The High Court has nullified a tax agreement between Kenya and Mauritius that would have seen companies registered in both countries enjoy lower tax rates.
The two countries signed a Double Tax Avoidance Agreement (DTAA) in 2012 that provided companies with the option of paying taxes in one legal jurisdiction in a bid to make Kenya more attractive to external investors.
However, tax lobby Tax Justice Network Africa (TJNA) sued the Treasury and the Kenya Revenue Authority (KRA) in 2014, arguing the deal signed in Mauritius’ Port Luis was not ratified by Parliament and was thus unconstitutional.
TJNA further argued that the agreement would erode Kenya’s revenue base by giving companies a legal leeway to shift their profits to Mauritius to avoid paying taxes in Kenya.
Article 11 of the agreement, for example, spells out the withholding tax rate in Mauritius at 10 per cent compared with Kenya’s 15 per cent which would have made companies registered in either country to report their profits in Mauritius to enjoy the lower rate.
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In its defence, however, Treasury through the Attorney General’s office had argued the deal was signed within the confines of the law and was not against the constitution.
“Section 3 (4) of the Treaty-Making and Ratification Act bilateral agreements that are important and may be necessary for the government in matters relating to government business or relating to technical administrative or executive matters are not subject to ratification as opposed to the bilateral treaties in section 3(2) of the said act,” said the Treasury in its replying affidavit.
Last week, the High Court in Nairobi ruled in favour of TJNA, declaring Legal Notice No 59 of 2014 that instituted the Kenya-Mauritius tax deal as null and void, and unconstitutional.
“It was not shown that the legal notice No 59 of 2014 was laid before Parliament and it is the duty of this court to declare that the said legal notice ceased to have effect and became void in accordance with section 11 (4) of the Statutory Instruments Act, 2013,” said the High Court in its ruling.
“This ruling is groundbreaking not just for Kenya but other African countries,” said TJNA Executive Director Alvin Mosioma.
“We welcome this ruling as a validation of our argument that requires all DTAA’s to be subject to the constitutionally required ratification process.”
Mr Mosioma said the ruling reinforces the need for African countries to review all their tax treaties, particularly those signed with tax havens that have proven to create opportunities for revenue leakages from the continent.
“This ruling affects not only the Kenya Mauritius DTA but also has legal implications for all other treaties signed under the Constitution,” said TJNA Policy Lead - Tax and Investments Jared Maranga.
“It rightly pushes us to rethink the costs, benefits and motivations around signing DTAs in the first place,” he added.