Trucks await clearance at the Mutukula border between Uganda and Tanzania. Companies with cross-border investments in EAC are taxed twice. PHOTO | FILE
What you need to know:
The agreement is expected to lower taxes and increase cross-border investments.
The initial deadline was July last year, but it was extended to November 2014 after all the EAC member countries failed to meet the timelines.
Currently, EAC governments tax income earned by investors both in the country where it is generated and in the country where the taxpayer originates, subjecting companies to the double taxation dilemma.
Uganda, Tanzania and Burundi are yet to secure internal approvals for the Double Taxation Agreement (DTA) to operate in East Africa, five years after the deal was struck. This has left companies with cross-border investments paying tax twice on their incomes.
The DTA among the EAC member states was signed on November 30, 2010, but there has been little progress in terms of fast-tracking internal approvals by member countries, including securing Cabinet or parliamentary sanctions to implement the pact. Countries must seek either Cabinet or parliamentary approval to adopt international treaties.
The initial deadline was July last year, but it was extended to November 2014 after all the EAC member countries failed to meet the timelines. The agreement is expected to lower taxes and increase cross-border investments.
“We expect everybody to be ready by now because that was the last deadline,” an official from Kenya’s National Treasury who did not want to be named said. Only Kenya and Rwanda are ready for the operationalisation of the agreement.
Kenya’s Principal Secretary in charge of East African Affairs John Konchellah said the two countries have deposited their internal consent documents with the EAC Secretariat and dismissed fears that there is lack of commitment from their regional counterparts.
“Basically there is a lot of goodwill on the integration of the EAC because it is in the interest of everybody that we go in that direction,” Mr Konchella told The EastAfrican last week.
Currently, EAC governments tax income earned by investors both in the country where it is generated and in the country where the taxpayer originates, subjecting companies to the double taxation dilemma.
Tax experts say the delay in the implementation of the EAC DTA will discourage cross-border investments, negatively affect economic growth rates and undermine the gains from regional integration.
“On EA tax treaties, we have been waiting for as long as I can remember. Not having a treaty means that a business can be taxed on the same income in more than one country in the region,” said Nikhil Hira, a tax partner at Deloitte & Touche East Africa. “For example in Kenya, if we don’t have a treaty with a country then any withholding tax deducted on invoices to another country is not recoverable in Kenya, we are effectively subjecting the income to double taxation.”
Kenya is the biggest investor in Tanzania, while Uganda is Kenya’s biggest trading partner. Uganda is also Rwanda’s biggest trading partner.
Endorsing the agreement is expected to save companies millions of dollars in tax and provide greater incentives for cross-border investments. According to the National Treasury, Kenya has negotiated rates of between 10 per cent and 12.5 per cent under the DTAs with its counterparts.
The rates are charged on interest, dividends and royalties, including management and technical fees earned by investors.
“We have very many double taxation agreements with several countries. We sign these agreements depending on the value and market rates,” said Henry Rotich, Kenya’s Cabinet Secretary in-charge of the National Treasury.
To date, the Kenyan government has signed some 18 DTAs with a number of nations of which nine are active, according to data from the National Treasury.
DTAs that are already effective include those signed with the UK, Sweden, India, Denmark, Norway, Zambia, France, Germany and Canada.
DTAs signed by the Kenyan government but not yet been approved and gazetted are with the United Arab Emirates, Seychelles, Qatar and Korea, while those concluded by the Kenyan government but awaiting the go-ahead from their counterparts are with South Africa, Iran, EAC and Mauritius.
However, a dispute with a lobby group, Tax Justice Network Africa (TJN-A), over the rates agreed with Mauritius has stalled the implementation of the agreement.
Sources from the National Treasury said that the two countries had agreed on a tax rate of 10 per cent from the initial proposal of 15 per cent.
As a result, TJN-A filed a suit in court arguing the agreement would lead to the erosion of Kenya’s tax revenues. The double tax avoidance agreement between the two countries was signed in May, 2012.
