Take care as you ink double taxation deals

A most perturbing government initiatives is the pursuit of double taxation agreements (DTAs) without an implementation policy.

This leaves the country exposed to the risk of having its domestic revenue mobilisation efforts undermined by illicit financial flows, especially when negotiated with known tax havens.

Recently, the National Treasury asked for public submissions on a DTA with Singapore and has been actively working to operationalise another with Mauritius that had been held up by a court case filed by Tax Justice Network Africa (TJNA).

According to the Corporate Tax Haven Index, Singapore and Mauritius are among the top 20 most secretive, aggressive and extensive jurisdictions that help multinationals escape paying taxes, eroding revenue collection measures in other countries.

Also called double taxation treaties (DTTs) or double taxation avoidance agreements (DTAAs), DTAs are international bilateral deals that aim at determining taxation rights between multiple jurisdictions. They aim at the sharing of tax information between jurisdictions and promote foreign direct investments by eliminating double taxation.

Slowing economic growth

Double taxation, or imposition of tax on the same income by multiple jurisdictions, is perceived to hamper international trade by dampening FDI and slowing economic growth. But while DTAs are expected to be good trade instruments in the short term, the secrecy and opacity associated with their negotiation, and linkages to tax havens, aids money laundering and other illegal activities that harm national and global economies in the long term.

DTAs may also serve as a channel for tax avoidance. This may not be illegal but it is considered immoral based on the impact of undermining domestic revenue mobilisation and self-sufficiency. The dangerous consequences of DTAs is seen in a recent report by Finance Uncovered and the Daily Nation on how sports betting giant SportPesa may have evaded its Kenyan tax obligations by ‘shifting’ profits to the United Kingdom. UK subsidiary SPS Sportsoft transferred £42 million (Sh5.8 billion) from Pevans East Africa as payment for “IT and services”.

This overcharge denied the government an opportunity to accurately tax the company on account of an existing 43-year-old DTA with Britain.

Such loopholes are an abuse of the “arm’s length principle” (ALP), which contends that even as entities within the same company, a transaction of parties considered subsidiaries of a company are viewed as independent and on equal footing. This provides an opportunity for charges to get inflated and restricts the government from raising revenue.

Kenya has pursued 48 DTAs since Independence, 14 of them in recent times, especially after the 2010 Constitution.

Parliament should seek a cost benefit analysis and impact assessments for past, present and future DTAs from Kenya Revenue Authority to understand the amount of tax lost or gained.

Mr Wanyama is the coordinator, East African Tax and Governance Network (EATGN). [email protected] @lennwanyama