the MLI provides three (3) methods for elimination of double taxation. Therefore, the signatory States are free to choose the option that suits them.
Senegal has chosen to apply option C which allows a foreign resident to be able to deduct the tax they have paid in Senegal from the amount of income tax that they must pay in their country of origin.
Such deduction shall not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable to the income or the capital which may be taxed in that other contracting jurisdiction.
As such, the bilateral DTTs between Senegal and respectively Belgium and Canada are those which include in their provisions the option C chosen by Senegal.
Position of Senegal regarding the prevention of abuse of tax treaties
Article 7.1 of the MLI provides that “Notwithstanding any provisions of a covered tax agreement, a benefit under the covered tax agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, regarding all the relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the covered tax agreement”.
Senegal reserves the right not to apply this Article 7.1 to its covered tax agreements which already set out certain provisions that deny all of the benefits granted if the main purpose or one of the main purposes of a contract or transaction was to obtain those benefits.
In addition, Senegal states that it temporally accepts the application of Article 7.1 and intends to adopt, through bilateral conventions, a limitation rule for benefits when possible, in addition to or in replacement of Article 7.
From these two positions of Senegal, we notice some contradiction which is likely to temporarily lead to controversial interpretations in the tax treatment of transactions that are within the scope of a covered tax agreement.
The impact of the ratification of the Multilateral Convention on the bilateral conventions concluded by Senegal
The MLI potentially modifies any bilateral tax treaty that each of the two signatories shall notify to OECD. Thus, it offers concrete solutions to governments to sort out the shortcomings of the provisions of any bilateral DTT in force by integrating into said DTT the package of measures developed under the OECD/G20 BEPS project.
Each State will therefore have to analyse each provision and make any reservations it deems necessary.
The impact of the MLI provisions on the DTTs will depend essentially on the reciprocity of the positions or options made by the States concerning the covered tax agreement, and for each DTT, the selected articles and/or reservations made.
If the positions of the two signatory States of a bilateral tax treaty converge, the application of the latter would be efficient. Otherwise, the covered tax agreement would be subject to divergent interpretations.
Note: Senegal has just signed the MLI but has not yet ratified the same.
However, the draft law authorising the President of the Republic to ratify the MLI has already been adopted by the Council of Ministers on 14 October 2020.
It has been submitted to the vote of the National Assembly. Generally speaking, the ratified treaty is textually the same as the one adopted by the Government.
Read the WTS Transfer Pricing Newsletter here
