A Kenyan court has declared a tax agreement the country signed with Mauritius unconstitutional, citing a breach of due process.
High
Court Judge Weldon Korir declared the Double Tax Avoidance Agreement
(DTAA) unconstitutional, saying the government failed to follow
constitutional requirements for ratification.
A DTAA is a treaty signed by two or more countries to help taxpayers avoid double taxation on income.
The
treaty allows residents of a third country to design business
structures to avoid paying tax. Experts have warned that there is a thin
line between tax evasion and tax avoidance.
The Tax Justice Network Africa (TJNA) had challenged the constitutionality of the Kenya-Mauritius DTAA signed on May 11, 2012.
The
continental initiative, which promotes accountable and progressive
taxation systems said Kenya failed to subject the tax agreement to the
due ratification process in line with the Treaty Making and Ratification
Act.
Ratification procedures
The
treaty authorised reduced tax rates for firms set up in the island
country, but it did not come into force before it was challenged in
2014, because Kenya had not notified Mauritius of completion of
ratification procedures.
Justice Weldon Korir in the
ruling delivered on March 15, granted TJNA’s plea, declaring Legal
Notice No. 59 of 2014 null and void.
The government
argued that the treaty would increase investment and jobs, but critics
claimed it would join a string of agreements signed between Mauritius
and other African countries to reduce taxes.
TJNA in
its submissions said investors and local companies could potentially use
the agreement to dodge tax “by round tripping their investments
illicitly through a Mauritius shell company.”
“It is
the first step in ensuring proper and wider stakeholder consultation on
matters of national interest,’’ said TJNA executive director Alvin
Mosioma.
Mr Mosiama said the judgment validates the
call for African countries to review all their tax treaties signed with
tax havens to plug revenue leakage.
Experts argue that
agreements signed with tax havens have been avenues of tax evasion,
denying African countries the revenues to finance development.
“This
is a landmark case because tax treaties are technical instruments that
undergo only cursory parliamentary scrutiny,” said London School of
Economics researcher Martin Hearson, who submitted his analysis to the
High Court.
Double tax avoidance agreements have a direct bearing on taxing rights of states, he added.
According
to him, it is important for governments to put in place mechanisms to
ensure effective public participation as part of the treaty ratification
process.
Kenya Civil Society Platform on Oil and Gas coordinator Charles Wanguhu said DTAAs portend risks for countries that want to expand their tax base as treaties reduce tax obligations of firms operating in Kenya.
Kenya Civil Society Platform on Oil and Gas coordinator Charles Wanguhu said DTAAs portend risks for countries that want to expand their tax base as treaties reduce tax obligations of firms operating in Kenya.
“The risks are higher in the oil
and gas sector as some companies operating in Kenya are registered in
Mauritius or have subsidiaries in Mauritius. There is a firm registered
in a Cayman Islands tax haven owning Kenyan petroleum rights through a
subsidiary in another tax haven in Mauritius,” he said.
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