Kenya risks losing out on international tax treaties – experts

Government urged to review double taxation agreements before ratification.

In Summary

•Some of the treaties said to create an avenue for tax evasion.

•Kenya has signed double taxation agreements with 10 countries in the past three years.

An aerial shot of the Nairobi CBD.
An aerial shot of the Nairobi CBD.

Kenya has been cautioned against bilateral treaties with tax haven jurisdictions, with the Tax Justice Network Africa saying they rob the country of billions in tax evasion.

This comes as the government is working on new double taxation agreements (DTAs), including their ratification. 

The deals are aimed at attracting Foreign Direct Investments.

Kenya already has has double tax avoidance treaties with Canada, Denmark, France, Germany, India, Iran, Norway, Sweden, United Kingdom, Zambia, South Africa.  An agreement with Mauritius is in progress.

It has pushed for 10 treaties in the last three years. Treaties with East African partner states, Kuwait, Iran, Mauritius and UAE have been concluded but not ratified.

Last year, the government was also in pursuit of new DTA's with the government of Barbados and the Republic of Singapore.

Some of the treaties provide for preferential withholding tax rates. In most cases however, the standard tax rates apply.

The treaties will in most cases allow for the set-off of withholding tax against tax liability in the respective countries. 

As the government, through the National Treasury pursue these treaties, tax experts have said having DTAs with some of these countries places Kenya at risk of eroded tax revenues in a time of increased debt strain, which has hit Sh7.1 trillion.

This is against dwindling revenues as KRA continues to miss its targets, worsened by the Covid-19 pandemic that hit the country early last year.

Singapore for instance is globally ranked as the eighth most aggressive tax haven allowing for extensive avoidance and evasion of taxes from other jurisdictions around the world.

A deal with Mauritius, another tax haven, also creates loopholes for domestic Kenyan investors who could dodge local taxes by “round-tripping” their investments through a Mauritius shell company.

As in other problematic treaties, only foreign companies with a "permanent establishment" in Kenya would pay taxes on many services.

The treaty generously allows companies to undertake considerable business activity without qualifying as "permanent establishments."

After the government published a legal notice to bring the tax treaty with Mauritius into effect in May 2014, TJNA identified both substantive and procedural problems with the agreement.

Substantively, the treaty would lead to significant revenue losses, it noted, and would undercut the government’s ability to collect capital gains taxes.

TJNA director Alvin Mosioma notes: "Evidence has shown that contrary to their objectives, these DTAs have led to double non-taxation and resulted in massive revenue leakage for African countries.”

Last year, TJNA and Katiba Institute (KI) moved to court to oppose Double Taxation Agreements Kenya has signed with 10 countries.

“The government should reflect on its tax measures and seeks a remedy to current policy implementation of DTAs,” the lobby groups said, with the High Court declaring “void and unconstitutional”, the Double Tax Avoidance Agreement between Kenya and Mauritius.

The country has been mentioned globally in tax evasion rackets as investors ride on double taxation agreements, denying the country the much needed revenue.

Recently, a sports betting firm was said to have avoided 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.

The Financial Crimes Enforcement Network (US financial intelligence unit) notes that a number of treaties are aiding money laundering and other illegal activities that harm the Kenyan economy.

A 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.

The most recent DTA Kenya is pursuing is one with the government of portugal, commenced November last year,  with the National Treasury keen to ensure growth of investments.

“The government wishes to enter into an agreement for the avoidance of double taxation with respect to taxes on income,” CS Ukuru Yatani said in a public notice, “ the National Treasury and Planning is spearheading the process on behalf of the government of Kenya.”

For the country to safeguard its interests, the government has been urged to ensure public and experts' participation in the process.

There is a need to evaluate both tax treaties in relation to how they are likely to negatively affect Kenyan tax law,” TJNA notes.

Meanwhile, Kenya should prioritise implementation of one that has already been developed by the East African Community (EAC) members, who are Kenya’s largest trading partners, pundits have urgued.

The revenue implications of the various benefits, and possible losses from exemptions in tax treaties must also be evaluated against the conceivable gains.