Tax Justice Network Africa calls for a review of Kenya’s Double Taxation Agreement with Mauritius

Tax Justice Network Africa has called for an urgent review of the double taxation agreement between Kenya and Mauritius arguing that it significantly undermines Kenya’s ability to raise domestic revenue to underpin the country’s development . This will be possible since it opens up loopholes for multinational companies operating in the country and super- rich individuals to shift profits abroad through Mauritius to avoid paying appropriate taxes.

For example, provisions under Article 11 of the Agreement relating to interest limit Kenya’s withholding tax to 10 per cent whereas the Kenyan domestic rate currently stands at 15 per cent. This will significantly affect the tax base of the Kenya Revenue Authority (KRA), a statement from the company read in part.

The President of the Republic of Mauritius H.E Ms. Ameenah Gurib visited Kenya in early September, after being elected in June, indicating how the two countries intend to work together.

According to Tax Justice Network Africa which has also sued the government on this issue, the Agreement also sharply contravenes Articles 10 and 201 of the Constitution and is inconsistent with the principles of good governance, sustainability and accountability.

The Agreement is open to abuse and this could endanger the growth and development of Kenya.

In the prayers before the court, TJN-A want

  • That the High Court declares the government’s failure or neglect to subject the Kenya-Mauritius Double Taxation Avoidance Agreement to ratification in line with the Treaty Making and Ratification Act 2012 as a contravention of Articles 10 (a), (c) and (d) and 201 of the Constitution of Kenya.

  • That the Court directs the Cabinet Secretary for Treasury to immediately withdraw Legal Notice 59 of 2014 and commence the process of ratification in conformity with the provisions of the Treaty Making and Ratification Act 2012.

A key aim of signing DTA’s between countries is to prevent the same income getting taxed twice: so-called ‘double taxation’.

The contention that Tax Justice Network Africa has also includes the details in the agreements. It authored that

Unlike Mauritius’ DTA with Uganda and Nigeria for example which have specific provisions for withholding tax for management/technical services fees, Kenya failed to negotiate any such provisions.

Provisions under Article 12 of the Agreement which relates to royalties restrict at- source withholding tax to half (10 per cent) of Kenya domestic rate of 20 per cent. This can weaken Kenya’s ability to raise revenue to finance its development.

Another contention is the agreement’s compliance with global standards.

The Agreement is neither United Nations nor OECD compliant and it also fails to address the issue of disposal of shares in companies. The Agreement effectively reserves under Article 13.4 all taxation of capital gains from selling shares in companies to Mauritius where the effective Capital Gains Tax is zero per cent, the statement further reads.

Under the Agreement foreign investors in Kenya can acquire Kenyan companies through Mauritius holding companies and Kenya cannot tax any of the gains when they sell these businesses again. This is open to abuse.

When a DTA is mooted, the two countries will start off with a model convention, which is a template containing the standard articles and clauses of a DTA. Each country will come to the negotiating table with its list of conditions or ‘must-haves’. The treaty that is ultimately signed is therefore the culmination of rounds of negotiations, compromises and trade-offs. The OECD (Organisation for Economic Co-operation and Development) model convention is one of three main ones; the other two are the UN (United Nations) and the US model conventions.

The tax experts argue that domestic Kenyan investors can dodge Kenyan taxes by round-tripping their investments illicitly through Mauritian shell companies. Moreover, Kenyan companies can also easily avoid Kenyan taxes in dividends paid to foreign investors through devices like share buy-backs therefore deny the government of development funds.

The provision is very similar to the Capital Gains Tax Article in the India-Mauritius treaty which has proved very controversial costing India an estimated US$600 million a year in revenues as a result of tax avoidance and illicit round-tripping by Indian business executives driving the Government of India to initiate steps to renegotiate its Agreement with Mauritius.

Tax experts argue that territorial double taxation discourages international trade. They posit that a trader is better off trading within the state boundaries and suffer tax in one country only. However, it is a widely accepted commercial reality that international trade is economically good for the countries concerned, and that international trade should be encouraged. Thus, countries believing in the benefits of international trade would try to provide a more conducive environment for cross-border trade by putting down rules to avoid or minimize double taxation.

This leads to the need for countries to bilaterally and mutually agree to specific terms and rules of how income or profits of international trade or cross-border transactions are to be treated by the two countries so that the final tax suffered will not be worse off than if the profits or gains are derived from similar non-cross-border transactions.

How the court rules in this matter will significantly determine how DTAs will be signed in future including specific clauses in it and whether they need to be approved by Parliament as the Constitution stipulates or not.

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