The recent signing of an agreement to eliminate double taxation between Kenya and China has aroused mixed reactions from various experts, especially on the issue of whether Kenya benefits in case there is trade imbalance between signatories. Kenya has now signed 20 similar agreements with other nations.
These include Mauritius, Egypt and the Netherlands. According to the National Treasury Principal Secretary Kamau Thugge, such agreements stimulate investors to invest more in both countries because they will be taxed once, in their country of origin. Furthermore, they help in ensuring that there is no tax avoidance and evasion as the two countries seek to harmonise their tax administration.
“The agreement will create certainty to the taxpayers and taxation of cross border incomes derived from either country. This will also ensure there is no tax avoidance and evasion through tax planning as we seek to eliminate double taxation,” Thugge observed.
However, there are others who view the elimination of double taxation as a contravention of the country’s constitution. Tax Justice Network Africa not long ago filed a suit in the High Court, the first of its kind in Africa, challenging the constitutionality of the Kenya-Mauritius Double Taxation Agreements (DTAs) signed in Port Louis, Mauritius in May 2012.
Part of the agreement was that Kenya committed to allow multinationals that have operations in both countries to decide where between the two jurisdictions they would elect to pay their taxes.
This allowed several Kenyan firms to set up subsidiaries in Mauritius so as to benefit from the treaty. In the petition, the organisation argued that agreement will encourage even local firms to stop paying taxes locally. “…domestic investors can dodge tax by round-tripping their investments illicitly through a Mauritian shell company,” part of the petition said.
The petitioners wanted the court, among other pleadings, to determine the differences in taxation laws in the two countries, where any reasonable investor would prefer declaring their profits in the lower tax rate jurisdiction.
However, according to Francis Kamau, a Partner at Ernst & Young, although sometimes the signing of DTAs may lead to loss of revenues, especially where the two countries have a trade imbalance, the big picture is that it ensures investors do not have to pay tax in both countries for the same transaction.
“The agreement reduces the tax burden for the taxpayers and also reduces tax disputes between countries because countries,” Kamau said.
Similar sentiments were shared by legal expert in taxation Michael Njuguna of Gikera & Vadgama Advocates who pointed out that DTAs provide certainty by specifying tax treatment for various types of income and for being well understood by using an internationally understood terminology and structure.
“The DTAs override the domestic law, thus makes it difficult to change tax treatment because they are difficult to change quickly. They also remove tax barriers to cross-border trade and investment in a reciprocal manner by eliminating double taxation, reduce tax rates and also prevent tax discrimination,” he said.