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Will new suit spoil party for blue chip companies registered in Mauritius?

By Moses Michira | October 21st 2014 at 00:00:00 GMT +0300

Will new suit spoil party for blue chip companies registered in Mauritius?
Kenya Revenue Authority Commissioner General John Njiraini.

Kenya has signed a tax treaty with Mauritius, the tiny Indian Ocean island State with a population of 1.3 million, which its critics claim could severely undermine the Government’s revenues.

Ramifications of the treaty on the ordinary mwananchi would be dire, warns a tax NGO - Tax Justice Network Africa (TJN-A) - in a suit it plans to file in court any time now opposing the agreement.

According to suit papers seen by Business Beat, the deal would prompt a slump in tax that the Kenya Revenue Authority (KRA) can collect from firms and business people with operations in both Kenya and Mauritius.

They claim that this would increase the tax burden on ordinary citizens whose expenses, unlike companies, are not deductible for taxation purposes. A salaried worker who earns Sh60,000 a month, for instance, pays Sh13,094 as income tax, before factoring in any of his expenses like bus fare or rent. A uniform personal relief of Sh1,162 would be the only reprieve for the typical Kenyan worker. A corporation on the other hand only pays income tax on net profits.

Manipulate accounting

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It gets worse for a company that has operations in several countries, in this case Mauritius, since the company can manipulate accounting procedures to determine how much profit it makes, and in which country the earnings would be reported.

“It is a unique and unprecedented case in many ways because it has been very rare that Government policies with regard to economics, and specifically taxation, have gone to court, but the principles of public finance accountability are now enshrined in Kenya’s Constitution under Article 201, which sets out the principles of public finance management and expenditure of public finances bringing in the principle of accountability,” said lawyer Gitobu Imanyara acting for the TJN-A.

“Where policies are shown to be unsustainable, they are contrary to specific provisions of the Constitution and the High Court of Kenya has jurisdiction to intervene to ensure that those policies that cannot meet the criteria of public sustainability of economy are stopped,” he said.

OpenCorporates, an online tool for tracking companies in different jurisdictions, puts the tally of registered companies in Mauritius at 133,363, working out to an average of one corporate entity for every 10 people including children.

In acreage, it is smaller than Kiambu County. Attractive taxation has attracted most of these firms, which include Bharti Airtel that is the holding company for various firms including Kenya’s Airtel.

TJN-A has raised 10 objections against the treaty in the suit that will be mentioned early next month. KRA, the society argues in a litany of claims on its petition, will be barred from taxing ‘other income’ reported by companies. “Article 20 reserves all taxation of “other income” not dealt with in specific articles to the residence State effectively reducing withholding tax to ‘zero per cent” on services, management fees, insurance commissions etc.

Whereas Kenya’s domestic withholding tax rate currently stands at 20 per cent resulting in the potential loss of tax revenue from ‘other revenue’ and therefore breaching the principle of good governance, integrity, transparency and accountability,” says TJN-A.

Withholding tax on services such as management fees and commissions is subject to zero taxation in Mauritius, but is 20 per cent in Kenya. The difference on the absolute tax rate alone might not mean much, till you look at the financial reporting of major multinationals operating in Kenya.

Many multinational firms, including some listed on the Nairobi Securities Exchange, pay billions in management and others fees to their parent and or sister companies abroad.

The tax loophole offers a window for companies to cut on their operational costs and there is nothing illegal in applying this strategy. It is upon the Government to seal the anomaly to maxise on revenue collection.

East Africa Breweries Limited, for instance, spent Sh3 billion on management fees last year, up 50 per cent from the previous year, which it paid to its parent company Diageo according to its audited 2012/2013 financial statement.

Some are the subject of ongoing arbitration and civil cases in court. According to court documents, Bamburi is challenging a Sh1 billion tax demand by KRA, which partly arises from a Sh1 million-a-day consultancy fee charge it pays to its South African parent Lafarge SA, that has a controlling 58.3 per cent stake.

