The double taxation treaty between Kenya and Mauritius this year is likely to significantly fuel tax avoidance by multinationals further, experts told The Star on Friday.
Since the treaty was enforced in June, companies can legally set up holding companies on the Indian Ocean island state and take profits accrued in Kenya offshore to reduce their tax liability.
The Double Tax Avoidance Agreement with Mauritius means tax avoidance will become "even more widespread" as it legalises it. The rate of corporation tax in Mauritius is 15 per cent compared to 30 per cent for resident companies in Kenya.
The amount the Treasury loses through tax avoidance is set to increase going forward as more companies make the move to funnel profits off-shore.
Double taxation treaties are designed to prevent multinational companies from paying tax on the same income twice, but in reality, firms are using the legislation to avoid tax.
The Kenya Revenue Authority announced that a recent audit on transfer pricing added Sh25 billion to the Exchequer as firms that trade with related companies abroad undervalue the transactions to avoid taxes.
Kenya has double taxation treaties with Canada, Denmark, France, Germany, India, Norway, Sweden, the UK, Zambia and now Mauritius.
"A lot of companies have set up holding companies in Mauritius, to maximise shareholder wealth and minimise effective tax rate for the group," said Philip Muema, CEO of tax advisory company Nexus Africa.
"It's difficult to put a ball-park figure on it but I think we'll see a lot more Kenyan companies setting up holding companies."
Holding companies can be set up quickly and cheaply and this has resulted in 50 per cent of Mauritius' GDP coming from 'global business transactions'.
Nikhil Hira, a tax partner at Deloitte, said that setting up of holding companies offshore has always taken place, but that tax efficiency is the major reason companies are going to Mauritius.
"It cuts across the board and I think it's going to get even more widespread," he told The Star on phone.
He did however insist that tax avoidance through transfer pricing was not as widespread as some commentators have suggested.
Savior Mwambwa, spokesman for the Tax Justice Network Africa, said: "If you look at the trend for these kind of agreements, it is purely set up to allow for low tax."
"Also, in the passing of the law, parliamentary processes were bypassed, and transparency was lost."
Mwambwa added that KRA should carry out an impact assessment to know what "is coming in and going out".