LEGAL ANALYSIS OF THE BILATERAL TREATIES AND FOREIGN

DIRECT INVESTMENTS: A Focus on the Recent Development in

Tanzanian Tax System

MAFWENGA Handley Mpoki

L.L.M (in Taxation) Graduate Essay

University of Dar es Salaam
August, 2014
 UNIVERSITY OF DAR-ES-SALAAM

LEGAL ANALYSIS OF THE BILATERAL TREATIES AND FOREIGN

DIRECT INVESTMENTS: A Focus on the Recent Development in
Tanzanian Tax System

NAME: MAFWENGA, Handley Mpoki

REG NO: 2013-06-1743
COURSE: LLM (Taxation)

A GRADUATE ESSAY SUBMITTED IN PARTIAL FULFILMENT OF

THE REQUIREMENTS FOR THE AWARD OF LLM [IN TAXATION]
OF THE UNIVERSITY OF DAR-ES-SALAAM

AUGUST, 2014
 CONTENTS

CERTIFICATION ...................................................................................................................... i

DECLARATION AND COPYRIGHT......................................................................................ii

ACKNOWLEDGEMENT ....................................................................................................... iii

ABBREVIATIONS AND ACRONYMS ................................................................................. iv

LIST OF CASES........................................................................................................................ v

LIST OF FIGURES .................................................................................................................. vi

LIST OF TABLES .................................................................................................................... vi

1.0: INTRODUCTION .............................................................................................................. 1

2.0: BILATERAL TREATIES AND FOREIGN DIRECT INVESTMENTS: CONCEPTUAL

AND LEGAL FRAMEWORK ..................................................................................................... 4

2.1 CONCEPTUAL FRAMEWORK ............................................................................... 4

2.1.1 Definition of investor and Investment ..................................................................... 4
2.1.2 Principle of Bilateral Investment Treaties ............................................................... 5
2.1.2.1 Principle of Reciprocity ....................................................................................... 5
2.1.2.2 Fair and equitable treatment Principle ............................................................... 6
2.1.2.3 National treatment (NT) Principle ....................................................................... 7
2.1.2.4 Most Favoured Nation Treatment (MFN) Principle ............................................ 8
2.1.2.5 Dispute Settlement Principle................................................................................ 8
2.2 LEGAL FRAMEWORK ............................................................................................. 9
2.2.1 Constitutional Legitimacy .................................................................................... 9
2.2.2 National Investment Promotion and Protection Act, 1990 ................................ 10
2.2.3 The New Investment Policy, 1996 and Tanzania Investment Act, 1997 ........... 11
3.0 THE IMPACT OF BITs, DTTs ON FDIs AND TANZANIA TAX SYSTEM ........... 13

4.0 CONCLUSION AND RECOMMENDATIONS ......................................................... 18

4.1 Conclusion................................................................................................................. 18
4.2 Recommendation ....................................................................................................... 18
REFERENCES ........................................................................................................................ 19
 ~i~

CERTIFICATION

The undersigned certify that they have read and hereby recommend for examination

by the University of Dar es Salaam a Graduate Essay entitled: Legal Analysis of the

Bilateral Treaties and Foreign Direct Investments: A Focus on the Recent

Development in Tanzanian Tax System, in (Partial) fulfilment of the requirements

for the degree of Master of Law (in Taxation) of the University of Dar es Salaam.

MR. E. S. MSHANA

(SUPERVISOR)

------------------------------------------

Signed this.day of..2014

 ~ ii ~

DECLARATION AND COPYRIGHT

1, Handley Mpoki Mafwenga, declare that this Graduate Essay is my own original
work and that it has not been presented and will not be presented to any other
University for a similar or any other degree award.

Signature ------------------------------------------

This Graduate Essay is copyright material protected under the Berne Convention, the
Copyright Act 1999 and other international and national enactments, in that behalf,
on intellectual property. It may not be reproduced by any means, in full or in part,
except for short extracts in fair dealings, for research or private study, critical
scholarly review or discourse with an acknowledgement, without the written
permission of the Director of Postgraduate Studies, on behalf of both the author and
the University of Dar es Salaam.
University Dar es Salaam, School of Law 2014

Handley Mpoki Mafwenga

 ~ iii ~

ACKNOWLEDGEMENT

The completion of Master degree of law (LLM) is the culmination of my life as a

student at the University of Dar-Es-Salaam. As such, there have been countless
individuals who have shaped my life, both contributing to my successes and helping
me overcome my failures. While a comprehensive list of all those people could
comprise another Essay, therefore, I hereby use this opportunity to express my
gratitude to those who have contributed the most pedagogical achievement. A
disproportionate amount of thanks goes to my supervisor- Ebenezer Mshana, and my
wife Bertha, they have been trusted advisors, role models of the highest regard, and
invaluable allies, without them I would not be the person I am today. Their
unwavering love and support have been the foundation for all of my
accomplishments, for which they can never be fully repaid. My sons Issack, Malcom,
Clerick and Alvin also deserve a great deal of thanks. They continued to provide an
unending encouragement and have been my most treasured friends through life's ups
and downs, both personal and academic. Without them, my successes would be
joyless and my failures more painful.

No single person is more responsible for my growth as guru in tax laws- Emmanuel
Masalu (the Coordinator of the Programme), Dr Saudin Mwakaje Ph.D, Erasmus
Nyika, Semu and Joseph Chikongoye have also been instrumental in my
development. I am grateful to them for sharing their wealth of knowledge and I value
our many conversations over the past several years. I am extremely fortunate to have
worked so closely with people of such great character and can only hope to live up to
the examples they have set.