Bamburi’s gross turnover in 2013 was Sh33.9 billion and it has an agreement to pay 2 per cent of its net revenue to its French parent firm Lafarge. Though Executive Director Alvin Mosioma, TJN-A has also raised questions on the suitability and applicability of capital gains under the treaty.

A Mauritius company, holding at least one-tenth of the capital of a Kenyan company, will be subject to only five per cent withholding tax on dividends instead of 10 per cent, which is the current rate applicable to shareholders from non-treaty countries, according to the agreement deed.

Seek credit

For qualifying companies, the applicable tax just got slashed by half, while withholding tax on interest will drop to 10 per cent instead of 15 per cent. It is common practice for multinationals to lend to their subsidiaries, in what are technically known as shareholder loans, rather than seek credit from commercial banks.

The benefits for companies could be enormous savings on interest expenses for the beneficial shareholders, while utilising disposable revenues at sister companies. A case in point is the Sh19.9 billion loan granted by Diageo to EABL to finance the buyback of a 20 per cent stake in its subsidiary Kenya Breweries Ltd.

Under the Mauritius treaty, for a company with a similar financing arrangement, interest paid by the borrower would be subject to a much lower tax rate of 10 per cent. Another avenue through which KRA could lose, according to the petition, is on the recently re-introduced capital gains tax in Kenya.

“The taxing rights on capital gains made in Kenya by a Mauritius-based company will remain in Mauritius except for gains arising from the sale of immovable property in Kenya or the sale of movable property forming part of the business property of a firm having a permanent establishment in Kenya,” says TJN-A in its petition.

Foreign and local investors in Kenya can buy Kenyan companies through Mauritian holding companies but Kenya cannot tax any of the gains when they sell these businesses, an article that could be open to abuse even though it would not be necessarily illegal.

Among Mauritian firms that could benefit are two firms owned by Kenya’s Centum Investments, Centum Development and Centum Exotics. Centum’s chief executive said in a previous interview on the company’s Mauritius-based subsidiaries that the island State was attractive because it had “numerous tax agreements with other countries” including Kenya.

Mr Mosioma cited the example of India which signed a similar treaty with Mauritius on the articles relating to capital gains taxes. The provision is similar to the capital gains tax article in the India-Mauritius treaty, which has proved very controversial, costing India an estimated Sh50 billion ($600 million) a year in revenues as a result of tax avoidance and illicit round-tripping by Indian businesspeople.

India has signaled its intention to renegotiate its agreement with Mauritius, he says. Under internationally agreed provisions, such treaties have a minimum period during which they have to be in force and can typically not be revised until the expiry of five years.

But the State claimed that the country is hungry for new foreign investments and is willing to give investors concessions like tax holidays and investment deductions in the determination of taxes.

Along with new investments is the badly needed job creation, in a matrix the Treasury hopes will have benefits that outweigh the foregone taxes. Mauritian expatriates working in Kenya, except those in top-level managerial positions, will also be spared double taxation on remuneration earned since their income will only be taxed in Mauritius.

It was initially thought that the treaty would stimulate foreign direct investment in Kenya and the Treasury previously expressed a similar sentiment.

But it is perhaps the objection from senior tax officials at KRA that can shed light on what Kenyans should expect when the agreement takes effect on January 1, 2015.

A senior KRA official who asked not to be named because of the sensitivity of the matter told Business Beat that the treaty might not bring any benefits for Kenya, and might even undermine the agency’s efforts to meet its revenue collection targets.

The double tax avoidance agreement was signed by both countries in May, 2012 before a formal notice was published in the Kenyan Gazette on May 23, 2014. Nigeria, Indonesia, Rwanda and India are all trying to get out of similar treaties they have with Mauritius, and are hoping to renegotiate the articles of the respective agreements, according to the tax expert at KRA.


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