Re-negotiated tax deal will benefit Lesotho: Majoro


In this wide ranging interview, the Lesotho Times (LT) Reporter Pascalinah Kabi discusses with Finance Minister, Moeketsi Majoro, on the pros and cons of the re-negotiated Double Taxation Agreement (DTA) between Lesotho and the United Kingdom which was concluded in November 2016.

The agreement will come into effect once it has been ratified by the two countries’ parliaments. 

LT: Is the government of Lesotho aware of the ongoing discussions in the UK parliament on the UK/Lesotho DTA? If yes, what is Lesotho doing to play its part in completing its “legislative procedures” as expected by the agreement? When is Lesotho going to begin its legislative procedures as expected by the agreement? If no, now that this has been brought to your attention, what are you going to do to ensure that Lesotho plays its role? 

Dr Majoro: In Lesotho, the Minister of Finance is by law authorised, on behalf of the government of Lesotho, to enter into, amend or terminate   international tax agreements with governments of other countries. For purposes of conclusion of a tax treaty, the process starts with identification of a potential tax partner, after which Cabinet clearance is sought for initiation of negotiations.

Cabinet clearance was accordingly obtained sometime in 2007 for the re-negotiation of the Convention Between the Government of the Kingdom of Lesotho and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, along with negotiation of tax treaties with a score of other countries.

Once treaty negotiations have been concluded, the legislative procedures are initiated to have the treaty in force. Such process starts with the Minister again securing Cabinet clearance for the signing of the agreement as initialled by respective negotiating teams.

The treaty is then signed by both countries – in the case of Lesotho, by the Minister of Finance or authorised representative, for example, an ambassador based in the treaty partner country – before ratification processes are commenced in line with each countries’ constitutional requirements. Thus, whilst it is ideal for the ratification processes to be synchronised in the respective countries, in reality such processes finish at different times.

Following the signing process, another Cabinet clearance is sought to have the treaty ratified. An instrument of ratification will thereafter be sent to the treaty partner as confirmation that the ratification process has been concluded. Depending on which of the two countries last submitted the instrument of ratification, the date of entry will thereafter be agreed based on the date of the last submission.

In between the signing and ratification processes, the Double Taxation Agreement (DTA) will be tabled before parliament for information purposes and this is the case with Lesotho. In other words, the DTA is not debated and passed into law like other domestic laws. The UK practice is thus different in this regard. Lesotho is currently in the last part of the process where Cabinet Approval is being sought to have the UK-Lesotho DTA ratified.

LT: As government, are you aware of the implications this agreement has on Lesotho’s revenue earnings should it be enforced? 

Dr Majoro: Lesotho is aware of the implications of the renegotiated agreement.  The key factors underlying the renegotiation were:

  • To align the treaty with international developments in international taxation, especially the standards emanating from the OECD and UN Model Conventions that have brought about significant improvements on existing treaties to combat treaty abuse and avoidance of taxes;
  • To attend to the ten-year Tax Sparring concession granted to Lesotho by the UK which was due for expiry in 2007. Tax sparring provisions force countries to further reduce their tax base by considering tax incentives provided by other countries. Put differently, the tax sparring provisions in the Lesotho-UK treaty of 1997 required the UK to treat UK residents doing business and enjoying tax concessions in Lesotho as it they were taxed at normal tax rates in Lesotho. In that way, the benefit of tax concessions in Lesotho would be effectively enjoyed by the concerned UK residents and not passed through to the UK government through limitation of international tax credit to those residents to the normal tax rates in Lesotho. Lesotho does not use tax incentives of the nature and extent that justify negotiating tax sparring provisions in the DTAs. At the same time, the UK policy had been to terminate all tax sparring provisions in all its treaties.

LT: How much is Lesotho likely to lose, in terms of FDI, should this agreement enter in force?  

Dr Majoro: The purpose of a tax treaty is to attract foreign direct investment. This can be done by reducing rates, allocating taxing rights between treaty partners, preventing tax discrimination and fiscal evasion. By so doing, tax certainty is enhanced and stability ensured for investors.

It must be noted that the standard rate of tax, which is 25% in Lesotho, is applied on residents of countries with which Lesotho does not have a tax agreement. The   1997 Lesotho-UK DTA had reduced that standard rate on dividends to the withholding tax rate of 10%. 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. It is only in respect of UK dividends recipients who have a minimum shareholding of 10% of capital of the company paying such dividends who are entitled to a lower rate of 5%. That is, the lower rate applies to recipients who have a beneficial ownership of at least 10% who are entitled to the concessionary rate of 5%.

This is an incentive to encourage equity investment by UK investors, as opposed to debt-financing which erodes domestic taxes due to consequential costs that come with it. The new rate has also introduced the concept of beneficial ownership which ensures that income is taxed in the hands of the ultimate owner and in the process minimising abuse of the treaty.

Prior to 01 July 2009, the UK used to exempt dividends paid by resident companies to resident shareholders. This exemption has since been extended to residents of other countries after that date. 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 all of Lesotho’s taxing rights.

