Double taxation is observed when an individual or firm is taxed twice on the same profits earned during a particular year of income. This occurs where both countries deem the person as a resident during the tax period in which the income was earned. This affects both individuals and firms carrying business in more than one economic jurisdiction.
In Kenya, section 3(1) of the Income Tax Act states that income tax is charged on all income accrued in, deemed to be or is derived from Kenya by a resident and non-resident person. A person can be a natural person in which case an individual person or an artificial person in which case is a company that has a permanent establishment but does not include a partnership.
Who is a resident person?
- A permanent home within Kenya. or
- They were physically present within Kenya for 183 days or more in the specified year of income. or
- Were in Kenya for an average of more than 122 days in that year of income and 2 years preceding that year of income.
1.Has been incorporated in Kenya under the laws of Kenya. or
- The management and control of the affairs of the company were exercised in Kenya in that particular year of income. Or
3.Has been gazetted by the Cabinet Secretary to be resident in that particular year of income.
According to the Income Tax Act, where a business is carried on partly within and partly outside Kenya, the gains are deemed to have been derived in Kenya. This means that any income earned by a resident company from outside Kenya is deemed to have been derived from Kenya and therefore chargeable to tax.
For a resident company which also derives income from outside Kenya is likely to suffer double taxation since the income earned outside will be tax in the country where it was derived from and again taxed in Kenya upon remittance. Ideally, Kenyan residents earn income and gains from other countries while some non-residents also earn incomes and gains from Kenya. In cases where the total tax rate is so high, it becomes too pricey for the international business to thrive.
For this reason, Kenya has been at the forefront to support the idea of DTAs which are tax incentives for investments. These benefits the Kenyan citizens as well as the government in securing a stake of taxes that would have been paid to the other countries.
What is Double Taxation Agreements (DTAs)
Double Taxation Agreements are treaties between two or more countries to avoid international double taxation of income and property. The main objective of DTA is to allocate the right of taxation between the engaging countries, to circumvent differences for taxpayers to have equal rights and security, and to avert tax evasion.
The dialogue that leads to DTAs has been helpful to the interested parties in the past. Studies have shown that there is substantial Foreign Direct Investments and size asymmetry in mediation between elevated and low-income countries resulting in the preference of DTAs. Research has also shown that developing countries that depend more on corporate income tax are more likely to sign DTAs with richer countries and more likely to negotiate for greater tax rates. Developing countries have also become better negotiators as they gain experience with time.
The dialogue that leads to DTAs has been helpful to the interested parties in the past. Studies have shown that there is substantial FDI and size asymmetry in mediations between elevated and low-income countries resulting in the preference of DTAs. Research has also shown that developing countries that depend more on corporate income tax are more likely to sign DTAs with richer countries and more likely to negotiate for greater tax rates. Developing countries have also become better negotiators as they gain experience with time.
However, some countries may not wish to engage in DTAs, in general, or with specific countries because of a worry to lose revenue as a result of the controls on source taxation that such agreements impose. Additionally, if the terms are multifaceted the DTAs are likely to be hostile to developing countries when the Foreign Direct Investment relationship between the two countries is more unilateral.
The fact that some countries are still attracted to negotiate for DTAs, such arrangements means that source countries’ governments have political and economic intentions beyond the attraction of foreign direct investment such as the desire to heighten tax administration cooperation, satisfy the interests of certain domestic communities and the aim of strengthening diplomatic connections with another country.
Realizing the potential costs and benefits related to DTAs, and the ways in which to operate to achieve intended outcomes helps in ensuring that the correct negotiations are put in place first to result in the most advantageous outcomes.
The choice to go in into double taxation agreements with another country should not be taken lightly, particularly for developing countries. This is because there are both associated gains and costs from closing a DTA, so it is appropriate to have a thorough DTA strategy.
The need of Double Taxation Agreements (DTAs).
DTAs can promote both developed and developing countries. If between two developed countries, where the capital flows are equal in both ways, the elimination of tax impediments to cross-border investment and the deterrence of tax evasion gives a clear benefit to both countries. Any decreases in source taxation are usually compensated by heightened residence-based taxation.
The emphasis of DTAs is broader than the removal of double taxation. They lessen tax hindrances to cross-border businesses and investments and support tax administration and management by:
Kenya has signed DTAs with a number of countries of which some are already in force while others are still in in the progress to conclusions. Some of the countries where the DTAs are in force include; Canada, Denmark, France, Germany, India, Iran, Korea, Norway, Qatar, South Africa, Sweden, UAE, UK, and Zambia.
The DTA between Kenya and Mauritius was suspended in March 2019.
Other countries include; the East African Community countries, Italy, Kuwait, Netherlands, Seychelles, Botswana, Nigeria, Portugal, Saudi Arabia, Singapore, Thailand, Turkey, Algeria, Cameroon, Democratic Republic of Congo, Ethiopia, Ghana, Ivory Coast, Jordan, Macedonia, Malawi, Mozambique, Russia, Senegal, South Sudan, Zimbabwe, Belgium, Egypt, Japan, Malaysia, and Spain.
The Double Tax Agreement between Kenya and China was signed in September 2017, however, it is yet to be in force.