Finally, I would like to express my appreciation to the almighty God for enabling me
to accomplish my Legum Magister (LLM) without any pungent in pedagogical
commitments during the entire period of my studies.
 ~ iv ~

ABBREVIATIONS AND ACRONYMS

AGOA African Growth Opportunity Act
BITs Bilateral Investment Treaties
CEO Chief Executive Officer
CIR Commissioner for Internal Revenue
DTAs Double Taxation Agreements
DTCs Double Taxation Conventions
DTTs Double Tax Treaties
EAC East African Community
EBA European Banking Authority
ECT Economic Charter Treaty
ESC Economic and Social Council
FET Fair and Equitable Treatment
FDIs Foreign Direct Investments
IIAs International Investment Agreements
IMF International Monetary Fund
ITA Income Tax Act
IPC Investment Promotion Center
MIGA Multilateral Investment Guarantee Agency
MFN Most Favoured Nation
NIPPA National Investment Protection and Promotion
NT National Treatment
OEEC Organization for European Economic Cooperation
OECD Organization for Economic Cooperation and Development
OFCs Offshore Financial Agreements
SADC Southern African Development Cooperation
TIEAs Tax Information Exchange Agreements
TIC Tanzania Investment Centre
TRAB Tax Revenue Appeals Board
TRAT Tax Revenue Appeals Tribunal
UAE United Arab Emirates
UN United Nations
UNCTAD United Nations Conference on Trade and Development
URT United Republic of Tanzania
US United States
VAT Value Added Tax
 ~v~

LIST OF CASES

Azurix Corp. v The Argentine Republic (2006) ICSID CASE No. ARB/01/12

Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan

(2005) ICSID Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005

Biwater Gauff (Tanzania) Ltd Vs The United republic of Tanzania (2005) (ICSID
Case No. ARB/05/22)

Fedax NV Vs Republic of Venezuela, Award 9 March 1998, 37 ILM 1391 (1998)

Franz Sedelmayer Vs. The Russian Federation (1998), SCC Award, 7 July 1998

International Thunderbird Gaming Corporation Vs United Mexican States,

NAFTA/UNCITRAL (Award 26th January 2006) 313, 319, 348,354, 468

Jan de Nul N.V. Dredging International N.V. Vs Arab Republic of Egypt (2006),
ICSID Case No. ARB/04/13, Decision on Jurisdiction, 16 June 2006.

Jacques Vs Federal Commissioner of Taxation (1924) 34 C.L.R 328 at 362

LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. the
Argentine Republic, ICSID case No ARB/02/1, Decision on Liability, October 3,
2006, paras.169-175.

Merrill & Ring Forestry L.P. Vs The Government of Canada, UNCITRAL, ICSID
Administered Case NAFTA April, 22, 2008 Award March, 2010

Salini Construttori S.p.A. and Italstrade S.p.A Vs The Hashemite Kingdom of

Jordan, ICSID case No. ARB/02/13), Decision on Jurisdiction, 29 November, 2004

Suez Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios

Integrales Del Agua S.A.Vs The Argentine Republic, ICSID Case No. ARB/03/17
 ~ vi ~

LIST OF FIGURES
Figure 1 : Articles of a Treaty .................................................................................................. 3

Figure 2: Objectives of the legal investment framework ....................................................... 10

Figure 3: The BITs and IIAs in Tanzania .............................................................................. 14

Figure 4: The FDIs Flow and Greenfield FDI Projects ....................................................... 15

Figure 5: The Growth in the Number of BITs and DTTs (1960-2006)-(Number)................. 16

Figure 6: Legal Framework of DTTs Negotiation under ITA, 1973 and ITA, 2004 ............ 16

LIST OF TABLES
Table 1: Legal Framework of the DTTS Negotiation under ITA, 1973 and ITA, 2004 ......... 16
 ~1~

1.0: INTRODUCTION

Foreign Direct Investment (FDI1 ) is a financial investment made abroad with the purpose
of acquiring significant influence or outright control over a foreign firm. It may involve
establishing a new company abroad or investing in an existing enterprise (Asian
Development Bank 2010)2. More specifically, the FDI is protected by the International
Customary Law through principles of diplomatic protection and state responsibility. In the
same vein, The International Monetary Fund (IMF) and Organization Economic
Cooperation and Development (OECD3) define FDI as cross-border investment made by
a resident entity in one economy (the direct investor or multinational enterprise) with
the objective of establishing a lasting interest in an enterprise resident in an economy other
than that of the direct investor (the foreign affiliate).2 Lasting interest implies the
existence of a long-term relationship between a direct investor and a foreign affiliate, and a
significant degree of influence on the management of the latter.

It should be noted that the definition of investment in Bilateral Investment Treaties

(BITs) is typically much broader and includes everything of economic value, virtually
without limitation, in order to ensure flexibility in the BITs application, Calvin Hamilton
and Paula Rochwerger (2005). When a country faces political, economic and/ or social
instability, the risk for the firm who wants to invest in a particular country will increase.
These kinds of instability could occur when a country does not have a stable legal system,
lack of appropriate laws, faces high inflation, volatile exchange rate etc.4.

