Kenya losing billions through loopholes in key tax treaties

Prof. Solomon Picciotto testifies before High Court on double tax agreements signed by Kenya.

International companies have been avoiding paying taxes in Kenya by taking advantage of loopholes in treaties signed on behalf of the government, the High Court was told.

Prof Solomon Picciotto, a senior fellow at the International Centre for Tax and Development said that international companies and wealthy Kenyans only require briefcase companies in tax havens to walk away with billions of shillings made from Kenyans without paying a cent to Kenya Revenue Authority (KRA).

Testifying during the hearing of a case seeking to invalidate at least 10 double taxation treaties, the expert witness told Justice Anthony Mrima that Kenya is losing huge revenues to international firms out of agreements it has signed with developed countries. 

Picciotto is the first witness in a case filed by Tax Justice Network Africa, challenging treaties signed by Kenya with Kuwait, Seychelles, South Africa, Qatar, India, United Arab Emirates and the Netherlands.

The professor of the law argued that the State has been vague about its priorities when negotiating double tax treaties.

He noted that out of the 14 bilateral treaties he had analysed, which includes those with China, Barbados and Singapore, Kenya got the short end of the stick.

He said the treaties prohibit Kenya from imposing withholding taxes on management and technical services and consultancy fees on international companies originating from partner countries.

This, he observed, denies Kenya a 20 per cent tax that is contained in her domestic law.

The judge heard that for instance, Kenya can only get a six per cent capital gains tax from United Kingdom nationals.

However, the UK wanted zero per cent.

The court heard that international companies are ‘treaty shopping’ to get profits but legally avoid paying taxes.

He argued that a company, for example in the US will open a briefcase company in a tax haven and do business with Kenya in the belief that it is based on the tax haven country to ride on the double tax treaty between these two countries.

“After examining the content of the treaties that are subject of this petition, I am concerned that some of them represent much greater curbs on Kenya’s tax sovereignty than should have been required to reach an agreement,” he stated.

“To my knowledge, there has been no statement from the Kenyan government to explain why concessions were made. In several treaties under consideration, Kenya has retained hardly any of the taxing rights that are usually the subject to negotiations.”

Another issue raised was that from the treaties, Kenya tied KRA’s hands such that it cannot pursue taxes owed by foreign nationals.

This prohibits KRA from imposing a capital gain tax on the sale of shares in Kenyan firms if owned by residents of the treaty partner.

The expert said Kenya’s treaties prohibit it from imposing a withholding tax on dividends and loyalties.

He observed that it is only the treaty between Kenya and China that has a clear expression that it cannot be used as an avenue for tax abuse.

The court heard, for instance, Kenya appeared to have signed a good deal with India and Barbados but was short-changed by Korea, Netherlands, Singapore, Mauritius and Kuwait.

The Netherlands deal, he said, is the lowest for Kenya.

Other countries with which Kenya got a raw deal are Kuwait, Seychelles, South Africa, Qatar, India and United Arab Emirates.

He said that for example, the treaty with the Netherlands provides that arbitrators outside Kenya should arbitrate in case there are disputes.

According to him, none of the treaties went through Parliament.

“As a sovereign nation, it is open to Kenya to conclude international treaties on whatever terms it wishes.

“It is quite surprising, however, that the State should have concluded treaties that impose such significant curbs on its ability to apply the tax laws approved by Parliament without the latter’s oversight,” he testified.

The court heard that Zambia has cancelled its agreement with Mauritius for being a tax haven while Rwanda has renegotiated the treaty.

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