President Mnangagwa spoke on Thursday at a special event on the margins of the Africa Investment Forum Market Days 2022 in Abidjan, Côte d’Ivoire
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ABIDJAN, Ivory Coast, November 4, 2022/ — “Private sector opportunities in Zimbabwe are limitless” – Zimbabwe President Dr. Emerson Mnangagwa; Agriculture will power our way to achieving vision 2030” – Anxious Masuka.

Zimbabwean President Dr. Emerson Mnangagwa has called on investors to realize the massive investment opportunities in Zimbabwe and shun negative perceptions of risk.

Zimbabwe, self-sufficient in food production and a major exporter of wheat, tobacco, and corn to the 14-member Southern African Development Community, to other African countries and the wider world before 2000, saw its exports plummet. Before 2000, farming accounted for 40% of all Zimbabwe’s exports. In 2010 though, it dropped to 2%.

President Mnangagwa spoke on Thursday at a special event on the margins of the Africa Investment Forum Market Days 2022 in Abidjan, Côte d’Ivoire. The event dwelt on the broad range of investment opportunities in Zimbabwe. Several cabinet ministers accompanied the president, namely Foreign Affairs Minister Frederick Shava, Finance and Economic Development Minister Mthuli Mcube, Agriculture Minister Anxious Masuka and Industry and Commerce Minister Sekai Nzenza.

“The focus is to persuade global capital assembled in this city to realize that there are opportunities for investment in Zimbabwe,” President Mnangagwa said.

The African Development Bank and its seven partners set up the Africa Investment Forum—Africa’s premier investment platform—to attract investment and capital to Africa. The forum’s Market Days 2022 which runs from the 2nd to 4th of November, feature boardroom sessions that promote flagship sectors where Africa has a comparative advantage. Examples are women-led businesses, music, film, fashion, textiles, and sports.

President Mnangagwa said African Development Bank President Dr. Adesina invited him to the forum when Adesina visited Zimbabwe earlier this year. Adesina agreed to champion Zimbabwe’s debt clearance strategy. Zimbabwe has been hurt by sanctions imposed by the European Union and other Western countries.

“Our mission here is to explain ourselves, assure investors that Zimbabwe is a safe investment destination,” President Mnangagwa said.

Adesina said Zimbabwe could count on the African Development Bank’s strong support. He confirmed the bank’s approval of a $4 million grant to support the development of a secretariat to move the country’s debt arrears clearance issue forward.

“I know the story of Zimbabwe, the opportunities and potential of Zimbabwe,” Adesina said. “I think Zimbabwe is not as risky as you think…Private sector opportunities are limitless.”

Adesina outlined the country’s many potential areas for investment, including steel, agriculture and information technology. He said the bank was lending support in these and other sectors.

The African Development Bank also made a grant to Zimbabwe during the Covid-19 pandemic, stepping in where other institutions had not.

“Zimbabwe is strongly committed… Zimbabwe will again be the breadbasket of Africa. I will swim right beside you,” he said.

President Mnangagwa’s ministers also spoke bullishly about Zimbabwe’s investment prospects.

Ncube said the Zimbabwe Investment and Development agency (ZIDA) was the country’s one-stop shop for potential investors. “With ZIDA, your investment is safe…we have the capacity…we are waiting for you,” the finance minister said.

Nzenza said the country was focusing especially on mining, agriculture, tourism and manufacturing, such as producing cotton, locally and lithium batteries.

“There’s no doubt that sanctions hurt, but Zimbabwe is open for business. The key words are value addition…we have been exporting raw materials we must manufacture,” Nzenza said.

Masuka said in his opinion, the biggest opportunity was the land reform program that Zimbabwe had embarked on. The government has put agriculture at the top of its agenda. “We want to develop agriculture…there are massive opportunities. Agriculture will power our way to achieving vision 2030,” Masuka said.

Private sector panelists at Thursday’s event were invited to offer advice to potential investors in Zimbabwe. They included Marjorie Mayida, managing director of Zimbabwe’s leading insurance company, Old Mutual; George Manyere, managing director of Brainworks a Zimbabwean company listed on the Johannesburg and London stock exchanges; Kalpesh Patel, managing director of SteelMakers Group of companies; and Peggy Mapondera, an investment principal at Masawara PLC, a pan-African diversified investment holding group.

George Manyere of Brainworks Ltd said Zimbabwe’s economic performance against neighboring countries like Zambia, Malawi and Mozambique—which do not have sanctions and enjoy support from the international lending community—was proof of the nation’s capacity to perform despite perceptions of risk, and the country’s biggest selling point.

Tshepidi Moremong, Chief Operating Officer of Africa50 noted the progress and opportunities in transport, logistics, infrastructure. She said that following a mission to Harare last month, Africa50 would be signing a memorandum of understanding, specifically on asset recycling.

Kapesh Pattel of SteelMakers Group advised that getting out in front of investors would help to demystify negative and misleading perceptions of Zimbabwe.

