(PHOTO CREDITS: Courtesy NATION)
By
Leonard Wanyama
A version of this article was published in the Daily Nation on 15 September 2020
One of the most perturbing government initiatives in Kenya is the pursuit of double taxation agreements (DTAs) without having an implementation policy in place.
This has left the country exposed to the risk of having its domestic revenue mobilisation efforts undermined by illicit financial flows especially when negotiated with countries that are known tax havens.
Recently Kenya’s Ministry of Finance asked for public submissions on a DTA with Singapore and has been actively working to operationalise a DTA with Mauritius that was previously held up following a challenge in court by Tax Justice Network Africa (TJNA).
It should be noted that according to the Corporate Tax Haven Index both Singapore and Mauritius are in the top 20 most secretive, aggressive and extensive jurisdictions that help multinationals escape paying taxes thereby eroding revenue collection measures in other countries around the world.
Similarly referred to as double taxation treaties (DTTs) or double taxation avoidance agreements (DTAAs), DTAs are international bilateral deals that aim at determining taxation rights between multiple jurisdictions.
The purpose of DTAs is supposed to encourage the sharing of tax information between jurisdictions and promote foreign direct investments by eliminating double taxation.
This is because double taxation, that is, the imposition of tax on the same income by multiple jurisdictions is perceived to discourage the conduct of international trade by dampening foreign direct investment and eventually slowing economic growth.
However, while DTAs are expected to be good instruments in the short term for taxpayers engaging in business across borders, the secrecy and opacity associated with their negotiation plus linkages to tax havens encourages money laundering or other illegal activities that harm countries and the world economy in the long term.
Also, if not properly negotiated and structured according to best practice or international commitments, DTAs serve as a channel for tax avoidance. This is legal planning of an entity’s financial affairs to reduce tax liability within a single territory or several territories to one’s own advantage.
Whereas, tax avoidance may not be an illegal practice, it is considered immoral based on the impact of undermining efforts towards domestic revenue mobilisation and self-sufficiency particularly in developing countries.
For example, the dangerous consequences of tax planning as a result of DTAs can be seen in a recent report by Finance Uncovered and the Daily Nation on how sports betting giant SportPesa dogged its Kenyan tax bill obligations by ‘shifting’ its profits to the United Kingdom.
SportPesa’s UK subsidiary SPS Sportsoft transferred GBP 42 million (KES 5.8 Billion) from its Kenyan operation Pevans East Africa by claiming payment charges for supply “IT and services” used to conduct betting operations within the country.
Despite both being SportPesa facilities, this overcharging of a Kenyan entity for technical services by a UK entity denied the government an opportunity to accurately tax the company on account of an existing 43-year old DTA with Britain.
Such transfer pricing legally allows the manipulation of charges between subsidiaries of a company in different countries to shift profits out of higher tax jurisdictions.
Moreover, such loopholes in DTAs arise as an abuse of the “arm’s length principle” (ALP) which contends that even as entities within the same company, a transaction of parties that are considered subsidiaries of the same company are viewed as independent and on equal footing.
This provides an opportunity for the charges to get inflated, thereby not comparable or realistic if the services were provided at market rates.
Further, it restricts government from raising the necessary revenues needed to deliver better services domestically, ultimately limiting its pool of resources needed for sustainable development.
Kenya has pursued a total of 48 DTAs since independence. At various stages these have been considered, negotiated, concluded, signed and enforced without having a DTA policy in place to guide their development in line the country’s interests or development objectives.
Subsequently, in recent times especially since the passage of Constitution of Kenya 2010 the country has engaged 14 DTAs which, sadly, give away more of Kenya’s taxing rights as compared to those negotiated prior to the new constitution.
This leaves Kenya at risk of haemorrhaging to illicit financial flows with the Kenya Revenue Authority (KRA) fighting to achieve targets with its hands tied behind its back.
Parliament should therefore seek cost benefit analysis and impact assessments for past, present and future DTAs from KRA.
This is in order to understand the amount of tax lost or gained for existing DTAs or those coming into force as a matter of urgent national interest for review and update in conformity with international standards.
The author is the Coordinator of the East African Tax and Governance Network (EATGN); Twitter: @lennwanyama Email: coordinator@eataxgovernance.net
