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Kenya urged to revoke double tax plans with Portugal, Turkey

By Steve Umidha

Kenya has been cautioned against signing double taxation agreements (DTAs) with Portugal and Turkey, with tax experts calling on due diligence on such treaties.

The Tax Justice Network Africa (TJNA) and the East African Tax and Governance Network (EATGN) warned that having such agreements with both countries would place Kenya at risk of eroded tax revenues and increased debt strain.

“There is a need to evaluate both tax treaties in relation to how they are likely to negatively affect Kenyan tax law.

In our view, the minimum portfolio rate percent of 10 percent proposed in the Portugal draft is quite low – even lower than the domestic rate of 12.5 percent – and is not in accordance with the rates provided by Kenya in its other DTAs,” alerted the Tax Justice Network Africa.

In its report, The Good, the Bad and the Ugly, centering on Kenya’s tax treaties with Portugal and Turkey, TJNA says that such a decision could expose the country into future revenue losses if those agreements are to be ratified in their current forms.

It is now calling for an exhaustive scrutiny to avoid foul play by State officials.

DTAs are international agreements between two countries to allocate taxing rights between the two countries that have negotiated the particular DTA – whose purposes are to help the two countries avoid double taxation.

Kenya mainly uses DTAs to avoid double taxation at international level.

Bernard Odhiambo from the Kenya Investment Authority (KenInvest) also noted glaring policy gaps in such contracts urging relevant agencies such as the national Treasury and the Kenya Revenue Authority (KRA) to work in unanimity while crafting such treaties.

“All agreements are domiciled at the Treasury and it is always unclear why such documents were never made public,” he noted.

With regard to the Turkey draft, the report further pointed out that the provision does not provide a time threshold within which such shares must be held.

“Without giving a minimum timeframe in which the 25 percent shareholding is to be held, this provision is likely to be abused by non-resident shareholders who may increase their shareholdings just before dividends are paid in order to obtain the concessional tax rate,” it noted.

The group further claims that the unclear tax treaty between the countries could also expose Kenya into what is known as Offshore Indirect Transfer, ordinarily meant to prevent the collection of Capital Gain Tax (CGT).

Shrewd business individuals and powerful politicians including government officers are known to use the technique (Offshore Indirect Transfer) to set up multinational companies and offshore accounts in countries like Singapore for fraud and illegal business dealings.

CGT is tax charged on gains arising from sale of property and is legally charged at 5 percent of the net gain is not subject to further taxation after payment, which is considered final.

The current corporate tax rate applicable in Kenya is 30 per cent in the case of resident corporations such as limited liability companies – while a non-resident company with a permanent establishment in Kenya is taxed at 37.5 per cent.

An expatriate, who is resident in Kenya is liable to pay income tax – often charged at 30 per cent.

An expatriate, who is not resident in Kenya, but who is employed by a person who is resident in Kenya or by a permanent establishment of a nonresident is also liable to income tax.

Similar concerns were raised two years ago when Kenya announced intentions of signing a treaty with the Government of Barbados and Singapore, which were also opposed.

The two countries were considered by anti-corruption and global anti-money laundering agencies as some of the murkiest financial centres in the world besides Mauritius and other well-known tax havens.

Kenya has DTAs with over twenty countries with a number of such treaties already in force while others are still in the progress to conclusions. Some of those countries are Canada, Denmark, France, Germany, India, Iran, Korea, Norway, Qatar, South Africa, Sweden, UAE, UK, and Zambia among others.

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