Companies that get mixed up in such a tax avoidance scheme--which unlike tax evasion is not necessarily illegal--explain that the different companies involved in the project are not related.
Kenya has ratified a key global treaty that tightens the noose on multinationals that have devised complex cross-border tax avoidance strategies.
The Organisation for Economic Co-operation and Development (OECD) confirmed that Kenya officially ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Beps Convention), which helps governments to seal loopholes for abuse.
“Today, Kenya deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Beps Convention), underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (Beps) by multinational enterprises,” said the OECD in a statement published on Wednesday.
DTAs are bilateral agreements between two countries that assign taxing rights over income between the pair thereby preventing double taxation of income. The core objective of DTAs is to prevent and or eliminate avoidance and evasion of taxes on income and capital by both individuals and companies particularly, multinationals.
The DTAs are negotiated through lengthy processes and guided by standard texts under the UN and the OECD models and follow a win-win or give-and-take approach.
They offer low tax rates, encourage individuals and corporations operating in foreign jurisdictions to comply. There has, however, been a concern about the abuse of DTAs by some multinationals in various forms.
For example, some firms abuse profit fragmentation of income to dodge tax.
This is a scenario where a multinational with a project in Kenya, for instance, passes on its ownership to another firm just before the lapse of the six months required for a company to be deemed to have a permanent residence in the country and thus expected to pay income tax.
Companies that get mixed up in such a tax avoidance scheme--which unlike tax evasion is not necessarily illegal--explain that the different companies involved in the project are not related.
However, the government has seen this as a tax planning strategy devised to avoid paying taxes.
Kenya has since put in place anti-fragmentation rules that look at the duration of the project and not the company’s length of stay in the country.
Another tax avoidance trick that has been used to abuse bilateral tax treaties is treaty shopping.
With treaty shopping a company that is not a resident of either of the two countries in a treaty finds a way to benefit from the tax incentive. Beps Convention empowers Kenya to tax such a company.
