PUBLISHED ON March 9th, 2015

East Africa edging closer to adopting single taxation regime

East Africa is edging closer towards a single taxation regime in its bid to attract more capital from investors who have been putting their money in tax havens like Mauritius.

Kenya has joined Rwanda in ratifying the EAC double taxation agreement (DTA) that promises investors taxation in the country of incorporation rather than the country of operation within the bloc.

A double taxation agreement means that an income that has already attracted any form of taxation in the signatory country cannot be subjected to another levy by any of the countries involved. This means that investors operating in two or more EAC countries will only pay in one jurisdiction.

A typical scenario is where a multinational company like Bidco Oil Refineries, Kenya Commercial Bank or Uchumi Supermarkets, which transacts business in Kenya and other East African countries, finds the profits or gains thus accruing are subject to tax in Kenya and the other regional country it is operating in.

“With the agreement in place, governments will formulate regulations on how to tax such companies’ income only once — either in the country of origin or in the company it is operating in. This will see companies save up to 50 per cent of their income tax,” said Andrew Luzze, executive director of the East African Business Council.

However, Mr Luzze added, the EAC governments are resisting the idea of signing the DTA for fear that they may lose revenues, with some countries pushing to renegotiate contracts that they feel are skewed.

“It is our expectation that partner states will move quickly to implement this agreement to increase cross-border businesses and investment that, in the long run, will increase employment as well as domestic revenue,” said Mr Luzze.

He said that once the partner states start implementing the agreement, top line taxes like corporation taxes will be charged only in one country, with the operating subsidiaries in other EAC countries being required to pay domestic taxes like excise and value added tax only.

Peter Kiguta, EAC director for trade and customs, said that Kenya deposited its ratification instruments last month, but the remaining EAC countries — Tanzania, Uganda and Burundi — were yet to report on the progress of their ratification process.

Burundi and Ugandan officials, however, said that the documents for the DTA ratification were with their respective parliaments for scrutiny before they are approved for ratification.

“The DTA is expected to significantly lower the tax burden and encourage cross-border movement of capital, helping companies expanding into the region to grow and create jobs,” said Mr Kiguta.

For instance, in Mauritius, which has a double tax treaty with Kenya, the Mauritius Revenue Authority offers a 15 per cent tax rate on a company’s taxable income that consists of business or trading profits and other passive income. This rate is much lower compared with Kenya, where the company tax is pegged at 30 per cent.

Thus the tax rates for dividends, interest, royalties and treatment of capital gains are beneficial for Mauritius resident companies investing in Kenya. A similar agreement with Mauritius was also signed by Rwanda.

Hadijah Nannyomo, senior manager indirect taxes at Ernst & Young said the DTA will also apply to citizens working in other EAC countries.

“For example, an employee in a group company based in Uganda who comes to work in Kenya is currently supposed to pay tax both in Kenya and Uganda. The DTA dictates that the employee will be taxed in only one country,” said Ms Nannyomo.

The East Africa Community Heads of State Summit agreed to remove double taxation for investors whose companies operate in two or more member countries in 2010.

According to Vimal Shah, chairman of the Kenya Private Sector Alliance, the delays in ratifying the treaty are one of the biggest non-tariff barriers to growing cross-border trade and investment, limiting the region’s attractiveness to investors.

“Currently, investors are being taxed twice, in their home country and the country in which they invest,” said Mr Shah.

Ordinarily, countries would push to negotiate tax treaties with major trading partners to avoid cross-border investors being taxed twice on their income and to maximise investment between them.

“Ratifying the agreement could save companies millions of dollars in tax and provide greater incentives for cross-border investments,” said Mr Shah.

While the highest level of personal income tax for four of the member countries is fixed at 30 per cent, Burundi’s goes as high as 60 per cent, according to an EAC tax competition study.

Currently, apart from Burundi, which has a corporation tax rate of 35 per cent, other member countries have 30 per cent corporation tax.

Kenya and Tanzania have reduced the rate to 25 per cent for companies that are part of an export-processing zone. Rwanda does not operate EPZs but has free trade zones. Companies in this category are exempt from corporation tax and can repatriate profits freely.

The delay in ratifying the tax protocol has forced businesses in the region to spend time and money on creating complex financial structures, often involving holding companies in countries with bilateral tax agreements outside the bloc. For example, Kenya has signed a DTA with Mauritius, Qatar and Nigeria.

Uganda is a signatory to 10 DTTs, with developing countries like Zambia, transition countries like Mauritius and India, and developed countries such as the Netherlands and the UK. Five others are pending ratification or final negotiation, including with secrecy jurisdictions or tax havens such as the Seychelles.

Rwanda also has double taxation avoidance treaties with South Africa and Mauritius Tanzania has treaties with nine countries. Burundi does not have any tax treaty with any country.

Business analysts say that the Community also needs a model DTA that will make it easier to enter into new tax treaties with foreign countries in future.

Source: The East African

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