(PHOTO CREDITS: Courtesy NATION)
Julians Amboko of NTV Business Redefined hosted Alvin Mosioma, Executive Director of Tax Justice Network Africa (TJNA), and Lena Onyango, an advocate and specialist on tax matters, to discuss the Kenyan Double Taxation Agreements with Barbados and Singapore.
JULIANS AMBOKO: Tonight, we are focusing on the pertinent subject of double taxation treaties.
Double Tax Treaties are agreements reached between tourist jurisdictions rather allocating tax rights and ensuring there is no imposition of tax on the same income by multiple jurisdictions.
Such treaties seek to catalyse trade and investment flows between two jurisdictions.
This notwithstanding the treaties are open to manipulation through practices such as treaty shopping by briefcase companies.
Kenya is currently pursuing double tax treaties with Singapore and Barbados and tonight, we’ll take a deep dive into this with Alvin Mosioma who is the Executive Director at the Tax Justice Network Africa and Lena Onyango, who is an advocate and specialist on tax matters.
Welcome on set and just to kick it off, Alvin, I was reading the TJNA analysis on this matter.
The title is Trick or Treaty, why is this the case?
ALVIN MOSIOMA: Well as you rightly said in the beginning, really, the purpose of double tax agreements is to help ensure that companies are not being taxed twice.
On one side where they’re registered and on the other side where they’re doing their business operations, but what our researchers have shown is that many a times these double tax agreements result to double (non) taxation so the companies find tricks to basically beat the system and shift profits away from the jurisdictions where they’re operating.
Therefore, we have been very critical about particularly the double tax agreements that are being negotiated and signed with these jurisdictions that are g considered as e tax havens.
AMBOKO: Alright, and crossing over to Lena clearly there is an issue of merit and demerits here, from your assessment, what do you think outweighs the other in this case?
LENA ONYANGO: Coming from a government and private sector perspective, the whole idea of double tax treaties as you have correctly defined, is to avoid instances where either a person is taxed twice or the same income is taxed twice in different jurisdictions .
Now the advantage, and I believe the whole intention, of a double tax treaty is to foster trade between contracting entities which are between two party states.
Over and above fostering trade, they encourage foreign direct investment from foreign jurisdictions into Kenya.
The reason being if they’re pumping money into the Kenyan economy, they will not [like to] be taxed both in Kenya and their jurisdiction of the residence of the holding company or their parent company.
From a business perspective, I think double tax treaties open avenues that were probably not there and it does not necessarily come across for goods [alone], it also cuts across the service sector so double tax treaties are favourable and are actually a good move by the government in terms of trying to widen the tax treaty network in Kenya.
AMBOKO: Coming back to you, Alvin we have a precedent in this country where not too far back, the double taxation treaty with Mauritius was nullified by the high court thanks to your organisation.
Why is this the case and are we in trouble again with what we are pursuing right now with Singapore and Barbados?
MOSIOMA: Yes, we are most likely to be in trouble again. The case we filed in court against the Kenya-Mauritius double tax agreement was really built on two foundations.
One, we were making an argument that the due process of the law was not followed.
There is a very clear laid out procedure in terms of what governments should be doing when they are negotiating and signing double tax agreements.
Some of these provisions, for example, in the new constitution [stipulates] that: parliament needs to be involved in the ratification process; there should be measures for public participation; the government needs to ensure that they are conducting sufficient cost-benefit analysis in order to argue and say [any] treaty with a particular country make sense.
In the case of Mauritius, we were convinced, and the court saw it right, that this (procedure used in negotiating and signing the Mauritius double tax agreements) was not the case. We [argued] and indeed we were right that the treaty with Mauritius was opening up the country for significant resource leakage both through the different avenues of abuse be it treaty shopping, transfer mispricing, or round tripping where you find Kenyan entities moving off to Mauritius to take advantage of particular provisions in that particular treaty.
In the case of Singapore and Barbados, we are very critical of this and we have also made our submissions to the government on the technical aspects.
[Nonetheless,] I also would like to add that we commend the Kenyan government in this instance in terms of at least going out of its way with these particular treaties to consult the public.This is really, to my knowledge, the very first time that the government has taken the step to collect views from the public in terms of what do they feel about this particular treaty.
Nevertheless, in essence, I think my real question is why Barbados? I mean a country which has got about 300,000 people or why Singapore? Which is ranked as number six as one of the most secretive and one of the largest tax havens in the world.
