Kenya has ratified a key international treaty that tightens the noose on multinationals that have devised complex cross-border tax avoidance schemes.
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.
The deposited instrument of ratification automatically updates Kenya’s 15 double-taxation agreements (DTAs), tightening the noose on multinationals that could have been abusing the bilateral agreements through various tax avoidance strategies.
“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, January 8.
DTAs are bilateral agreements between two countries that assign taxing rights over income between those two countries thereby preventing double taxation of income.
The core objective of DTAs therefore, is to prevent and or eliminate avoidance and evasion of taxes on income and capital by both individuals and companies particularly, multinational enterprises.
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 based on the interests of the negotiating countries.
Since DTAs offer reduced tax rates, they encourage individuals and corporations operating in foreign jurisdictions to pay taxes.
There has, however, been a concern about the abuse of DTAs by some multinationals in various forms.
For example, some companies 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.
Firms 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.
