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Policy brief on double taxation agreements

Countries’ signing double taxation treaties (DTTs) is not new practice: the first double tax treaty on record was signed between Austria-Hungary and Prussia in 1899. Many countries, especially OECD member states, entered into DTTs between 1950 and the 1970s. DTTs haveattained much more prominence and attention in the last 20 years, which saw the signature of 60% of the total current DTTs - 2976 treaties - by 2011 (UNCTAD).  There has also been tremendous increase in signing of DTTs between developed and developing and transitioning countries/economies, which by 2008 accounted for more than 50% of the total DTTs signed, (UNCTAD, 2009). Many developing countries sign DTTs with the aim of increasing foreign direct investment (FDI), anticipating increased tax revenue base and job creation which are critically needed to ignite their economies for sustaining economic growth and development. One key motivation for developing and transitioning countries to conclude bilateral investment treaties (BITs) and double taxation treaties (DTTs) is to signal to investors that investments will be legally protected under international law in case of political turmoil, and to provide certainty that double taxation of foreign investors will be relieved. Zambia registered the second highest FDI inflow of $1.981 billion and highest out flow in the COMESA region totalling to $1.150 billion out of the region total of $2. 266.9 billion. With increased FDI in Zambia, one would expect high employment and reduced poverty levels. However, poverty in Zambia is still a huge challenge; most of the population is still struggling to have a decent livelihood. Analysis by Zambia Food Security Research Project (FSRP) shows that the number of poor rural households in Zambia stood at 89.6%, while the nationalextreme poverty stands at 42.3%. Level of inequality also remains very high in Zambia, with the Gini coefficient of 0.57. The key question for Zambia’s policymakers is therefore, how we can ensure that tax treaties deliver both sustainable tax revenues and quality FDI for the benefit of poverty reduction?