LT: The agreement was signed under the previous regime. Is the government going ahead of this agreement or are you going to negotiate with the UK government to suspend it and ensure that the 1997 UK/LESOTHO DOUBLE TAXATION CONVENTION remains in place? 

Dr Majoro: The new DTA is going to address deficiencies from the 1997 treaty. The new Government will not lightly interfere with existing tax treaties unless there are critical deficiencies that constitute a vital departure from the government’s policy outlook.

In view of the fact that DTAs are meant to lay down durable tax arrangements for investors, the Government would exercise caution prior to reneging from such arrangements.

Any rash interference with international obligations would, on the contrary, critically negatively affect Lesotho’s investor confidence in general, and not just from the UK, and, consequently, impact on the country’s economy. 

LT: During the UK parliamentary discussions, British legislator, Anneliese Dodds, argued that “it would be helpful to know why the British Government decided to promote mandatory binding arbitration in this agreement through the mechanism of specialist—and, by the way, secret—international courts”.

“That is a new measure in this treaty. It was not in the 1997 version, and, as was mentioned, it appears to be a new measure generally in our double taxation treaties for low-income countries. I am keen to learn whether the UK Government considered the potential barriers that would prevent a low-income country such as Lesotho from representing itself properly in such a court.”

Does the government of Lesotho share the same sentiments of Hon Dodds? 

Dr Majoro: Introduction of the mandatory binding arbitration to the treaty is beneficial for Lesotho in terms of potential investors having the assurance of finality to their disputes. It will open up further opportunities for concerned parties to explore and adopt more effective global measures in dispute resolution. References to decided court cases from elsewhere, can be used to firm up on positions taken.

In adopting the arbitration provision, the Lesotho-UK DTA aligns with international standards provided for under the OECD, UN, ATAF and SADC Model Tax Treaty Agreements, all of which contain the provision on binding arbitration in defined circumstances. The reason for a groundswell towards the arbitration provision is the need to provide certainty and finality is resolution of tax disputes.  Non-resolution of tax disputes has been a growing concern in the tax world and, over time, treaty provisions have been developed to address the issue. It must be remembered that binding arbitration will only be resorted to after mutual agreement procedure (MAP) has not produced results over a given period of time.

Again, a MAP happens only between the tax officials of the tax treaty countries, to the exclusion of the taxpayer (except for provision of underlying information only). Having said so, a majority tax disputes do not go beyond MAP. Thus, a binding arbitration provision is a safety valve of last resort where officials of the two countries cannot resolve issues concerning a taxpayer within a given period of time. In the new Lesotho-UK DTA, arbitration would be resorted to if an issue is not resolved by the officials of the two countries within three years.

It is considered that Lesotho would surely be able to represent itself in arbitration proceedings, regard being had to the amount of tax that would be at stake. For example, if the taxes at stake were to be M1 billion, Lesotho would not hesitate to spend even a M1 million to recover such amount. Arbitration proceedings open up opportunities to secure the best talent available in the international market in pursuit of the best interests of the country.

Dr Majoro: The Table below shows some of the benefits, apart from dividends and mandatory binding arbitration explained above, that are going to be derived from the new agreement as opposed to the old one.

1997 DTA Renegotiated DTA
No capital gains taxation Inclusion of a capital gains article and under taxes covered. Lesotho has previously lost approximately M250 million in taxes due to absence of a similar article in the Lesotho-RSA DTA.
Limited circumstances under which Permanent Establishment (PE) may be deemed to exist The definition of PE was expanded to include building sites and assembly projects, furnishing of services by both employees and independent individuals.


Since the UK does not subject withholding tax on services, the time period agreed upon was 183 days for ordinary services while those specifically related to exploration of natural resources was given 90 days, reducing it from six months.


The article has also been broadened to include services.

Deduction of Head Office expenditure not limited The UN formulation which determines HO expenses that may be allowed as deductions for a PE has been adopted as a control measure.
Royalties – no main purpose test. UK limits taxation of royalties to residence. A rate of 7.5% was agreed on the basis that UK agrees to forfeit a portion of royalties charged and paid in Lesotho at a lesser rate. As a royalty paying country, residence based taxation would erode tax revenue for Lesotho.


The main purpose has been included to curb abuse

Exchange of Information – was limited in scope and does not include issues on bank secrecy and lack of domestic interest. The OECD version of this article was adopted, which would make exchange of information more efficient and allows for broader but more cautious ways to exchange information in a bid to enhance revenue collections, even on VAT.


The new agreement broadens exchange of information beyond just income tax but to other taxes and allows for exchanges even where there is no domestic interest and discourages bank secrecy.

Assistance in the collection of taxes – The agreement does not have this article Inclusion of the assistance in the collection of taxes article. Through this provision, Lesotho may request the UK tax authorities to collect taxes from a UK resident in the UK and pay it over to the tax authorities in Lesotho.


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