Kenya’s banking sector regulator Monday signed an information sharing pact with the Bank of Mauritius, which will see the two exchange records on financial institutions in both countries.
The agreement comes at a time when Kenyan commercial banks are increasingly interested in opening shop in the Indian Ocean island market known mostly for its low corporate taxes.
Mauritian companies pay corporate taxes of 15 per cent compared to Kenya’s 30 per cent.
The island has been viewed as a tax haven for companies intent on avoiding higher tax in other jurisdictions.
But the Mauritius Central Bank governor Rundeersing Bheenick denied that foreign investors, including Kenyan banks, wanted to enter the market because the country was a tax haven.
“We have reduced our tax rate from over 80 per cent to 15 per cent but that does not amount to being a tax haven. We are really not a tax haven as some may say,” said Mr Bheenick.
Kenyan tax authorities have in the past year or so become more aggressive in investigating companies that are avoiding tax through transfer pricing which reduces their tax bills.
But KRA has not given a figure of how much it has lost or recovered through transfer pricing.
Tax experts said that in 2009, for example, the government received Sh1.76 billion following audit of several multinationals with half the amount coming from one company.
In going to Mauritius, a Kenyan bank that could set up a holding company in Mauritius that would then enjoy lower taxes after transferring the profit earned elsewhere to the foreign-based subsidiary.
“A bank wanting to benefit from such an arrangement would have to set up a subsidiary as a holding company to which profits can be transferred and taxed at a lower rate,” said Mr Eric Mwangi, a tax advisor at Ernst & Young, tax and financial advisory firm.
He said that whereas some sectors enjoyed a 15-per cent tax rate, there were others that enjoyed an even lower tax rate as the country sought to attract investment in such sectors.
A Kenya Revenue Authority document described transfer pricing as a practice designed to “transfer profits to jurisdictions with lower or nil taxes or ones with weak enforcement or detection mechanisms.” CBK governor Njuguna Ndungu said the signing of the memorandum of understanding had been necessitated by the growing trend of cross-border activity as financial institutions are increasingly choosing to set up across borders.
“One Kenyan bank – I&M Bank – has already established a presence in Mauritius while other banks are also considering exploring opportunities in Mauritius. Similarly, banks from Mauritius have direct and indirect commercial relations with our Kenyan institutions,” said Prof Ndung’u.
Mr Bheenick said that tax rate had come down from 88 per cent years back to 15 per cent but stressed that this had no relationship with the country being a tax haven.
“Mauritius is not a tax haven at all. Yes, we have reduced tax rates from very high to a lower level of 15 per cent but this does not make the country a tax haven,” said Mr Bheenick when he spoke to journalists during the signing ceremony at CBK building Monday.
The MoU signed on Monday sets forth a statement of intent between the Bank of Mauritius and the CBK to establish a framework for mutual assistance, co-operation and the exchange of information in the fulfilment of the institutions’ respective supervisory responsibilities.