New UK tax agreement could cost Lesotho

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 Pascalinah Kabi

LESOTHO could lose millions of United States dollars of annual tax revenues if the country goes ahead and ratifies a re-negotiated Double Taxation Agreement (DTA) it signed with Britain during the tenure of the short-lived former seven parties’ coalition government that was headed by former Prime Minister, Pakalitha Mosisili.

The DTA was signed between the two countries on 3 November 2016 with the aim of ensuring “the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains” and both countries’ parliaments have begun the processes towards ratifying it before it takes effect.

The Lesotho Times has established that in the ongoing parliamentary discussions in the British lower house popularly known as the House of Commons, some British legislators have warned that if implemented the tax agreement could deprive Lesotho of millions of dollars it desperately needs to fund its social programmes. They say the revenue is crucial for funding various programmes aimed at alleviating poverty and combating the deadly HIV/AIDS pandemic among other things.

If ratified, the new treaty will replace the 1997 UK/Lesotho Double Taxation Convention signed in January 1997 and effected in in Lesotho on 1 January 1998.

Britain is the largest single source of foreign direct investment (FDI) into Lesotho, amid revelations in the British parliament that this year, Britain will pour at least US$17 million which translates to one third of the expected FDI of US$51 million for Lesotho for 2018.

And if the tax deal is ratified, Lesotho will lose substantially as it will have to tax British investments at much reduced rates as low as 5 percent for dividends instead of previous rates that were as high as  10 percent and 7.5 percent (down from 10 percent) for royalties.

Finance Minister, Moeketsi Majoro, has sought to downplay the impact of the tax deal, saying rather than cost Lesotho, it would make the country a more attractive destination for FDI.

Finance Minister Moeketsi Majoro has however, downplayed the consequences of the re-negotiated Double Taxation Agreement (DTA); saying “contrary to the perceived fear that the rate of 5% in the DTA yet to be ratified by the two  countries, is likely to adversely affect the FDI, the rate of 10% still applies to general cases of dividend payment”.

Dr Majoro also said the new deal was in line with international best practice and it could benefit Lesotho by making the country an attractive destination for FDI.

Asked how much Lesotho stood to lose when the agreement was ratified, Dr Majoro said the purpose of a tax treaty was to attract foreign direct investment and that could be done by reducing tax rates, preventing tax discrimination and fiscal evasion.

“Contrary to the perceived fear that the rate of 5% in the DTA that is yet to be ratified by the two  countries is likely to adversely affect the FDI, the rate of 10% still applies to general cases of dividend payment,” Dr Majoro said.

“Thus, viewed against other countries competing for FDI from the UK, Lesotho would remain highly uncompetitive especially for beneficial owners of equity in foreign companies. It must be noted that some other countries grant a 0% rate on dividends payable to UK residents in their DTAs with the UK. Thus, the new rate of 5% on those who qualify on the set beneficial ownership threshold positions Lesotho competitively for UK’s FDI without giving away all of Lesotho’s taxing rights,” Dr Majoro said.

However, some British parliamentarians have questioned the new DTA, saying while it would benefit British companies and individuals doing business in Lesotho, the reduction in revenue earnings for the Lesotho government would affect its ability to fund its social spending on development programmes including poverty alleviation and efforts to combat the HIV/AIDS pandemic.

One of the British legislators, Anneliese Dodds, said in a recent parliamentary session that “around a quarter of people in Lesotho of working age are infected with HIV/AIDS”.

“Life expectancy in Lesotho is just 54 years which means there are more pressures on public services and public service financing in Lesotho than in many other countries.

“In that regard, it is important that we take our responsibilities as parliamentarians very seriously when we scrutinise such deals. In particular, it is important that we assure ourselves that this treaty is in line with the policy coherence for development principles, which state that in every area we must ensure we do not legislate in such a way as to deviate from our international development commitments,” Ms Dodds said.

She said that the UK was Lesotho’s largest single source of foreign direct investment as the total amount of FDI in Lesotho was US$51 million and the British contribution is US$17 million.

“There is a reduction of 80 percent (tax) for dividends, 60 percent for interest payments and 70 percent for royalties. I am particularly interested in finding out why the withholding tax on dividends has been pushed down from 10 percent in 1997 to 5 percent. Why is the withholding tax on royalties down from 10% in the previous treaty to 7.5% in this new treaty?”

She said it was important for the British government to consider the potential impact of the new DTA on the revenues of the Lesotho government, particularly those allocated to poverty alleviation, HIV/AIDS and tuberculosis reduction programmes.

Letšeng Diamonds and Liqhobong Mine are some of the companies with a large British shareholding.

Another legislator, Steve McCabe asked, “Is it not the case that if the Lesotho treaty did not exist, Lesotho would be free to charge the diamond companies and others a 25% withholding tax, rather than one of 5%?”

“Why are the rates of the withholding tax in this treaty so low? It seems like Robin Hood in reverse,” Mr McCabe said.

He asked what safeguards existed to ensure that large corporations did not use the DTA to threaten Lesotho so that it does not try to challenge blatant tax avoidance.

He said British parliament needed a much better parliamentary process that involves full and proper scrutiny and provides evidence that such treaties are fair and in “keeping with the values and traditions of our country”.

In response, Britain’s Financial Secretary to the Treasury, Mel Stride, said double taxation agreements removed barriers to international trade and investment and provided a clear and fair framework for taxing businesses that trade across borders.

He said the new deal with Lesotho also included a marked improvement on the taxation of services unlike the previous agreement which allowed Lesotho to tax the gross value of services provided by UK residents who had not even set foot in Lesotho.

Under the new agreement, Mr Stride said, Lesotho will tax only services that are actually provided in Lesotho by someone who is present for more than 183 days within a 12-month period and only the net profit will be taxed.

“This is much more in line with established international principles. Because such taxes act as a barrier to investment, the lower rates of withholding tax for dividends and royalties are also very welcome. They will benefit the economies of both countries.

“In summary, these are agreements that the UK and Lesotho can be happy with. They will provide a stable framework in which trade and investment between the United Kingdom and Lesotho can continue to flourish,” he said.

 

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