TAX JUSTICE

Civil groups challenge Kenya's double tax treaties in court

They argue that while the country is signing DTAs to attract FDIs, the tax revenue given away outweighs returns

In Summary

•It is estimated that Kenya could be losing Sh15 in tax revenue for every Sh12 earned in DTA aided FDIs with Mauritius.

•They want DTAs be passed in Parliament 

Mauritius International Trade minister Seetanah Lutchmeenaraidoo and President Uhuru Kenyatta during their meeting at State House in Nairobi, January 17, 2017
Mauritius International Trade minister Seetanah Lutchmeenaraidoo and President Uhuru Kenyatta during their meeting at State House in Nairobi, January 17, 2017
Image: PSCU

Tax Justice Network Africa (TJNA) and Katiba Institute (KI) have moved to court to oppose Double Taxation Agreements (DTAs) Kenya has signed with 10 countries.

Double Taxation Agreements are treaties between two or more countries to avoid international double taxation of income and property.

The main purpose of DTA is to divide the right of taxation between the contracting countries, to avoid differences, to ensure taxpayers' equal rights and security, and to prevent evasion of taxation.

Even so, the two agencies argue that while the country is signing DTAs to attract foreign direct investment (FDI), the tax revenue given away outweigh returns from FDI.

This practice has opened doors of all sorts of tax treaty abuse like treaty shopping, round-tripping all of which have ultimately led to the loss of revenue especially to the capital importing countries which are mainly developing countries,’’ they said in the petition.

In a petition filed the petition at the Human Rights Division of the High Court by Yussuf Bashir of Bashir and Noor Advocates, the two rights groups want the government compelled to provide details surrounding DTAs.

Kenya has in the past three years signed double tax agreements with  Iran; Kuwait; Seychelles; South Africa; Qatar; Korea; the United Arab Emirates (UAE); India; the Netherlands and Mauritius.

''This petition hopes to make the government reflect on its tax measures and seeks a remedy to current policy implementation of DTAs,’’ the lobby groups said.

They also want the government to initiate DTAs in a transparent manner according to the tenets of the constitution and involve Parliament by providing a transparent cost-benefit analysis of each DTA for the purposes of decision making.

They are concerned that four out of 10  countries cited in the petition including  (Seychelles, South Africa, Netherlands, and Mauritius) are ranked as the most aggressive and extensive tax haven jurisdictions that are used by multinational enterprises to avoid paying tax, thereby eroding revenues of other countries, more so in the developing world.

In the petition, they have cited a recent media investigation that revealed how betting firm, Sportpesa voided payment of taxes through the transfer of $53 million to the United Kingdom.

This was done under the guise of the local subsidiary paying the UK subsidiary for “IT and services” used in its Kenyan operations.

"Likewise, the FinCEN files exposé points out how this emerging DTA network is aiding money laundering and other illegal activities that harm the Kenyan economy,’’ they said in the petition filled Thursday.

The leaked financial records submitted to the US Department of Treasury covering $2 trillion of suspicious transactions globally reveals how 53 Kenyan companies and individuals used DTAs to move $60 billion in suspicious tractions.

Tax Justice Network Africa (TJNA) executive director Alvin Mosioma said that If in one exposé you are able to estimate that a country loses Sh6 trillion, that points to how the knowledge of the problem is just the tip of the iceberg.

How much more revenues will we be able to collect if we seal these loopholes? TJNA intends to ensure that in future, similar tax negotiations are not in contravention with the laid down laws and procedures,’’ he said.

He added that the petition is necessary because DTAs entail a restriction on tax sovereignty and have major revenue implications since they grant tax benefits and exemptions to foreign investors not available to Kenyan citizens or companies, resulting in a reduction of government revenue.

In March last year, the NGO successfully won a case where it had opposed the DTA between Kenya and Mauritius on the grounds the agreement did not go through Parliament.

The victory was, however,  short-lived after President Uhuru Kenyatta flew to Port Louis the following month to sign another set of trade agreements, including a tax treaty.

Financial experts fear Kenya could be losing Sh15 in revenue for every Sh12 received from the Indian Ocean country due to a tax agreement that allows Mauritius domiciled firms to only pay taxes back home.