Double Taxation in a Kenyan concept

By Victor MUJIDU

Double taxation is a tax principle referring to income taxes paid twice on the same source of income.

This occurs when both a company’s profits are taxed and then shareholders are taxed on dividends received from those profits.

It can also happen when an individual earns income in one country and is taxed on that income there, but then is taxed again on that same income in another country.

Double taxation is often an unintended consequence of tax legislation. It is generally seen as a negative element of a tax system, and tax authorities attempt to avoid it whenever possible.

To address this, the tax legislation uses a key method known as Double Taxation Agreements (DTAs) that reduces uncertainties related to tax implications.

Kenya, like many other countries, has championed the idea of DTAs, which are tax incentives for investments and the prevention of double taxation of income or financial assets that may arise due to international trade.

These agreements have helped many nations gain clarity and consistency on how taxes are levied on cross-border activities involving two countries.

By eliminating potential double taxation, DTAs promote international trade, investment, and economic cooperation by reducing barriers and uncertainties related to tax implications.

Additionally, these agreements often include provisions for the exchange of information between tax authorities to prevent tax evasion and ensure compliance with tax laws.

Why do many countries support DTAs?

There are two primary models that states looking to negotiate DTAs as a framework.

The United Nations Model Convention, created by the U.N., is the first model. With this concept, the investor’s home nation (the resident country) would have fewer taxing powers than the host country of investment (the source country).

Given that the majority of source nations are Depositor Compensation Schemes (DCs), which are thought to have little bargaining leverage, the UN model treaty aims to protect them by giving them additional taxing rights.

The second model, on the other hand, is biased toward developed countries, or in this instance, the resident country. It was created by the Organization for Economic Cooperation and Development (OECD).

In this context, resident countries are primarily developed countries that own capital. The approach, often called the OECD approach Convention, aims to provide resident countries broader taxing rights.

Here, the articles in the UN and OECD models are intended to support the preservation of the taxing rights of the source nation (UN model) or the resident country (OECD model).

Kenya signs DTAs with many countries globally.

As a champion of the Double Taxation Agreements, Kenya has signed the agreements with a number of countries, some of which are already in force while others are still in the process of reaching conclusions.

Some of the countries where the DTAs are in force include Canada, Denmark, France, Germany, India, Iran, Korea, Norway, Qatar, South Africa, Sweden, the UAE, the UK, and Zambia.

The DTA between Kenya and Mauritius was suspended in March 2019.

Other countries that are still under consideration and negotiations include the East African Community countries, Italy, Kuwait, the Netherlands, the Seychelles, Botswana, Nigeria, Portugal, Saudi Arabia, Singapore, Thailand, Turkey, Algeria, Cameroon, the Democratic Republic of Congo, Ethiopia, Ghana, Ivory Coast, Jordan, Macedonia, Malawi, Mozambique, Russia, Senegal, South Sudan, Zimbabwe, Belgium, Egypt, Japan, Malaysia, and Spain.

The Double Tax Agreement between Kenya and China was signed in September 2017; however, it is yet to be in force.

Conclusion

The fact that some nations are still interested in negotiating DTAs indicates that their governments have political and economic goals beyond luring in foreign direct investment.

These goals may include enhancing cooperation in tax administration, appeasing the concerns of particular domestic communities, and fortifying diplomatic ties with other nations.

It is easier to make sure that the right discussions are started first in order to produce the best results when one is aware of the possible expenses and benefits associated with DTAs as well as how to conduct business to accomplish desired results.

Particularly for developing nations, the decision to sign double taxation arrangements with another nation should not be made hastily. This is due to the fact that closing a DTA entails both benefits and expenses, making a detailed DTA strategy appropriate.