Why these jurisdictions?
This is especially critical in the context of Kenya committing to the African (Continental) Free Trade Area.
We should be looking at focusing on signing double tax agreement with jurisdictions that we’re actually doing business with like Uganda, in the East African Community (EAC) and others.
I think this should be having more priority than focusing on jurisdictions that are largely tax havens which are in my sense are very open to abuse.
AMBOKO: But Alvin just to be fair to the government and as I bring in Lena on this point we might not know much about Barbados in terms of the trade volumes because of scarcity of data but we do know something about Singapore.
I mean exports worth about KES 2 billion, imports about KES 6.8 billion, over the last two years. We’ve seen an increasing partnership between Kenya and Singapore in terms of data transfer as well as investment flows. Clearly there seems to be a case here for an agreement with Singapore.
Lena what are your thoughts on this?
ONYANGO: Amboko I agree with you on that.
There has been a substantial increase in investments from Singapore to Kenya that I’m personally aware of [business] now doing affordable housing projects in Kenya.
I think let’s not paint DTAs to be a bad thing in the sense that we cannot pick on a country like Barbados just by virtue of having a population of about 300,000 vis a vis the Kenyan population but I believe between Kenya and Barbados there are certain trade activities, and correct me if I’m wrong but I understand that the key intention of the government entering into a DTA with Barbados was to drive the financial services sector.
The government is really keen on having Kenyan financial institutions setting up and operating with Barbados and that creates also bigger opportunities from a Kenyan perspective.
So the DTAs [should not be perceived as working] against Kenya but I’m also looking at it from the perspective that it has opened doors for Kenyan institutions to set up in other jurisdictions and therefore we’re growing our economy and of course the Barbados economy benefits as well.
AMBOKO: Alright and I’m sure Alvin you have a rebuttal to that but even before we get into that just to throw something at you.
I was reading the critique of the TJNA around this whole issue and one of the issues you raised and recommendations really tabling is the matter of limitations of benefits.
To the best of my understanding this is catered for when you read the income tax act Section 41 clearly spelling out this issue.
If you consider that all these tax treaties are coming post January 2015, when the income tax act rather came into force, don’t you think this matter is addressed?
MOSIOMA: Okay I’ll respond to that later but let me first address the question of investment through Singapore, the one you listed earlier about investments that are being channelled through Singapore and Mauritius.
What you note is that in real terms many of these jurisdictions that are considered tax havens have positioned themselves globally, and have designed their domestic tax laws deliberately as conduit hubs.
So in essence what I’m saying is that it’s not rich Barbadians that will be channelling their investments to Kenya, it’s not Singaporean entities that will be channelling their investments in Kenya but most likely you would find is Chinese investments, American investments, German investments.
We have seen there is evidence for example in the last expose of the Paradise Papers where you found a treaty that had been signed between Senegal and Mauritius.
Canadian companies were using that as an avenue to move to Mauritius, set up base there and then use it to come into Senegal as a Mauritian entity.
This is what we are literally seeing and this likely what’s going to happen when you have these treaties being signed with these jurisdictions, when they themselves don’t have substantive economic muscle but are positioning themselves as conduit countries to channel investment.
If you look at Mauritius, it is really marketing itself globally as the so-called gateway into the continent which in my own sense is not really a gateway but providing a getaway car for tax planning and tax avoidance.
To the second question you raise about limitation of benefits, in principle yes, a limitation of benefits can act as a very good instrument to be able to prevent tax abuse in a treaty network.
However, this only applies in cases where the substantive investment is coming from that particular jurisdiction.
For example if you were to have a situation where Kenya is signing a treaty with Germany and the investments are being channelled directly from Germany, as it were foreign direct means coming directly from that particular country, then the limitations of benefit would work.
Yet when you have the situations where the treaty that is being negotiated and being signed is with a jurisdiction that is being considered a tax haven we must take note that tax havens really provide two things, Julians, tax havens provide secrecy and they provide low taxation.
They provide incentives that encourage companies to use those jurisdictions as conduits for channelling investments into other jurisdictions and taking advantage of the particular provisions of those double tax agreements.
So, in essence we are not against double tax agreements per say, actually we have been campaigning and pushing for the Kenyan government to encourage the colleagues in Tanzania to sign the East Africa Double Tax Agreement.
