Maximising Kenya’s global trade footprint through tax deals

Double Taxation Agreements / Treaties, commonly termed DTAs or DTTs, refer to bilateral taxation agreements that seek to eliminate the double taxation of income arising in one jurisdiction and is paid out to residents in another jurisdiction. Governments, through DTA's seek to foster cooperation and coordination in tax revenue collection to enhance Foreign Direct Investment (FDI).

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

The effort to bolster Kenya’s image as a key investment destination in the African region is evidenced by the increasing efforts to conclude DTAs with critical partner states, of which 15 DTAs are currently effective, while 34 DTAs are in various stages of conclusion. This illustrates Kenya’s commitment to ensure that adequate legal structures are in place that appeal to both foreign and local investors seeking favourable investment destinations.

The pro-active stance by Kenya is welcome. As the world moves towards becoming a global village, 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 DTAs often highlight DTA abuse as a potential source of tax leakages. DTA abuse, also known as treaty shopping, refers to tax avoidance mechanisms purposed at taking advantage of tax relief offered by DTAs 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, seeks to prevent treaty shopping by limiting instances whereby tax relief guaranteed under a DTA may be utilised. Specifically, DTA relief is restricted to entities whose ownership (at least 50%) is held by persons who are resident in the other contracting state or entities who are listed in a stock exchange in the other contracting state.

In consideration, it is our duty as an active Nation on the global stage to create an internationally facing tax regime that promotes FDI 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.