Tax evasion and tax avoidance including base erosion and profit shifting are significant
global challenges for both developed and developing countries. In that regard, Double
Taxation Treaties (DTTs) are intended to eliminate double taxation and prevent fiscal
evasion due to dual residence, resolves cases of double taxation between the State of

1
From the perspective of the investor, Caves (1971) distinguishes between horizontal, vertical, and conglomerate FDI.
Horizontal FDI- is undertaken for the purpose of horizontal expansion to produce the same or similar kinds of goods
abroad as in the home country. Hence, product differentiation is the critical element of market structure for horizontal
FDI. Generally, horizontal FDI is undertaken to exploit certain monopolistic or oligopolistic advantages, such as patents
or differentiated products, particularly if expansion at home were to violate anti-trust laws. Vertical FDI- is undertaken
for the purpose of exploiting raw materials (backward vertical FDI) or to be nearer to the consumers through the
acquisition of distribution outlets (forward vertical FDI). Conglomerate FDI-This type involves both horizontal and
vertical FDI.
2
Asian Development Bank (2010), Key Indicators for Asia and the Pacific 2010, 41st edition
3
The OECD, Detailed Benchmark Definition of Foreign Direct Investment (Paris: OECD, 1996), third edition, and The
International Monetary Fund, Balance of Payments Manual (Washington: IMF, 1993), fifth edition.
4
J. P. Chousa, K.C. Vadlamannati , B. P. Aristidis and A. Tamazian (2008), Determinants of Barries to quality of direct
Foreign Investments Evidences from South & East Asian Economies
 ~2~

Residence and State of Source, and allocates residential jurisdiction to one of the
Contracting States; and when applicable in tandem with the Bilateral Investment Treaties
(BITs), both would likely encourage FDIs5.

Broadly, the general objectives of DTTs prevent discouragement which taxation may
provide for the free flow of international trade and investment and the transfer of
technology. They prevent discrimination between taxpayers in the international field, and
provide a reasonable element of legal and fiscal certainty as a framework within which
international operations can be carried on. In addition, the treaties have an objective of
creating the improvement of cooperation between taxing authorities in carrying out their
duties. This is provided under the Article 26 (relating to the exchange of information) and
Article 27 (Assistance in the Collection of Taxes) respectively of the OECD Model
Convention and in the DTTs that Tanzania has signed with other Countries as shown in
Figure 1.

As a general school of thoughts, DTTs taking into account their key functions can
influence FDIs in two possible ways. From the viewpoint of the first objective, tax treaties
contribute to an increase in foreign direct investments because they reduce harm of
investments by eliminating international double taxation. On the other hand, from the
viewpoint of the second objective, tax treaties may contribute to a reduction in the
investment scale, because they discourage international tax avoidance.

The BITs are reciprocal agreements (between two States) aimed at protecting and
promoting foreign investment through legally-binding rights and obligations. They are one
of the policy tools used by countries in their efforts to attract foreign direct investment
(FDI). By signing these treaties which provide protection for investment under
international law signatory countries send a signal of their commitment to providing a
stable, transparent and predictable investment climate.

The BITs objective is to enhance the flow of capital thereby fostering prosperity,
improving living standards, and promoting sustainable development in the signatory
economies. In that, the Contracting parties clarify that the agreement is in line with certain
principles and policy goals, such as the protection of sovereign regulatory powers, the

5
The International Monetary Fund defines FDI as an international investment with a long term horizon and significant
influence over the management of the operation, (IMF, 1993).
 ~3~

maintenance of human rights, health, labour and/or environmental standards. They provide
investors with direct right of action to enforce treaty rights against governments to the
extent that provide investors and host States with neutral, international fora to arbitrate
disputes.

Figure 1 : Articles of a Treaty

Source: Tanzanian Model Double Taxation Agreements (2003)

BITs provide a broad range of Substantive standards of protection for investments and
investors and a powerful arbitration mechanism that allows investors to seek monetary
compensation if the host country falls short of its obligations. There are four pillars of
protection namely; Standards of treatment, Expropriation, Transfers, and Settlement of
disputes. This is supported by the case of Azurix vs. Argentina6

6
Azurix vs. Argentina: in 1999, Azurix, a subsidiary of Enron Corporation, agreed to purchase the exclusive right to
provide water and sanitation services to Buenos Aires for 30 years. When the Argentine government issued a warning to
citizens to boil their water after an algae outbreak, some customers refused to pay for the water. According to Azurixs
claim, the government of Argentina violated their rights under the US-Argentina bilateral investment treaty to protection
from expropriation without compensation, fair and equitable treatment and other standards. The tribunal found in
favour of the investor and ordered the state to pay compensation to Azurix. The case demonstrates the high price that can
be paid when governments decide to serve the public good in ways later deemed by a tribunal to be contrary to investor
interests.
 ~4~

2.0: BILATERAL TREATIES AND FOREIGN DIRECT

INVESTMENTS: CONCEPTUAL AND LEGAL FRAMEWORK

2.1 CONCEPTUAL FRAMEWORK

2.1.1 Definition of investor and Investment

The 1998 Energy Charter Treaty (ECT) in its article 1(7) (a) (ii) defines investor with
respect to a contracting Party to include a company or other organisation organised in
accordance with the law applicable in that Contracting Party. This broad definition is
somewhat qualified by Article 17 of the ECT which calls for an inquiry into a companys
substantive connection with the state in which it is incorporated (see below, denial of
benefits clause). In Jan de Nul N.V. Dredging International N.V. Vs. Arab Republic of
Egypt, the tribunal concurred in relying on the so-called Salini-test to qualify as an
investment the activities carried out in connection with the dredging operation of the Suez
Canal.

Likewise in Bayindir v. Pakistan the operation at stake was a highway construction

contract. In determining whether there was an investment, the Tribunal relied once again
on the Salini-test. Likewise, in the case of Franz Sedelmayer Vs. The Russian Federation
which is the first case in which an arbitral tribunal has interpreted the notion of investor in
a way that allowed the protection of an investment made by the intermediary of a company
incorporated in a third state.

The definition of Investor in Tanzania varies depending on the BITs concerned; for
example, the BITs between URT and the Republic of Mauritius, URT and Republic of
Switzerland and the Model Convention regards natural person as investor upon having
Nationality status coupled with Permanent residence. Other BITs are restrictive to
Nationality even without Permanent residence; this means even if Nationals reside outside
the home state will have to be regarded as investors. On part of the legal person, the URT-
Kuwait BIT comes up with the concept of controlling interest.

