Dis­ap­point­ment as Kenya de­lays tax treaties

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Celia Becker

THE long-awaited dou­ble tax agree­ments en­tered into by Kenya with SA and Mau­ri­tius re­spec­tively did not come into force on 1 Jan­uary as ex­pected. The treaty be­tween Kenya and SA that was signed in Novem­ber 2010 was rat­i­fied by Kenya in Oc­to­ber last year, fol­low­ing ear­lier rat­i­fi­ca­tion by SA. The Mau­ri­tius treaty, signed on 7 May 2012, was rat­i­fied by Kenya in May last year. De­spite the rat­i­fi­ca­tion by Kenya, the fi­nal step re­quired to bring the treaties into force (a no­ti­fi­ca­tion by each con­tract­ing state to the other of the com­ple­tion of the pro­ce­dures re­quired by its law for the en­ter­ing into force of the treaty) was not com­pleted by Kenya by 31 De­cem­ber. Con­se­quently, the treaties can now, at the ear­li­est, only en­ter into force on 1 Jan­uary 2016 as it is stip­u­lated that the treaties will be­come ef­fec­tive on the first of Jan­uary fol­low­ing the date of the re­quired no­ti­fi­ca­tion.

Both treaties are based on a com­bi­na­tion of the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment (OECD) Model Tax Con­ven­tion on In­come and on Cap­i­tal and the United Na­tions (UN) Model Tax Con­ven­tion.

In the case of a cor­po­rate en­tity that is res­i­dent in both Kenya and the other con­tract­ing state in terms of their do­mes­tic leg­is­la­tion, in terms of the treaties it shall be deemed to be res­i­dent only of the state in which its place of ef­fec­tive man­age­ment is sit­u­ated.

The def­i­ni­tion of “per­ma­nent estab­lish­ment” in the SA and Mau­ri­tius treaties in prin­ci­ple fol­low the UN def­i­ni­tion. How­ever, the Mau­ri­tius treaty also specif­i­cally in­cludes in the def­i­ni­tion a ware­house, in re­la­tion to a per­son pro­vid­ing stor­age fa­cil­i­ties for oth­ers and any in­stal­la­tion or struc­ture used for the ex­ploita­tion of nat­u­ral re­sources. In terms of the SA treaty a build­ing site, con­struc­tion, as­sem­bly or in­stal­la­tion project or any su­per­vi­sory ac­tiv­ity in con­junc­tion with such a site will cre­ate a per­ma­nent estab­lish­ment if such site, project or ac­tiv­i­ties lasts for more than six months (as per the UN model), whereas per the Mau­ri­tius treaty, a per­ma­nent estab­lish­ment will only ex­ist af­ter 12 months (as per the OECD model).

Both treaties also in­clude the UN model pro­vi­sion that an in­sur­ance en­ter­prise of a con­tract­ing state shall (ex­cept in re­gard to rein­sur­ance) be deemed to have a per­ma­nent estab­lish­ment in the other con­tract­ing state if it col­lects pre­mi­ums in such ter­ri­tory or in­sures risks sit­u­ated therein through a per­son other than an in­de­pen­dent agent.

Com­par­ing the two treaties, Mau­ri­tius hold­ing com­pa­nies seem to be favoured. In terms of the Mau­ri­tius treaty the stan­dard non­res­i­dent with­hold­ing tax rate on div­i­dends are re­duced from 10% to 5% if the ben­e­fi­cial owner is a com­pany which holds di­rectly at least 10% of the cap­i­tal of the com­pany pay­ing the div­i­dend. The SA treaty does not pro­vide for any re­duc­tion in the 10% div­i­dend with­hold­ing tax rate.

In terms of the Mau­ri­tius treaty, cap­i­tal gains aris­ing from the trans­fer of shares in a com­pany shall gen­er­ally only be tax­able in the con­tract­ing state of which the alien­ator is a res­i­dent. Mau­ri­tius does not levy cap­i­tal gains tax, whereas Kenya has, with ef­fect from 1 Jan­uary this year, rein­tro­duced cap­i­tal gains tax at a rate of 5% which also ap­plies to the dis­posal of shares held in a Kenyan com­pany.

The cap­i­tal gains tax pro­vi­sions in the SA treaty more oner­ously stip­u­late that gains de­rived from the alien­ation of shares de­riv­ing more than 50% of the value di­rectly or in­di­rectly from im­mov­able prop­erty sit­u­ated in the other con­tract­ing state may be taxed in that other state.

Both the SA and Mau­ri­tius treaties re­duce the stan­dard non­res­i­dent with­hold­ing tax rate on in­ter­est from 15% to 10% and the roy­alty with­hold­ing tax rate from 20% to 10%.

Ar­ti­cle 27 of both treaties pro­vides for the con­tract­ing states to lend as­sis­tance to each other in the col­lec­tion of rev­enue claims, which in­clude an amount owed in re­spect of taxes of ev­ery kind and de­scrip­tion im­posed on be­half of a con­tract­ing state or its po­lit­i­cal sub­di­vi­sions or lo­cal au­thor­i­ties. When a rev­enue claim of a con­tract­ing state is en­force­able un­der the laws of that state, such claim shall, at the re­quest of the com­pe­tent author­ity of that state be ac­cepted for pur­poses of col­lec­tion by the com­pe­tent author­ity of the other con­tract­ing state as if it was a claim of that other state.

The 2014 Kenya Fi­nance Act as­sented to by the pres­i­dent on 14 Septem­ber 2014 lim­its the ex­tent to which per­sons in other con­tract­ing states can rely on the treaties en­tered into be­tween Kenya and such states in an at­tempt to limit “treaty shop­ping”. In terms of the 2014 amend­ment, treaty benefits will only be avail­able to a com­pany listed on the stock ex­change in the other con­tract­ing state or if more than 50% of its un­der­ly­ing own­er­ship is held by per­sons who are res­i­dents of the other con­tract­ing state. This pro­vi­sion would make it dif­fi­cult for multi­na­tion­als with in­ter­me­di­ate hold­ing com­pa­nies in tax-friendly ju­ris­dic­tions to ac­cess the benefits of Kenya’s treaties.

Iron­i­cally, the leg­is­la­tion amend­ment fol­lowed shortly af­ter rat­i­fi­ca­tion of the Mau­ri­tius treaty by the Kenyan gov­ern­ment. The ben­e­fi­cial pro­vi­sions of the Mau­ri­tius treaty would, as a re­sult, be of lit­tle use to groups with in­ter­me­di­ate hubs held from out­side of Mau­ri­tius. Kenyan tax ad­vi­sors are in dis­cus­sions with the Kenya Rev­enue Author­ity re­gard­ing the legal stand­ing of this leg­isla­tive pro­vi­sion in con­trast to the treaty pro­vi­sions, but for now only time will tell how this will be ap­plied in prac­tice.

Year-long wait be­fore tax treaties with SA, Mau­ri­tius can be brought into force

Celia Becker is an Africa Reg­u­la­tory and Busi­ness In­tel­li­gence ex­ec­u­tive at ENSafrica.

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