BEHIND DOUBLE TAX BILATERAL DEALS

Kenyans paying price of opaque tax treaty with Mauritius

The total revenue loss for the two years is enough to clear nearly half of Kenya’s debt obligation for the current financial year, which stands at Sh696.5 billion.

In Summary

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

• The European Union in 2017 placed Mauritius on its top 30 tax blacklist nations, while Oxfam listed it as one of the world’s worst tax havens in 2016.

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

Mauritius is Africa's leading foreign direct investor in Kenya, bringing $1.43 (Sh143bn) billion and $1.08 (Sh108bn) billion to the East African country in 2016 and 2017, according to the Kenya National Bureau of Statistics.

But beneath this rosy figure, 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.

Kenya lost $1.78 billion (Sh178bn) and $1.35 billion (Sh135bn) in tax revenues to Mauritius in the last two years respectively, courtesy of the Double Tax Avoidance Agreement signed in 2012.

 

The total revenue loss for the two years is enough to clear nearly half of Kenya’s debt obligation for the current financial year, which stands at Sh696.5 billion. The figure is four times the country’s current allocation to the health budget.

Joy Ndubai, a tax policy expert with the International Center for Tax Development says DTAAs, especially with tax havens, are easy legal channels for tax avoidance, denying countries much-needed revenues.

''Why will a Kenyan register his business here and pay a corporate tax of 30 per cent when he can go register in Mauritius and pay zero? Do you think all these firms trooping to Kenya are Mauritius-owned?'' Ndubai posed.

A recent study by the International Monetary Fund indicated that developing countries are missing 15 per cent of revenues in tax avoidance compared to 12 per cent FDI inflows as a result of double tax treaties, more than obliterating any benefits from the investment.

Kenya has a higher tax regime compared to Mauritius, which has a near-zero tax regime.

The European Union in 2017 placed Mauritius on its top 30 tax blacklist nations, while Oxfam listed it as one of the world’s worst tax havens in 2016.

According to KPMG, a Mauritian resident is taxed at a normal corporate rate of 15 per cent — but their eligibility to claim 80 per cent in foreign tax credit, therefore reduces that effective rate to a maximum of three per cent.

 

The Kenyan government keeps on missing its revenue collection targets, forcing Treasury to either borrow more or impose more taxes on businesses and households to fundraise for its budget.

The Kenyan Revenue Authority has been missing targets since 2013. In the financial year ended June 30, the agency missed by Sh250 billion, according to Treasury.

Kenya's public debt currently stands at Sh6 trillion or 60 per cent of the country's GDP  from Sh4.8 trillion in 2013.

''The spiral effect is high and unsustainable public debt which is passed on to already overburdened local taxpayers, pushing up the cost of living,'' Jared Maranga, Transfer Pricing and International Taxes expert at TJNA, said.

He added that it is unacceptable that the Kenyan government is shifting the tax burden to the ordinary citizen, while deliberately opening doors for the elite and unscrupulous businesses to evade and avoid taxes through DTAAs with secretive tax haven.

The negative effects of the policy saw Tax Justice Network Africa, an anti-illicit financial flows non-governmental organisation contest, it in court immediately it was signed in 2012.

The NGO won the case in March this year, after a seven-year legal battle, 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.

“During the bilateral talks, President Kenyatta and Prime Minister Pravind witnessed the signing of several agreements, including the Double Taxation Avoidance Agreement (DTAA), an Investment Promotion and Protection Agreement (IPPA) and MoU on Cooperation for the Development of Special Economic Zones (SEZs) and Export Processing Zone in Kenya,” State House said in a statement.

The two ministers said the DTAA would eliminate double taxation and provide greater tax certainty for business persons of both countries on all forms of income arising from cross-border activities. Tax experts have since dismissed it, saying the agreement only benefits elites who exploit it to avoid paying taxes but hurt an ordinary trader operating at the bottom of the economic pyramid.

Robert Maganga of Oxfam Kenya wonders why Uhuru was quick to act on the agreement that denies the country the much-needed revenue.

‘’The speed at which the government acted to reverse the law squashed by the court is suspect. Whose interests is he protecting?’’ Maganga asked.

Early this month, commissioner for Investigations and Enforcement at KRA David Yego told the Star they are reviewing some of the tax agreements Kenya has with other countries.

''East Africa Community continues to lose much-needed revenue courtesy of loose legal channels like double tax agreements. Tax investigators are going to screen them to ensure no revenue is lost,’’ Yego said.

Tax Justice Network Africa said the treaty is harmful to Kenya because it reduced withholding tax on services, management fees and insurance commissions from 20 per cent to zero per cent and provided for the right to tax capital gains from stock sales of Kenyan companies to reside with Mauritius, which does not levy any capital gains tax.

Kenya Investment Authority (KenInvest) said two Mauritius firms came or acquired a Kenyan entity every month last year. This was well-illustrated in the Mauritius Leaks, an investigation by the International Centre for Investigative Journalists published in late July.

It said prominent businesspeople and political leaders were using weak tax policies to perpetuate state capture, and repatriated profits from countries of origin to Mauritius.

In Kenya, several firms were mentioned, including a fintech, Umati Capital, linked to Joe Mucheru, the ICT Cabinet Secretary. According to the report, the firm was registered in Mauritius in September 2012, just four months after Kenya signed the DTAA, ostensibly to avoid paying taxes to Kenya.

The CS said, "No comment" when we contacted him over the matter.

 This story was produced by Victor Amadala. It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in collaboration with the Institute for the Advancement of Journalism.