The Draft 4th Edition of the OECD Benchmark Definition of Foreign Investment
emphasises the percentage of ownership or voting power in a company as the measure of
control under 50% basis, constituting the quantitative approach. The Tribunal in the
NAFTA case Thunderbird v. Mexico gave interpretation of what might constitute control:
 ~5~

Under Section 3 of the ITA Cap 332 the concept of control is linked with Associate
concept, where for the entity has also been based on 50% basis. This could be read with
"Controlled Foreign Trust" and "Controlled Foreign Corporation in that particular Section
and Section 74 through 75 of ITA Cap 332 justify for the application therewith"

Therefore, company duly constituted or organized under the laws of the home country
having substantive business operations or substantive economic activities in such country
qualifies as an investor in Tanzania. In this juncture, the substantive business operations
requirements requires a genuine link between the company and the home state but does not
prescribe specific requirements for seat, headquarters or effective management in the home
state. This is in line with the BITs of the URT and Canada, URT and the Sultanate
Republic of Oman, URT and Republic of Mauritius, and the URT and the Republic of
Thailand. On contrary, the BITs of the URT and Republic of Switzerland and the URT and
the Republic of China require seat together with real economic activities to justify
existence of investors.

The TIC Act, 1997, in the same line under Section 3 considers a natural person who is not
a citizen of Tanzania to be investor while for the company should be incorporated under
the laws of any country other than Tanzania in which more than 50% of the shares are held
by such a non-citizen person and for the Partnership the controlling interest must be owned
by non-citizen person. However, the Mining Sector has special regime where investors are
not under TIC nomenclature as excluded under Section 2 of TIC Act, 1997, though they
may enjoy similar incentives as stipulated under Tax legislations. The TIC Act also under
Section 3 gives the definition of investment as to mean the creation or acquisition of new
business assets and includes the expansion, restructuring or rehabilitation of an existing
business enterprise.

2.1.2 Principle of Bilateral Investment Treaties

2.1.2.1 Principle of Reciprocity

A BIT helps to attract investment by serving as a commitment device which may be made
on the preamble or under the specific article e.g. Article 3 of the Tanzanian Model7 and in
particular it could overcome or mitigate dynamic inconsistency problems; Riskier countries
7
Article 3 of the Tanzanian Model which asserts that, Each Contracting Party shall encourage and create favourable
conditions for investors of the other Contracting Party to make investments in its territory and admit such investments in
accordance with its laws and regulations.
 ~6~

tend to attract a higher level of FDI, most likely because of the risk premium payable
through such direct measures as tax holidays. In that regard, the Principle of Reciprocity is
a pillar in harmonizing the investments regimes. By virtue of the Articles 26 & 31 of the
Vienna Convention either of the Contracting parties is not expected to override the treaty
but to respect it8.

2.1.2.2 Fair and equitable treatment Principle

On part of the Fair and equitable treatment9 a Tribunal is likely to assess, based on its
own view and pre-conception but without regard to a normative basis or source, whether
the challenged conduct of the host state is Fair or equitable under particular
circumstances. In that, FET is not equivalent to a plain fairness standard, but rather is a
commitment that has to be interpreted within the framework of the principles of
international law. In the same vein, investors care about BITs because BITs provide
international legal support for the norm of Pacta Sunt Servanda,10 thereby allowing
investors and host states to enter into legally binding contracts.

Arbitral tribunals have developed a number of elements that are examined with respect to
FET; 1) Protection of investors legitimate expectations11 One dissenting arbitrator in a
recent case observed that the assertion that fair and equitable treatment includes an
obligation to satisfy or not to frustrate the legitimate expectations of the investor [] does
not correspond, in any language, to the ordinary meaning to be given to the terms fair and
equitable.3 The technique that has been used by most arbitral tribunals to buttress the
application of the legitimate expectation principle is to simply refer to previous arbitral

8
Articles 26 & 31 of the Vienna Convention provide that a Double Tax Avoidance Treaty (Treaty) should be
implemented in good faith. Article 27 provides that a Government may not invoke its internal law as justification for its
failure to perform a treaty.
9
Fair and Equitable Principle could be found under Article 6 of the BIT between URT and the Republic of China
which asserts that investors of one Contracting Party shall not be denied fair judicial proceedings by the other
Contracting party or be treated with obvious discriminatory or arbitrary measures
10
The principle of pacta sunt servanda, which means that contracts and clauses are laws with binding force between
parties, requires that every contracting party must keep his promise and fulfil his obligation. However, commercial
practice demonstrates that there exists event or change, which may result in performance being impossible or pointless or
substantial breach of the economic balance between parties. In such situations, the rigid application of the principle of
pacta sunt servanda will lead to the opposite of justice and generate unfairness. Therefore, it could be found the
contradiction between two principles in contract law, namely the principle of pacta sunt servanda on the one hand and the
principle of clausula rebus sic stantibus on the other hand. Contract laws in every legal system have been adjusting the
contradiction between these two principles in order to get the best balance.
11
Protection of Investors legitimacy protection can be accommodated also under Article 3 of the URT and the State of
Kuwait BIT under the Heading Admittance, Encouragement and Protection of Investments which is similar to
other BITs but extends its rationale to create consistence with recognized principles of International Law and it further
restrict Contracting Parties to impair by unreasonable or discriminatory measures management, maintenance, use,
enforcement, or disposal of investments of investors in the Territory of the other Contracting Party
 ~7~

awards which have endorsed such concept, in a sort of cascade effect. 12 2) Stability of
business, and Legal framework, and Consistency of state conduct; investors legitimate
expectations rely on the stability, predictability and consistency of the host States legal
and business framework. This framework consists of general legislation and regulations,
any undertakings or representations made explicitly or implicitly by the host State, or even
of a mixture of these factors, and 4) Denial justice, Due process, Arbitrariness,
Discrimination, Abusive treatment and some others; Due process and non-denial of justice
require fair administrative and judicial proceedings. Transparency requires a clear
communication with the foreign investor, and Non-discrimination prohibits arbitrariness
and harassment.