I think that in the context of the Africa Continental Free Trade Area (AfCFTA) we feel that the Kenyan government should encourage a broader treaty network because true it creates an enabling environment for investment but we are critical of treaties that are being signed by jurisdictions that are considered tax havens.
This is the case with Singapore, and it is also the case with Barbados.
(3 MINUTES BREAK)
JULIANS AMBOKO: Welcome back to business redefined.
Tonight, we are focusing on the issue of double taxation treaties between Kenya and other jurisdictions particularly the pursuit of such treaties with Singapore and Barbados.
On set I have Alvin Mosioma from the TJNA and Lena Onyango who is a tax analyst and also legal professional focusing on the subject.
Before the break we were discussing several issues including some of the challenges which were presented as well as opportunities.
Lena, on the issue of Singapore and Barbados being perceived as tax havens and could lead to revenue seepage, many are curious to know to what degree would the Foreign Account Tax Compliance Act (FACTA) which has been enforced in the United States play a role in terms of disclosure of some of these ventures where a lot of concern is coming about?
What could this translate into for a country like Kenya?
LENA ONYANGO: Amboko, FATCA is the US mechanism for getting financial information about its residents in other jurisdictions.
It is similar to the EU Savings Trade that they call EU-STD. Meanwhile Kenya has signed up to the automatic exchange of information a project that has been driven by the OECD and the G20.
Basically, the meaning, or the effect of this is that financial information between different countries will now be automatically exchanged annually between the revenue authorities.
If you look up the double tax treaties for both Barbados and Singapore, they provide for exchange of information.
Moreover, with Kenya being a signatory to the automatic exchange information mechanism then that means that if there is any person who moves money from Kenya to a financial institution which could be a bank or a broker either in Singapore or Barbados then that information would be relayed to the KRA.
KRA will therefore be able to compare what declaration the taxpayer has made in Kenya vi-a-vis the information that they have obtained and will be able to carry out investigations on that.
So, I’m not really worried about the DTAs between Singapore and Barbados in so far as illicit financial flows is concerned reason being [that Kenya is obligated are over and above them [thanks to being a] signatory to the automatic exchange of information.
This is required for companies that have cross border transactions, meaning, if a Kenyan company trades with a Singaporean company or a company based in Barbados there will be a transfer pricing policy, that KRA approves after it is shared with them.
This ensures that whatever inter-company transactions take place, the price at which those transactions are charged then will have to be based under the arm’s length principle.
This means that they have to be reasonably priced and I believe Alvin can confirm that in the case of illicit financial flows about 80% of it is through transfer mispricing.
So [with these measures] I feel that as a country [if we utilise the existing legislation to tackle] the concept of transfer pricing legislation [together with] automatic exchange of information then don’t think we should be worried about the issue of illicit profits transfers from Kenya.
AMBOKO: Alright Alvin I mean clearly Lena and I seem to be on the same page. We don’t seem too bothered as far as this issue of illicit flows is concerned, even the provisions of FATCA, what’s your take on this matter?
ALVIN MOSIOMA: Well I first I agree with Lena that transfer mispricing, as it were, is the largest avenue for resource leakage for the phenomena of illicit financial flows.
What we note is that countries either don’t have the capacity across the continent or they don’t have sufficient laws in place to be able to address the challenges that are related to transfer mispricing
Above all that if you really look at the concept of transfer mispricing, today we live in a world where over 80% of transactions) through intellectual property, through online transactions, the Uber’s, the two trillion dollar Amazon which is really doing transactions online the question of transfer pricing becomes really difficult to tackle.
This because there’s no real market value for particular services and there’s no particular brand value. What is the price of what Google as a product or as a brand? What is the market value?
So, it becomes really difficult to tackle that question of transfer mispricing because of the global shift we are seeing towards trade in services as opposed to trade in goods.
On the question of automatic exchange of information here I would like to differ because what you note is that the framework of automatic exchange of information was a setup to [only really] tackle tax evasion.
[If you look at] the terms of how it is framed in the founding documents they are talking about tax jurisdictions, and administration(s) exchanging information to be able to fight the illegal tax evasion.For tax avoidance, therefore, I don’t believe that automatic exchange of information is the appropriate tool to address this kind of profit shifting.
Here I would recommend the country by country reporting which I think has been a provision whose conversation has been started under the OECD.
