East Africa dithers over the Double Taxation Agreement, loses investment
The failure to ratify the treaty is seen as one of the biggest non-tariff barriers to growing cross-border trade and investment. Illustration | TEA graphic
What you need to know:
DTAs prevent the application of discriminatory tax treatments of one state to nationals or residents of the other state under certain situations, for example, in cases of a permanent establishment belonging to or enterprises owned by those nationals or residents, as well as on deductibility for tax of certain expenses paid to those nationals or residents.
DTAs may constitute the legal basis for co-operation between contracting states to prevent tax evasion by providing a platform for exchange of information or enforcement of the domestic laws of the contracting states.
Only Rwanda has ratified the agreement while the other four member states — Burundi, Kenya, Uganda and Tanzania— have not adopted it.
East African businesses are losing billions of shillings in taxes due to a failure by regional countries to ratify the EAC Double Taxation Agreement (DTA). The agreement was expected to lower taxes and increase cross-border investments.
Though the EAC Council of Ministers approved the Community’s double taxation treaty in 2010, only Rwanda has ratified the agreement while the other four member states — Burundi, Kenya, Uganda and Tanzania— have not adopted it. The treaty needs to be ratified by all countries to become operational.
Normally, countries must seek either Cabinet or parliamentary approval to adopt international treaties. Burundi’s Cabinet has approved the treaty, though the country’s parliament has not ratified it.
The failure to ratify the treaty is seen as one of the biggest non-tariff barriers to growing cross-border trade and investment and one that continues to limit the region’s attractiveness to investors. For investors, being taxed in two jurisdictions — their home country and the country in which a fund ultimately invests — it is a big turn-off.
Ordinarily, countries would push to negotiate tax treaties with major trading partners to avoid cross-border investors being taxed twice on their income and to maximise investment between them.
Kenya is the biggest investor in Tanzania, while Uganda is Kenya’s biggest trading partner. Uganda is also Rwanda’s biggest trading partner. Ratifying the agreement could save companies millions of dollars in tax and provide greater incentives for cross-border investments.
“Ratifying the region’s DTA would help companies operating in the region to reduce their effective and overall taxes, freeing more cash for investments,” said Chris Kirathe, associate tax director at Ernst&Young.
Experts say governments are resisting the idea of signing the DTA for fear that they may lose revenues with some countries pushing to renegotiate contracts that they feel are skewed. Rwanda has already re-negotiated its DTA with Mauritius.
“I think there is fear of revenue loss among EAC partner states. But it is our expectation that implementation of this agreement will increase cross-border businesses and investment — which, in the long run, will even increase employment as well as domestic revenue,” said Adrian Njau, a trade economist at the East Africa Business Council, the regional trade lobby.
While Uganda is yet to ratify the East African Community DTA largely because of red tape, growing concerns about misuse of these arrangements for concealment of profits by multinationals and scarcity of research on their benefits and disadvantages has created uncertainty over their economic impact.
Government officials who spoke to The EastAfrican revealed that delays in the ratification process encountered between Uganda’s Foreign Affairs Ministry, Finance Ministry and parliament have held back endorsement of the EAC DTA in recent months with limited hopes of a breakthrough during the current financial year.
“Uganda signed the EAC Double Taxation Treaty but is yet to ratify it through relevant local organs including parliament. Besides that, the government is reluctant to sign more DTAs until certain conditions that help minimise tax avoidance and profit shifting are fulfilled.
For instance, many companies originating from the Middle East have exploited Uganda’s DTA with Mauritius to avoid taxes under the cover of resident persons,” explained Ali Sekatawa, legal services manager at the Uganda Revenue Authority.
But the structuring of the EAC’s DTA is also seen as a disincentive to the signing of the agreement.
“Procedural matters have delayed ratification of the EAC Double Taxation Treaty. The Community also needs a model DTA that will make it easier to enter into new tax treaties with foreign countries in future. However, DTAs have lost some of their relevance of late, due to increased sharing tax information among countries,” noted Moses Ogwapus, Assistant Commissioner for Tax Policy in Uganda’s Finance Ministry.
“I also believe contradictions between the EAC Double Taxation Agreement and existing country level DTAs may be causing delays in ratifying the former,” observed Moses Ogwal, director for policy and advocacy at the Private Sector Foundation of Uganda, an umbrella body of local commercial interest groups.
When the EAC double taxation treaty comes into force, EAC partner states that are not supposed to offer more favourable treatment to third parties (countries that are not members of EAC) than what is offered to other EAC partner states.
But even as the EAC member states delay in ratifying the Community’s DTA, they signed the similar treaties with countries outside the bloc. For example, in May, Kenya signed a DTA with Mauritius, while early this year it signed a similar deal with Qatar and Nigeria.
Complex financial structures
The delay in ratifying the tax protocol has forced businesses in the region to spend time and money on creating complex financial structures, often involving holding companies in countries with bilateral tax agreements like Mauritius.
For example, Kenyan companies in the investment and financial sectors are increasingly registering subsidiaries in Mauritius. The tax treaty will provide a conducive environment for investment into Kenya using Mauritius as a platform.
“The tax rates for dividends, interest, royalties and treatment of capital gains are beneficial for Mauritius resident companies investing in Kenya. This treaty will further consolidate Mauritius as a jurisdiction of choice for trade and investing into Africa. Multinationals seeking to invest in Kenya now have an attractive jurisdiction to consider... for investment into East Africa. Mauritius now becomes a favourite, especially given its double taxation agreements with Rwanda,” said consulting firm KPMG in their assessment of the agreement.