The absence of the FET obligation may be perceived as a signal that the Contracting States
are not willing to subject themselves to an internationally enforceable minimum absolute
standard of treatment of foreign investors because FET provides procedural and
substantive protection to foreign investors. The case of Merrill & Ring v. Canada13
Emphasized that FET became part of customary law and that there is no difference
between FET and the minimum standard.

2.1.2.3 National treatment (NT) Principle

Another Principle is National treatment (NT) where the objective of this provision is to
ensure a degree of competitive equality between foreign and domestic investors by
preventing discrimination on the basis of the investors nationality. In general it requires
granting foreign investors the same investment opportunities as local investors in like
circumstances. This may limit the extent to which sectors or areas of economic activity can
be reserved to local investors or otherwise subject to discriminatory entry procedures. The
absence of the NT obligations weakens the protective functions of the treaty as becomes
disincentive to foreign investors as it fails to ensure competitive equality with domestic
investors in line with the Umbrella Clause.

12
Suez et al. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability, 30 July 2010, Separate Opinion of
Arbitrator Pedro Nikken, para. 3. See also id., paras. 20-21. See also the admonitions by the ad hoc committees in MTD
Equity Sdn. Bhd. and MTD Chile S.A. v. Chile, ICSID Case. No. ARB/01/7, Decision on Annulment, 21 March 2007,
para. 67 (The obligations of the host State towards foreign investors derive from the terms of the applicable investment
treaty and not from any set of expectations investors may have or claim to have. A tribunal which sought to generate
from such expectations a set of rights different from those contained in or enforceable under the BIT might well exceed
its powers, and if the difference were material might do so manifestly)
13
Merrill & Ring Forestry L.P. v. The Government of Canada, UNCITRAL, ICSID Administered Case
 ~8~

The Tribunal in LG&E v. Argentina14 was also called to examine the umbrella clause
included in the US-Argentine BIT. It characterised the umbrella clause as one which
creates a requirement by the host State to meet its obligations towards foreign investors,
including those that derive from a contract; hence such obligations receive extra protection
by virtue of their consideration under the bilateral treaty. It had to decide whether the
abrogation of the guarantees under the statutory framework (Gas Law) calculation of the
tariffs in dollars before conversion to pesos, semi-annual tariff adjustments and no price
controls without indemnificationviolated Argentinas obligations to LG&Es
investments. It concluded in the positive, by expressing the view that the provisions of the
Gas Law obligations were not legal obligations of a general nature but was very specific in
relation to LG&Es investment in Argentina. It stated that these laws and regulations
became obligations . that gave rise to liability under the umbrella clause of the treaty.

2.1.2.4 Most Favoured Nation Treatment (MFN) Principle

The MFN treatment is another principle whose objective is to ensure competitive equality
between foreign investors by preventing discrimination on the basis of the investors
nationality. The obligation applies to the full-life cycle of an investment including an
investors entry and establishment in the host country and its participation in existing
enterprise. This MFN treatment Article is an application of the general principle of pacta
sunt servanda in favour of the property of nationals of another party, and their lawful
successors in title unless the undertaking expressly excludes such succession.

The expropriation and compensation principles are also fundamental; the transfer of funds
principle basically focuses on the freedom of Transfers obligation of the host state so as to
allow a foreign investor to transfer capital and funds relating to its investment in and out of
the host state. The objective of this provision is to ensure that a foreign investor can make
free use of invested capital, returns on its investment and other payments related to the
establishment, operations or disposal of an investment.

2.1.2.5 Dispute Settlement Principle

The principle pertaining to the Dispute Settlement more specifically Investor-State Dispute
Settlement (ISDS) offers investors recourse to international arbitration to settle investment

14
LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. the Argentine Republic, ICSID
case No ARB/02/1, Decision on Liability, October 3, 2006, paras.169-175.
 ~9~

disputes with the host state.15 Under Section 23 of the TIC Act, 1997 all disputes between
the Investor and the TIC are entitled to be settled through negotiations for an amicable
settlement; and if negotiations between the Government and the Center has not been settled
shall be submitted in accordance with the Arbitration Laws of Tanzania for investors, and
in accordance with the Rules of procedures for arbitration of ICSID and within the
framework of any bilateral or multilateral agreement protection agreed by the URT and the
government of the country of the investor originates. All these elements should conform to
the objectives of the legal investment framework as shown in figure 2.

2.2 LEGAL FRAMEWORK

2.2.1 Constitutional Legitimacy

The Bilateral treaties attain their legitimacy from the Constitution of the URT, 1977. The
National Assembly under Article 63(2) (e) is discharged with the function of deliberating
upon and ratifying all treaties and agreements to which the United Republic is a party and
the provisions of which require ratification. Therefore, the Constitution of the URT, 1977
preserves room for the Treaty to be ratified and as a matter of procedure, if no specific
provision for ratification the treaty will have to be approved at the Cabinet of the Minister;
this has been the case for the Treaty between URT and the Republic of South Africa which
was approved by the Cabinet of the Minister on 19th October, 2004 and the URT and the
Republic of Botswana which was concluded on September, 2005.

Moreover, Tanzania is a member of several international organizations including The

International Centre for the Settlement of Investment Disputes (ICSID) and the
Multilateral Investment Guarantee Agency (MIGA). Tanzania is also a signatory to the
New York Convention on the recognition and enforcement of Arbitration Awards.