However, what we are seeing is that that thresholds that have been put for companies to be able to report on the country by country basis are too high to be useful for developing countries particularly and more importantly in Africa.
So, yes, though I think that automatic exchange of information in double tax agreement are important in determining transfer pricing relations that are being put in place; I still believe that there are significant loopholes open to abuse.
Ultimately in the efforts for countries to generate more revenue these double tax agreements are more bad than they’re good for the country.
AMBOKO: Still within the context of exchange of information and of course the transparency within which this will take place, Lena looking at this within the context of the conventional mutual administrative assistance agreement, do you feel we have another safeguard as far as that is concerned regarding the concerns being raised by Alvin?
ONYANGO: I think you cannot take a one-way approach; we have the DTA’s, whose transfer pricing the guidelines in Kenya which are enforced in the country.
Over and above that Kenya has signed up to the automatic exchange of information this is now, of course, the common reporting standard together with the [OECD] framework around it.
So if you also look at the development in terms of legislation, the commissioner now has a right, if [it is deemed] that a tax payer has just made an arrangement for purposes of avoiding tax, to initiate the penalties that are double the tax that would have otherwise been paid.
To build up on that if, even on a domestic front, there are these punitive measures that have not been [utilised yet] to discourage this kind of arrangement, then I this this is a good reason why I believe the that provision iss sort of good,
It is [also] not a blanket provision for abuse by the commissioner if you, Amboko, probably shifted 100 million to Barbados then you’ll be automatically [liable] to pay double the tax, [because it must seek out] what was the intention [of the transfer]?
It must ask, what was the commercial benefit that you were going for, thinking about or wanted to obtain by investing in that other country.
For us in the legal front we have also noticed this a shift in decisions of the court especially in the UK [that in as much as tax avoidance is legal, it becomes an abuse of treaty if you plan your affairs without a valid commercial perspective or without having a commercial justification for it}.
So, there must be a definite need for commercial justification when taxpayers are making these kinds of arrangements.
AMBOKO: [….]
Meanwhile, there is a gentleman asking why Alvin has evaded the question on the limitations of benefits. Does it apply to all transactions in a DTA irrespective of FDI coming in or not, what’s your take on this Alvin?
MOSIOMA: So as I said earlier, limitations of benefit provisions are effective in situations where the investments are directly coming from the country of origin, the country where those investments are coming from and not a conduit country.
In a situation where, as I said earlier, with a particular focus on tax havens what you find is that the investments are channelled from country A through country B before they land in country C and that [is clear from the] example I gave of the Paradise Papers expose of mining companies.
We even had the case in Uganda of an oil company that was using Mauritius as a conduit to invest into there, yet the company actually came from the UK.
So, in situations like that when you find that the domestic law of these tax havens is designed in a way that it encourages companies from the investing countries to use them as a conduit to invest in other countries that is when limitations of benefits becomes ineffective in my own opinion.
AMBOKO: Okay, I have just about a minute to go Lena very quickly your closing remarks
ONYANGO: Just to close Amboko first thank you for this opportunity, I’m really happy that as a country we are having this conversation.
I feel that there’s not much awareness around the effects of double tax agreements and as Alvin has stated, the whole idea of public participation should not just be limited to stakeholders.
Secondly, parliament should also be involved; members of the public should also be more proactive because these are decisions and agreements that are going to have an impact on them one way or the other.
So my parting shot is just to say I feel Kenyans need to be more proactive on some of these things and with the tax justice network and the KRA. I feel a lot of awareness needs to be raised over the impact of such kind of agreements.
AMBOKO: Okay, Alvin very briefly your closing remarks.
MOSIOMA: I fully agree with the final remarks from Lena.
I think that there’s really need for more public participation in this process because ultimately it is about where the money that is financing development is going to come from.
What we see across Africa and even in the case of Kenya is that there’s a huge shift of the taxation burden to low income earners while those that are in the top categories are getting away with it because they have found ways of playing with the law and finding loopholes particularly in the double tax agreements to shift their profits and minimise their tax obligations.
It is for this reason that we feel that public participation in the tax formulation processes is very instrumental and that’s the work that TJNA was established to do.
AMBOKO: Alright, and those comments by Alvin take us to the close of Business Redefined.
The following conversation was edited for repetition, proper grammar, and improved meaning for purposes of clarity.
