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Kenya has signed an international agreement to fight schemes being used by multinational firms to dodge taxes.
The country on Tuesday signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) that will see it collaborate with 90 other countries to end tax cheating among multinationals.
Many multinationals exploit gaps in international rules to make corporate profits to “disappear” or be artificially shifted to low or no tax environments.
This is usually through multinationals selling to subsidiaries in other countries at above or below market price thereby transferring profits and costs to other divisions internally so as to reduce tax.
Developing countries like Kenya, who have a higher reliance on corporate income tax, suffer a bigger blow relative to their more developed peers from these tax avoidance schemes.
Kenya’s Ambassador to France Prof Judi Wakhungu signed the Convention in Paris during a ceremony attended by officials from the National Treasury and Kenya Revenue Authority (KRA).
“The convention has not only presented a platform to amend our existing treaties, but its provisions have also been incorporated in the current treaties being negotiated,” Prof Wakhungu said.
KRA commissioner-general Githii Mburu said joining the network will stop treaty shopping tendencies which promotes double non-taxation. Treaty shopping is estimated to reduce the effective withholding tax rate from nearly eight percent to two percent.
“The modifications introduced by the convention serve to protect our treaty network by countering treaty shopping, and ensuring that income will be taxed in at least one of the partner states,” Mr Mburu said.
The convention covers 1,600 bilateral tax treaties, strengthening Kenya’s position in sealing gaps and mismatches in tax rules that lead to revenue leakages running into billions of shillings.
Economic Co-operation and Development (OECD) estimates that base erosion and profit shifting cost countries between $100 billion (Sh10 trillion and $240 billion (Sh24 trillion) in lost revenue annually. This is about 10 percent of the global corporate income tax revenue.
“Thanks to international co‑operation, tax authorities now have access to a huge trove of information that was previously beyond reach. The benefits to the tax system’s fairness are enormous,” said OECD Secretary-General Angel Gurría.