The Government of URT has negotiated and signed several DTTs as shown in Figure 3 in
view of preserving the taxing rights and more specifically through the Exchange of
Information in Tax Matters as per Article 26 and Article 27 in the Assistance in the
Collection of Taxes of Tanzanian Model Conventions respectively. This aimed at curbing
tax avoidance, preventing fiscal evasion and attracting FDIs flows; Tanzania adopts the

15
If a dispute is submitted to ICSID, it must qualify for coverage not only under the investment treaty but also under the
ICSID Convention. That means that each Party must be either an ICSID Convention Contracting State or a national of
another Contracting State, and that their dispute must be a legal dispute arising directly out of an investment under both
the ICSID Convention and the investment treaty in question.
 ~ 10 ~

residence principle as a basis for its tax system; it seeks to tax all residents on all their
income regardless of the source of income.

The Tanzanian regulatory framework as a host country is a key determinant for the
location of foreign investment and early intention of the government to attract FDIs was
shown in 1963. Foreign Investment Act was passed in order to persuade FDIs in the newly
independent Tanganyika. Such efforts were unsuccessful since the government opted for a
Socialist path of economic development since 1967, following the Arusha Declaration.
There were minimal FDI activities taking place in Tanzania between 1970 and 1985. The
majority of the investments were made by the State directly or indirectly.

By 1980 there were about 400 public owned corporations and companies in form of State
Owned Enterprises (SOEs). The majority of these were owned by the Tanzanian
government with 100 per cent shares. The revival of the foreign investment attraction came
in 1985 when, among other things, Tanzania found that it could not cope with the ailing
and ill-managed public enterprises and companies (BoT, NBS and TIC (2004: 2009).

Figure 2: Objectives of the legal investment framework

Source: Westcott Thomas (2008)

2.2.2 National Investment Promotion and Protection Act, 1990

For over two decades, Tanzania has been improving her investment climate by adopting
national laws and regulations starting with first market-oriented Investment Code NIPPA
 ~ 11 ~

Act, 1990, which applied to all private investments - local and foreign and formed the
legislative backbone for the Investment Promotion Center (IPC) which was set up to
nurture and manage private investment. Initially, neither the 1990 Investment Code nor the
IPC were particularly successful.

With regard to the NIPPA Act, 1990 several problems were experienced including 1)
restrictive investment environment, 2) lack of coordination of sectorial policies and the
investment policy, 3) existence of several laws and regulations that conflicted with the
NIPPA Act, 1990, 4) existence of a non-commercialized society and 5) existence of a non-
facilitative civil service. Following such problems a number of studies were carried out
which include; Review of the investment Policy and Law, prepared by Dr. H. Sinare and
Dr. F. Ringo under the auspices of Economic and Social Research Foundation (ESRF) -
1996 and Investors Road Map (1996) prepared by The Services Group, a team from USA.
Both reports addressed policy, legal, procedural and administrative barriers to investment
in Tanzania.

2.2.3 The New Investment Policy, 1996 and Tanzania Investment Act, 1997

The reports forced GoT departments to re-examine their processes and make appropriate
changes; main changes include Adoption of the New Investment Policy 1996; Enactment
of the new investment code 1997 & establishment of Tanzania Investment Centre (TIC)
One Stop Shop for investors; Harmonized key legislation; Removed restrictions on
investment areas and Enhanced economic and social reforms from 1996 onwards.

The Government has implemented reforms aimed at transforming its economy from one
based on a large State-owned sector and central planning to a market-and private-sector-
based economy. 16 major reform legislations16 were enacted between 1990 and 2004.
These reforms have helped Tanzania to improve efficiency and weed out ills that impede
growth.

16
Major reform legislations enacted between 1990 and 2004
The Income Tax Act 2004; The Income Tax Act, Cap 332; The EAC Customs Management Act, 2004; The Companies
Act No. 12 of 2002; The Export Processing Zones Act No. 11 of 2002; The Commission for Human Rights & Good
Governance Act No. 7 of 2001; The Land Act 1999; The Mining Act 1998; The Privatization Trust Act No. 7 of 1997;
The Financial Laws Miscellaneous Amendments Act 1997; The Tanzania Investment Act No. 26 of 1997; The Tanzania
Revenue Authority Act No. 11 of 1995; The Immigration Act No. 7 of 1995; Capital Market and Security Act No. 5 of
1994 and as amended by Capital Market and Security Act No. 4 of 1997; The Public Corporations Act 1992 and
Amendment Act 1993; The Foreign Exchange Act 1992; The Banking and Financial Institutions Act No 12 of 1991 and
The Loans and Advances Realization Act 1991
 ~ 12 ~

In 1997, the Investment Code underwent a modernization that resulted in the TIC Act,
1997 which remains the most important vehicle for promotion of private-sector
investments in Tanzania; it covers both foreign and domestic investment. There were also
several reforms in the Taxation regimes namely ITA No 33 of 1973, Financial Laws
(Miscellaneous Amendment Act of 1997), ITA Cap 332, VAT Act, 1997 and VAT Act
Cap 148 and Customs Laws, which open more sectors to foreign investment, that facilitate
inward FDIs.

