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.
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.
“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.