Are investors and corporates geared up for a radical shift?

The traditional brick-and-mortar concept has been replaced with flexible operations where businesses operate from one corner of the world but conduct business across the world. PHOTO | POOL    

By ROBERT MAINA More by this Author

Historically, taxation has, to a large extent, been a country-specific affair with a government setting tax policies with minimal or no consideration of the policies of other nations.

This led to incoherent international tax systems, which had numerous negative consequences for some countries.

The situation was aggravated by changes in the global economic landscape. The traditional brick-and-mortar concept has in some instances been replaced with flexible operations where businesses operate from one corner of the world but conduct business across the world.

The incongruence in in-country tax systems and a lack of proper channels for the exchange of information between tax authorities provided opportunities for aggressive tax planning.

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Some countries, in a bid to attract foreign direct investment, lowered income tax rates to zero or near zero, leading to what has been described as a race to the bottom.

This created room for organisations to register presence in certain countries with minimal or no substance just to enjoy the reduced income tax rates.

In 2013, the Organisation for Economic Co-operation and Development (OECD) and the G20, working together, adopted a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS).

The project’s main objective was to create a single set of consensus-based international tax rules to address BEPS. This would protect tax bases while offering increased certainty and predictability to taxpayers.

Additionally, it would secure tax revenues by realigning taxation with economic activities and value creation.

In 2016, an inclusive framework on BEPS was established to allow interested countries and jurisdictions to work with OECD and G20 members to develop standards on BEPS-related issues.

Kenya became a member of the inclusive framework of BEPS.

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In November 2021, more than 135 countries and jurisdictions joined a new two-pillar plan.

The two-pillar plan sought to reform international tax rules and ensure multinational enterprises pay a fair share of tax in the various countries in which they have operations.

This was a culmination of concerted efforts to tame BEPS, which was attributed to multinational enterprises exploiting gaps and mismatches between different countries’ tax systems to pay very minimal or no tax.

It has been observed that developing countries were greatly affected by BEPS due to the heavy reliance on corporate income tax.

Participating members are committed to implementing various actions that are geared towards tackling tax avoidance, improving the coherence of international tax rules and ensuring a more transparent tax environment.

The Africa Initiative

African countries came together under the auspices of the Africa Initiative under the Global Forum on Transparency and Exchange of Information for Tax Purposes. They recently held the 11th Meeting of the Africa Initiative Forum in Nairobi.

The Africa Initiative seeks to tap into the endless opportunities presented by transparency and the exchange of information for tax purposes in Africa.

Members of the forum are being equipped to exploit the visible improvements in global transparency to tackle tax evasion and other forms of illicit financial flows

Beneficial ownership

The KRA has signed and ratified the Convention on Mutual Administrative Assistance in Tax Matters. The taxman has also been quoted indicating that KRA has created a functional exchange of information unit and trained its officers.

Recent changes to the applicable laws have made it easier for the KRA to access information about the beneficial owners of organisations.

For instance, the law requires a resident company to inform the KRA within 30 days when there is a 10 per cent or more change in its shareholding.

Additionally, Kenyan companies are required to lodge with the Registrar of Companies a copy of their register of beneficial owners.

A beneficial owner is defined as the natural person who ultimately owns or controls a legal person or arrangements or the natural person on whose behalf a transaction is conducted and includes those persons who exercise ultimate effective control over a legal person or arrangement.

Enabling law was enacted that requires qualifying financial institutions to report reportable accounts that are held, managed or administered by the reporting financial institution.

This is to enable the automatic exchange of financial account information. This is in addition to Foreign Account Tax Compliance Act, which requires qualifying financial institutions to report certain transactions to the Internal Revenue Service in the US.

By and large, there are local and global efforts to entrench transparency in the management of the tax affairs of organisations.

The management and board of directors must be alive to the new way of conducting business and align their operating models to the new global order.

Maina is an Associate Director at Ernst & Young LLP. The views expressed herein are not necessarily those of EY.