The Tanzania Investment Act (1997) represented an effort to create a more vigorous
business framework, and introduced several new legislative features, including; (i) the IPC
which was given a wider mandate and renamed Tanzania Investment Center (TIC); (ii)
regulations for company registration which were eased; and (iii) a set of investment
priorities which were identified, and incentives packages and investors rights which were
improved especially for priority sectors. FDI in Tanzania has primarily been in the form of
project financing for new ventures, although there have been some instances of
acquisitions particularly related to the privatization programme. In relative terms, FDI
has virtually skyrocketed since the early 1990s;

TIC Act, 1997 includes provisions for Settlement of commercial disputes, but current
legislation has numerous ambiguities and there is no statutory mechanism by which a
company can reach out-of-court settlements. One can seek agreement through the
arbitration laws of Tanzania, and/or through the International Centre for the Settlement of
Investment Disputes, but this is normally a lengthy procedure. The courts are regarded by
most companies as slow and prone to both political influence and corruption.

In the same vein, investors are allowed to obtain land for investment purposes through the
TIC that issues derivative rights (under the new Land (Amendment) Act (2004) ) and under
Section 24 of the TIC Act 1997, TIC certificate holders have the right of an initial
automatic quota of employing up to five persons during the start-up period; Likewise,
Govt. passed the Employment and Labour Relations Act (2004) with the purpose of having
a labour regime whose policies, laws and regulatory structures promote employment,
protect labour and at the same time allow enterprises to grow and compete in the modern
economy; Moreover, the country also benefits from specific bilateral initiatives particularly
USA, under the familiar AGOA program, and the EU under EBA.
 ~ 13 ~

DTTs and BITs are part of the regulatory framework of Tanzania as a host country and can
affect aspects of it directly. Most importantly, BITs establish certain standards of treatment
that become parameters for national regulations in the investment area, and DTTs establish
or clarify tax treatment for foreign investors. In this context, then, BITs and DTTs can help
improve the regulatory framework by complementing Tanzanian host-country policies
related to FDIs, guaranteeing certain investor rights, making the legal and tax frameworks
more transparent and stable for investors, and mitigating the potential impacts of political
or economic instability by establishing certain enforcement procedures.

3.0 THE IMPACT OF BITs, DTTs ON FDIs AND TANZANIA TAX

SYSTEM

BITs are unlikely to have much of an impact on FDIs since they lower risk because, BITs
defend and promote investment abroad by providing core protections to foreign investors,
reducing investors exposure to political risk and uncertain business environments. One of
the vacuums in the BITs in Tanzania are lack of clear definition of investment as they do
not give specific definition of investment; and this may open Pandora box in what should
really be deemed as investment. This is supported by the case of Biwater Gauff (Tanzania)
Ltd Vs The United republic of Tanzania17

However, there is no single definition of what constitutes foreign investment. According to

Juillard and Carreau (2007), the absence of a common legal definition is due to the fact
that the meaning of the term investment varies according to the object and purpose of
different investment instruments which contain it.

There is Ineffectiveness and Inefficiency on part of the Government of URT to enter into
Bilateral Treaties thereby confiscating the taxing rights and inadequacy for the Exchange
of Information in Tax Matters as per Article 26 and Article 27 in the Assistance in the
Collection of Taxes respectively of Tanzanian Model Conventions which had to curb tax
avoidance, prevent fiscal evasion and attract FDIs flows; This has also been contributed by
the Office of the Attorney-General, particularly in the Department of Treaties and

17
Biwater Gauff (Tanzania) Ltd Vs The United republic of Tanzania (2005) the Tribunal observed that the BIT (Tanzania
UK BIT, 1994) defines investment in extremely broad terms. Under Article 1(a), an investment means every kind
of asset, including (without limitation) and thus dismissed the Preliminary Jurisdictional Objection of the URT (that
the BGTs claim did not directly arise from the BIT) as the every kind of asset, notion could possibly include even
worthless assets.
 ~ 14 ~

Agreements where there is an inadequate capacity to give good quality, effective and
efficient service to other government departments. The number of BITs and IITs entered
by the Government of Tanzania has been shown in Figure 3.
Figure 3: The BITs and IIAs in Tanzania
25 23
NUMBER OF AGREEMENTS

20
16
15

10
7

0
BILATERAL INVESTMENT INTERNATIONAL TOTAL
TREATIES INVESTMENT TREATIES
UNITED REPUBLIC OF TANZANIA
SOURCE: UNCTAD Report (2012)

In Tanzania, more specifically DTTs and BITs may not to be regarded as inducing tool to
attract FDIs as evidenced in Figure 4 where greenfield FDI at the TIC has not been linked
with BITs or DTTs and the Outflows are insignificant in attaining comparative and
competitive advantage. Let it be known that, the steady rise of DTTs began nearly four
decades ago (while the sharp rise in BITs began in the early 1990s) as shown in Figure 5.

Starting in the late 1960s, as emerging markets increasingly became host countries for FDI,
and gradually also became home countries, the number of those countries that signed DTTs
with both developed countries and other developing countries also began to rise rapidly as
shown in Figure 5. In 1963, these countries issued a draft model DTT, which is updated
periodically and has become the model for most DTTs concluded since its conception.

The Government of the URT has negotiated and signed several DTTs as shown in Table 1.
In 1973, the Government of the URT enacted the ITA No 33 of 1973 the Legal Framework
has not been good as depicted in Figure 6, but this has profoundly been caused by the
exercise of tax reform thereby retarding the effort for DTTs negotiation.
 ~ 15 ~

Figure 4: The FDIs Flow and Greenfield FDI Projects

SOURCE: BOT and UNCTAD Reports (2012)

In 1974 through 1979 after enacting ITA No 33 of 1973, four DTTs were negotiated,
signed but not ratified, from year 1980 through year 1985 performance retarded due to the
war between Uganda and Tanzania; hence political instability and low level of economic
growth distorted confidence to investors.

After economic reform of 1986, Tanzania had only one DTT and in 1992 through 1997
two DTTs were negotiated. In the same vein, following investment policy of 1997 and TIC
Act, 1997, various agreements for the Reciprocal Protection and Promotion for
Investments were made in place.

