Amcham Kenya Key Taxation Concerns
The American Chamber of Commerce in Kenya (Amcham Kenya) positions itself as the credible voice representing U.S. business interests in Kenya. It’s focus is to promote U.S. business in Kenya through trade and free enterprise, and to further the legitimate general interest of its members. The AmCham encourages the Government of Kenya to undertake measures to increase its competitiveness and attract more investment in order to make it a regional investment leader.
Below are a few key taxation concerns the Amcham Kenya believes are affecting Kenya‘s competiveness as an investment destination and as a regional business hub for Multinational Companies from the US.
1. Double Tax Treaty Challenges
Non-resident service providers from the US are subject to the higher non-treaty withholding tax rates. Further, in the event of tax disputes resulting in upward tax adjustments on the Kenyan entities would lead to double taxation of same revenue in different tax jurisdictions with no possibility of claim and corresponding adjustment.
Initiate steps to establish a tax treaty between Kenya and the United States to eliminate instances of double taxation.
A treaty between the two nations will ensure the removal of any potential trade barriers by establishing internationally accepted provisions for the avoidance of double taxation on the same income.
A treaty will also establish appropriate channels for exchange of information between the two countries in mutual efforts to prevent fiscal evasion.
2. Double tax treaty limitation of benefits (LoB) provision – Introduction was aimed at restricting the exploitation of DTAs but in reality its penalising taxpayers – Section 41 ITA introduced in FA 2014
Primary objective of the LoB provision was to reign in Kenyan residents who undertake treaty shopping to unfairly eliminate or minimise their Kenya tax liability.
In practice, the provision fails to achieve above objective and also penalises foreign investors (including US resident investors) using a DTA jurisdiction to launch their investment into Kenya.
To seal the loophole that continue to be exploited by the targeted Kenyan residents, consider introducing Controlled Foreign Corporation (CFC) rules, where certain foreign dividends and operations controlled by Kenyan residents are subjected to taxation in Kenya. Foreign tax credits in Kenya could be given to minimise double taxation.
Further, Kenya can renegotiate any DTA that it considers to be open to abuse and have acceptable and reasonable conditions introduced therein to curb misuse. This approach eliminates the current international law conflict where Kenya has indirectly varied the scope of DTAs without following the procedure in the DTA which is negotiated and agreed to by the other Contracting State.
Current LoB limitation be removed to minimise the tax and administrative burden in the hands of genuine Kenyan businesses contracting with foreigners in DTA jurisdictions.
The amendment, if retained, will not fails to achieve its objective but results to increased cost and admin burden to genuine Kenyan businesses.
Proposals here have the effect of ensuring that Kenyan businesses pay rightful taxes and foreign investors are not unduly disadvantaged for investing in Kenya via certain jurisdictions.
Bona fide foreign investors are not ‘accidentally’ affected by blanket legislation targeting treaty shoppers and abusers of DTA concessions.
The re-consideration of the LoB provision will reinforce the certainty of tax and benefits from tax treaties, thus encouraging trade between Kenya and other countries
Tax Issues Affecting Kenya as a Regional Hub
3a)VAT on costs recharged by regional hubs based in Kenya
When international companies establish regional hubs in Kenya, they need to recharge the hub expenses out of Kenya.
While the VAT Act zero-rates services exported out of Kenya which is in line with OECD guidelines, recently the Kenyan Revenue Authority (KRA) has challenged this provision and issued assessments against regional hubs providing services in Kenya directly to offshore companies, in contrast to international best practice as defined by the OECD. This position has resulted into significant amount of receivable that the KRA owes companies thus affecting the cash flow position.
This is contrary to the destination principle which calls for VAT to be charged only on final consumption, ensuring VAT neutrality in international trade. Based on the current KRA interpretation, regional hubs will be forced to charge VAT to their offshore clients, which cannot claim the VAT back as input tax. This increases the cost of maintaining regional hubs in Kenya.
Clarify the definition of export of services by enumerating services that qualify as exports. This should include services provided by regional service hubs to offshore customers where the service hubs are not involved in the direct sale of goods and services to consumers in Kenya. This proposal conforms to OECD guidelines which specify the place of consumption as being that of the Country of the Customer, irrespective of where the services are rendered and provided that the Country of the Customer will be established through agreements between the Kenyan Company and the Overseas Customer. Inclusion of this clarification in the VAT legislation will fully address the existing issues in the interpretation of exports of services.
This will encourage the establishment of regional hubs in Kenya, creating and protecting employment opportunities locally.
The clarification will create certainty and reassure investors who currently have regional hubs in Kenya.
3b) Employee taxation: Double Taxation Concerns
I. Employees of the Regional Hubs
The Income Tax Act provides for the taxation of employment income paid by a Kenyan company to both resident and non-resident employees.
This result in double taxation for employees of Kenyan based regional hubs who work wholly outside Kenya as they are subjected to tax in Kenya and in the countries where they are based.
This problem is further compounded by Kenya’s limited treaty network, which means that the employees are denied the opportunity to obtain tax credits for the taxes paid in Kenya.
To cushion the employees, the regional hubs are forced to increase the employee salaries to cover the double taxation. This increases the cost of doing business in Kenya and has forced some companies to move employees off the Kenyan payrolls, thus creating a negative effect on employment.
II. Employees of the branches of the regional Hubs
Further, where a regional Hub in Kenya has established branches outside the country, and employed staff who are residents of those countries, KRA has been demanding PAYE on the payments to those employees even when they don’t work in Kenya or are not resident in Kenya.
In line with widely accepted international best practice, exempt Kenyan employees and non-residents from income tax and any other payroll taxes where their duties of employment are conducted outside Kenya.
Alternatively, legislation should provide for a tax credit for taxes paid offshore where the income is subject to tax both in Kenya and in the employee host countries. Such a tax credit should not be limited to Kenyan citizens only, as is currently the case. Also, the tax credit should be claimable through the monthly payroll to avoid creating tax refunds (claimed through the individual tax returns) which could take years to be paid out by the KRA.
The provisions will reduce the cost of doing business for regional hubs and make Kenya a more attractive host nation for multinational corporations operating in the region.
The change will make it more attractive for Kenyans to pursue international assignments without suffering double taxation.
3c)Withholding tax on payments by regional hubs in Kenya for services rendered outside Kenya
The Income Tax Act provides for withholding tax on payments by Kenyan companies to non-resident service providers for services rendered both in Kenya and outside Kenya.
Regional hubs located in Kenya often procure services from service providers in other countries. Currently the hubs are required to withhold tax on the payments to service providers even though the service providers are still required to account for tax on their income in their home countries.
In many cases, the service providers include this tax cost in their overall price, effectively shifting the burden of withholding tax to the regional hubs. This becomes an additional cost that regional hubs operating from Kenya have to bear.
This problem would have been solved by the East Africa Double Tax Treaty which would have allowed the service providers to receive a credit in their home countries for taxes paid in Kenya. But the delays in finalising the Treaty mean that the problem persists.
With the withholding tax on professional services at 20%, the increase in costs is significant. Proposal Restrict withholding tax on payments to non-resident service providers for services rendered in Kenya or eliminate the withholding tax requirement for non Kenyan service providers to regional hubs. Justification The change will reduce the tax related costs that regional hubs incur on payments to service providers outside Kenya, making Kenya a more attractive regional base for multinational corporations.
Source: The Exchange