Kenya loses 5-year court battle in Mauritius tax row

The Kenyan government has lost its attempt to keep a tax agreement it signed with Mauritius nearly seven years ago.

A high court ruling made on Friday last week by Justice W. Korir declared void and unconstitutional the Double Tax Avoidance Agreement (DTAA) the two countries signed in May 2012, bringing to an end a 5-year old suit whose petitioner maintained its consequences were dire on the ordinary mwananchi.

Tax Justice Network Africa (TJN-A), a non-governmental body had in October 2014 moved to the high court to stop a double tax treaty between Kenya and Mauritius, which was to come into force in July 2015.

But following the successful petition half-a-decade years later, the court ruled that due process was not followed and therefore Kenya Mauritius DTA ‘ceased to have effect and became void in accordance with the Kenyan law.’

“The government failed or neglected to subject the Kenya-Mauritius Double Taxation Avoidance Agreement to the due ratification process 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,” reads in part the ruling.

The petitioner, Tax Justice Network Africa in a court case pitting heavyweights National Treasury’s Cabinet Secretary Henry Rotich, Kenya Revenue Authority (KRA) and Attorney General (AG) as first, second and third respondents respectively in a protracted legal battle seen as a big win for Kenyan citizens and a major setback for the taxman.

TJN-A in its submission further said that Rotich had violated the Treaty Act in developing the DTA as well as failing to involve both the Parliament and Cabinet as required by law.

The organization had claimed that the treaty would increase the tax burden on ordinary citizens whose expenses, unlike companies are not deductible for fiscal policy purposes. A salaried worker who earns Sh50, 000 a month, for instance, pays Sh7, 330 or 14.66 per cent as income tax, after factoring NSSF Contribution (Sh1,080), Personal Relief (Sh1,408) and NHIF Contribution (Sh 1,200) and excluding key expenses such as bus fare, rent and food among others. A company operating in Kenya on the other hand only pays income tax on net profits.

“This ruling affects not only the Kenya Mauritius DTA, but also has legal implications for all other treaties signed under the Constitution. It rightly pushes us to rethink the costs, benefits and motivations around signing DTAs in the first place,” commented TJNA’s Policy Lead-Tax and Investments, Jared Maranga on the ruling, recommending for set up a DTA policy framework, which sets out the basic minimums the country should consider while signing bilateral tax agreements.

Adding that, “Double Tax Agreements have a direct bearing to the taxing rights of states. The governments should therefore put in place mechanisms to ensure effective public participation as part of the treaty ratification process.”

TJNA is now calling on the government to revisit all other recently signed DTAs including those with UAE, Netherlands, China and South Korea and those under negotiation to ensure that they are compliant with this new ruling. It also wants the National Parliament to play its role in the Kenya Mauritius treaty ratification process as ordered by the court.

“That Legal Notice Legal Notice 59 of 2014 is therefore invalid and that the Cabinet Secretary for Treasury should immediately commence the process of ratification in conformity with the provisions of the Treaty Making and Ratification Act 2012,” says the ruling.

As it is presently, the double taxation avoidance agreement allows firms registered in the two countries to pay taxes in only one country as well as allow Mauritian companies owning at least a tenth of a Kenyan firm to pay withholding tax on dividends of only five percent as opposed to 10 percent that customarily applies to foreign companies.

Withholding tax of services and management fees is subject to zero taxation in Mauritius but is 20 percent in Kenya.

Tax treaties with tax havens like Mauritius often allow multinational corporations to strip profits artificially out of victim countries in this case Kenya, but these treaties are used to insert a secrecy turntable into transactions and help Kenyan citizens dodge taxes by what is commonly known as “round-tripping” investments illicitly through shell companies in Mauritius.

A shell corporation is one that exists only on paper and has no office and no employees, but may have a bank account or may hold passive investments or be the registered owner of assets, such as intellectual property.