However, there has been an increase in FDI stocks in Tanzania from 1985 to 1990. Then
there was a dramatic decline in 1995, before peaking up in 1998 and 1999. The increased
inflows can be attributed to, inter alia, the far reaching reforms that Tanzania has been
undertaking and still at the midst of mainly from the mid-1980s.

Following the Tax Reform of year 2004 the new ITA, 2004 DTTs for the Republic of
South Africa was concluded and signed and had approval of the Cabinet of the Minister
and DTT for the Republic of Botswana was concluded, negotiated but not signed.
 ~ 16 ~

Figure 5: The Growth in the Number of BITs and DTTs (1960-2006)-(Number)

However, as various DTTs fall under the ITA No 33, of 1973 and the time for expiry has
been elapsed as majority were valid for three, five or six years; all DTTs are subject for
review and replacement in order to be compatible with the ITA, 2004 (ITA Cap 332) and
globalization policy.
Figure 6: Legal Framework of DTTs Negotiation under ITA, 1973 and ITA, 2004

SOURCE: Mafwenga H.M (2008) The East African Journal of Research-Tumaini University

Table 1: Legal Framework of the DTTS Negotiation under ITA, 1973 and ITA, 2004
 ~ 17 ~

Contracting Party Current Status Status under ITA,1973/ITA,2004 Remarks

Algeria Initiated but not Negotiated November, 2007 Under Negotiation
Botswana Concluded but not signed September, 2005 To be signed
Canada Initiated but not Negotiated signed on 15th December, 1995 To be reviewed
Denmark Signed and Concluded Signed on 6th May, 1976 To be reviewed
Egypt Signed and Concluded signed on 8th December, 2001 To be reviewed
England Signed and Concluded Date not clearly found To be reviewed
EAC signed and Concluded signed on 28th April, 1997 To be reviewed
Finland signed but not ratified signed on 12th, May 1976 To be reviewed
Italy Signed but not ratified signed 7th March, 1973 To be reviewed
India Negotiated but not Concluded signed on 1st April, 1999 To be reviewed
Korea Negotiated but not Concluded signed on 1st April, 1999 To be reviewed
Mauritius Initiated but not Negotiated Date not clearly found Under Negotiation
Mozambique Initiated but not Negotiated July, 2005 Under Negotiation
Norway Signed and Concluded signed on 28th April, 1976 To be reviewed
Qatar Initiated but not Negotiated October, 2006 To be reviewed
Sweden signed and concluded 2nd May, 1976 To be reviewed
South Africa Signed and Concluded 19th October, 2004 Approved by Cabinet
Sultanate of Oman signed and concluded 9th November, 1991 To be reviewed
Switzerland Terminated 20th August, 1963 To be reviewed
United Arab Emirates Initiated but not Negotiated March, 2006 To be reviewed
Zambia signed and concluded 2nd March, 1968 To be reviewed
Zimbabwe Negotiated but not Concluded Feb, 2004 Under Negotiation
Islamic Republic of Iran Initiated but not Negotiated Date not clearly found Under Negotiation
Russia Initiated but not Negotiated Date not clearly found Under Negotiation
Vietnam Initiated but not Negotiated Date not clearly found Under Negotiation
Seychelles Negotiated but not signed Feb, 2004 To be signed
Source: Ministry of Finance (2008)
 ~ 18 ~

4.0 CONCLUSION AND RECOMMENDATIONS

4.1 Conclusion

Major determinants of FDI could not be DTTs and BITS but rather macro-economic,
political stability, and effective legal framework which preserve room for the rule of law,
or being in proximity to a country with a large and growing GDP that can be exported to. A
BIT may help but without a stable and growing economy (or the ability to serve as an
export platform to a stable and growing economy) a BIT is of little help. In supporting the
aforementioned argument, this essay has found that, the objective relating to the Promotion
is not fulfilled in Tanzania.

4.2 Recommendation
4.2.1 Tanzania should not only consider enhancing speed in negotiating Bilateral treaties
but also updating their provisions and better reflecting some innovative practices in
its future bilateral treaties (BITs). Speed to update treaties that were negotiated or
entered under the ITA No 33 of 1973 fiscal regime should be re-negotiated to
reflect the real legal, economic and environmental factors that could impact on the
investment strategies. This should go in tandem with the updating of the Investment
Codes so as to ensure that Treaties are positively correlated with the prevailing
legal framework and economic situations.

4.2.2 While, BITs should go into further detail on issues among others, such as investor-
state dispute settlement (ISDS), or guarantee against unlawful expropriation, the
DTTs should focus on the curbing of transfer pricing and other factors that could
erode the tax base when inducing investors to come to invest to Tanzania. In that
regard, taking into account that, objective relating to the Promotion of investment is
not effectively fulfilled, Tanzania should perhaps consider alternative instruments
to attract foreign investors which would go in tandem with the efficient and
effective legal framework pertaining to the BITs negotiation and implementation so
as to ensure that the integrity to sign the DTTs is preserved.

4.2.3 BITs and DTTs should help improve the regulatory framework and complement
Tanzanian host-country policies related to FDIs, guarantee certain investor rights,
make the legal and tax frameworks more transparent and stable for investors, and
 ~ 19 ~

more generally, mitigate the potential impacts of political or economic instability

by establishing certain enforcement procedures.

4.2.4 As observed in the case of Fedax NV v. Republic of Venezuela based on the BIT
between the Netherlands and the Republic of Venezuela), the BIT should be
interpreted with in-depth examination so that the obligation of the parties must be
within the Umbrella clause. This would not only maintain integrity of the treaties
and sustainable legal framework but also offer the investor predicable investment
flows

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 ~ 20 ~

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 ~ 21 ~

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 ~ 22 ~

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