For the first time since the Africa Investment Forum began in 2018, three promising business transactions from Zimbabwe made it through to boardroom discussions during the Africa Investment Forum Market Days.

African Development Bank senior officials at the special side event included Director General for the Southern Africa region Leila Mokaddem, Zimbabwe Country Manager Moono Mupotola; and Kevin Urama, Vice President and Acting Chief Economist and Vice President for Economic Governance and Knowledge Management.

The Africa Investment Forum platform is an initiative of the African Development Bank and seven other development institutions: Africa 50; the Africa Finance Corporation; the African Export-Import Bank; the Development Bank of Southern Africa; the Trade and Development Bank; the European Investment Bank; and the Islamic Development Bank.

By Francis Mayebe, Candidate Attorney, overseen by Virusha Subban, Partner and Head of Tax, Baker McKenzie Johannesburg

Background

Bilateral tax treaties are mainly based on the principle of reciprocity. Under this principle, one state negotiates better treaty terms with another in exchange for making a particular concession. As is clearly seen in most protocols, the Most Favoured Nation (MFN) clause is usually included as a concession by a developing state looking to renegotiate particular treaty provisions. An illustration of this can be seen in the inclusion of the MFN clause in South Africa’s protocols with the Netherlands and Sweden, as it was negotiating to include withholding tax on dividends.

The broad rationale behind MFN clauses stems from the field of foreign direct investment. Throughout history, the MFN clause has seldom been accepted as a principle to be included in tax treaties. It is indisputable that the MFN clause comes with some benefits, however, its downfalls are significant. The most significant of these being that the clause creates various opportunities for the reduction of source taxation and that it exposes the source states, which are usually developing countries, to large-scale base erosion of taxes. To illustrate this, we analyse two court cases involving the Netherlands, South Africa and India.

A judicial perspective

In ABC (PTY) ltd v C: SARS 2019, the taxpayer sought to receive beneficial treatment from the South African and Kuwait Double Taxation Agreement (DTA), which provided an exemption from the dividends withholding tax. The basis for this claim had come about through a technical flaw in the wording between Sweden and South Africa’s DTA, which omitted the words “after the date of this convention”. As a result of this wording, treaty benefits afforded to another State by South Africa that are more favourable than those in the DTA with Sweden triggered the MFN clause. In effect, the exemption to withholding tax on dividends in the Kuwait DTA would automatically apply to the Swedish DTA.

The ripple effect of this clause is that all other States with an MFN clause, like the Netherlands in this instance, could claim the same exemption afforded in South Africa and Sweden’s DTA.

It is on this basis that the taxpayer argued that the exemption of withholding tax on dividends should apply to Dutch residents, by virtue of the MFN clause, in their tax treatment with South Africa.

The tax court found in favour of the taxpayer and instructed the South African tax authorities to provide refunds to all withheld dividend taxes to Dutch residents. Therefore, the technical or unforeseen error in the MFN clause between South Africa and Sweden resulted in a huge fiscal loss of revenue for South Africa. This case clearly demonstrates the dangers of unintended consequences that come with the inclusion of the MFN clause in tax treaties.

In the case of Concentrix Services Netherlands BV WP and Optum Global Solutions International BV WP (C) the court again found in favour of the taxpayer, who was a Netherlands tax resident. This resulted in the application of a lower withholding tax of 5%, as was applied in India and Slovenia Double Taxation Avoidance Agreement (DTAA), based on the MFN clause contained in the Indian and Netherlands DTAA.

A turning point, in this case, was a condition that required the third state to be an Organization for Economic Cooperation and Development (OECD) member before or at the time the DTAA was signed between the third state and India. However, the court held a contrary view, to the effect that the condition would only be fulfilled at the time the MFN benefit was claimed and not after the treaty. This interpretation, in our view, goes beyond the scope of the ambits of the MFN clause and its intended purpose when the tax authorities included it. This largely broad interpretation violates the principle of good faith as enshrined in the Vienna Convention on the Law of Treaties (VCLT).

This case demonstrates a clear downfall of the MFN clause in that it may result in unintended consequences due to the uncertainty posed by its interpretation, particularly in the judiciary.

 Practical comments

As can be deduced from the above discussion, the MFN clause infringes on the fundamental principle of the “Pacta sunt servanda” as enshrined in Article 26 of the VCLT. It infringes this principle by altering treaty provisions that are decided upon and conceded bilaterally by states during treaty negotiation by invoking future benefits or treaty terms that go beyond the original terms agreed upon by the states in their DTA.

These unforeseeable future treaty benefits have serious repercussions for states that would not gain from the invoked benefits. As already seen after the ABC v SARS decision, the MFN clause significantly increased investment flow through South Africa and the Netherlands due to the zero-rated withholding tax on dividends, thus increasing treaty shopping and significantly reducing South Africa’s collectible tax revenue on the declared foreign dividends.

Therefore, states negotiating or renegotiating their DTAs, including the MFN clause, should exercise caution when drafting the clause, and undertake a rigorous assessment of its impact on their tax treaties within their network prior to ratifying it.