Kenya revises double taxation agreement to attract investors
President Uhuru Kenyatta with Indian Prime Minister Narendra Modi. FILE PHOTO | AFP
What you need to know:
No EAC deal
Six years ago, the EAC Heads of State Summit agreed to remove double taxation for investors whose companies operate in two or more member countries, but only Kenya and Rwanda ratified the agreement.
A functioning DTA would see firms now paying corporate, personal and withholding taxes only once on any portion of their annual incomes derived from their operations across the region.
Kenya has reviewed its double taxation agreement (DTA) with India in a bid to attract more foreign direct investment, especially in the construction, technology, telecommunications, software, automotive and pharmaceuticals sectors.
The revised DTA was ratified two weeks ago during a state visit by India’s Prime Minister Narendra Modi to Nairobi: It largely incorporates amendments on income and corporate tax provisions for businesses operating in the two countries.
Besides India, Kenya has DTAs with Zambia, France, the UK, Germany, Canada, Denmark, Norway, Sweden, South Africa and Mauritius.
Under the DTAs, a firm or its subsidiary that has paid taxes in the country of operation cannot be asked to pay levies of a similar nature for proceeds repatriated home.
Kenya signed its first agreement with India in 1985, but it was ratified only in 1989, offering an income tax relief for businesses with jurisdictions in those two countries.
The agreement was first reviewed in November 2006, but the review had not been ratified.
KRA Deputy Commissioner for Domestic Taxes James Ojee said that the changing business environment between the two countries in the past two decades meant that the double taxation agreements were no longer effective.
“We have seen a lot of changes in the business arena. There has been an upsurge in telecommunications and technology growth, and we had to revise these agreements in order to capture the changes,” Mr Ojee said, adding that the taxman is also seeking DTAs with improved terms in order to seal tax loopholes.
The EastAfrican has learnt that the revised agreement also took into consideration a joint bilateral investment treaty that Kenya and India signed, which will offer tax incentives to businesses operating across the two countries.
“India has recently revised its 1995 bilateral investment treaty, which demands that it revise the 80 tax and investment treaties it has with other countries. This is one of the contents of the revised agreement that saw concessions on both income and corporate tax agreed between the two countries,” a diplomatic source with knowledge of the agreement told The EastAfrican.
Over the past decade, India’s construction, technology, telecommunications, software, automotive and pharmaceuticals sectors have grown significantly.
In March, Kenya’s Treasury Cabinet Secretary Henry Rotich signed a revised DTA with Italy. He said the agreements were meant to ease business processes and encourage investments.
“We have signed several agreements with partner countries but have not ratified most of them because of outstanding issues. It is my hope that the eventual ratification will bring into force the convention on avoidance of double taxation with these countries,” Mr Rotich said.
DTAs signed by Kenya that are awaiting ratification include one with Turkey signed last month, and another with Italy. The EAC has yet to ratify treaties with Burundi, Uganda and Tanzania.
“We need to sign more DTAs with other countries because it has been a major cost for firms having to pay tax in more than one jurisdiction. Within the region, we do not even have a single DTA with partner countries under EAC. This is costing us,” said Charles Kahuthu, the secretary of the East Africa Chamber of Commerce and Industry.
Esther Wahome, a tax manager with Deloitte East Africa, said the 2014 provision introduced in the Income Tax Act limits the benefits from the DTA.
The provision provides that the benefits under a DTA in respect to exemption from tax, exclusion of an item from tax or reduction of the tax rate, will only be available to a person in the other contracting state where 50 per cent or more of the underlying ownership (direct and indirect) of that company is held by an individual who is resident in that other state except companies listed on the stock exchange of that country.
“The provision negates the essence of such agreements because, in most cases, companies form subsidiaries in different countries with at least more than 50 per cent owned by the parent company. This means that such subsidiaries will not benefit from such DTA agreements,” Ms Wahome said.
