TAX TREATIES

Double Taxation Treaties can bolster Kenya’s investment attractiveness

How well formulated treaties can attract investors

In Summary

•The country is looking to strengthen global trade and investment partnerships, with the message passed across being that Kenya is ready and open for business

•It is important for governments to formalize agreements that will not only promote international trade, but also work toward sealing loopholes in the taxation system

CHECK POINT: Malaba border customs entrance on the Kenya-Uganda border.Photo/Reuben Olita
CHECK POINT: Malaba border customs entrance on the Kenya-Uganda border.Photo/Reuben Olita

Double Taxation Treaties, commonly termed DTT’s or DTA’s, refer to bilateral taxation agreements that seek to eliminate the double taxation of income that arises in one jurisdiction and is paid out to residents in another jurisdiction.

Through DTT’s, governments seek to foster cooperation and coordination in tax revenue collection so as to ultimately enhance foreign direct investment.

Kenya, in a bid to enhance her image on the global stage, as well as to strengthen trade relations with her international partners, has directed numerous resources toward the conclusion of DTT’s.

This is in line with the concerted effort to strengthen global trade and investment partnerships, with the message passed across being that Kenya is ready and open for business.

This concerted effort to bolster Kenya’s image as a key investment destination in the African region is evidenced by the gazettement of the Kenya – Mauritius DTA this past week.

The quick re-gazettement of the Kenya – Mauritius DTA, which was invalidated by the High Court early this year due to failure to follow procedural requirements prior to its initial gazettement, indicates the Government of Kenya’s commitment to ensure that adequate legal structures are in place that appeal to both foreign and local investors seeking favourable investment destinations.

 

This pro-active stance by the Government of Kenya is to be lauded. As the world moves toward becoming a global village, as a result of globalisation, it is important for governments to formalise agreements that will not only promote international trade but also work toward sealing loopholes in the taxation system. This carries the double benefit of attracting foreign investment in the short-term, and increasing tax revenues in the long term.

The above considered, it is worth noting that criticisms levied against DTA’s often highlight DTA abuse as potentially a source of tax leakages. DTA abuse, also known as treaty shopping, refers to tax avoidance mechanisms aimed at taking advantage of tax relief offered by DTA’s in multiple jurisdictions.

Indeed, treaty shopping activities by multinationals and potential investors may carry a negative impact with respect to Kenya’s tax revenues. It is critical therefore to ensure that measures are in place to prevent instances of the same.

The above considered, it is noted that the Kenyan Income Tax Act, under Section 41, specifically seeks to prevent treaty shopping by limiting instances whereby tax relief guaranteed under a DTA may be utilised.

In consideration of the above, it is our duty as an active Nation on the global stage to create an internationally facing tax regime that promotes Foreign Direct Investment in a manner that does not compromise our position as well. This is more so important given the increased interest in the Kenyan market – a positive consequence of the Kenya’s aggressive marketing strategy.

Karen Kandie – MD IDB Capital