Treasury permanent secretary Kamau Thugge has held in court that a treaty shielding Mauritian firms from normal taxation rates was signed to attract investors to Kenya.
Mr Thugge says, in response to a suit filed by a lobby, that the tax treaty signed in 2012 will lower levies for Mauritian firms doing business in Kenya but only for five years.
The Tax Justice Network-Africa (TJN-A) has sued the Kenya Revenue Authority, the Treasury and Attorney General Githu Muigai in a bid to quash the Double Taxation Avoidance Agreement which it says will deny Kenya billions of shillings in revenue.
The lobby says unscrupulous parties can manipulated the terms of the treaty to evade taxation by the KRA.
“Countries negotiate these agreements with the sole intention of attracting investors. The purpose and intent of the agreement will be defeated in the event that it confers similar or higher (tax) rates that are in the statute books of the two countries,” Mr Thugge says.
The DTAA allows firms registered in the two countries to pay taxes in only one country.
It also allows Mauritian companies owning at least a tenth of a Kenyan firm to pay withholding tax on dividends of only five per cent instead of the 10 per cent that applies to companies from other countries.
In addition, the withholding tax on interest was reduced from 15 per cent to 10 per cent for Mauritian firms doing business in Kenya. A company registered on the island only cedes 10 per cent of royalties to the Treasury as per the treaty, down from 20 per cent.
Mr Thugge has denied allegations by the TJN-A that the treaty will see the government waive taxes on insurance commissions and management fees, arguing that there are guidelines to levy Mauritian firms on the same services.
Kenyan firms part with 20 per cent of monies earned from insurance commissions and management fees.
“The taxing of services and management which the petitioner has alleged is at 0 per cent was cleverly inserted into the agreement,” Mr Thugge adds.