Date
In 2012, the Government of Kenya (GoK) and Mauritius signed a DTAA to promote Foreign Direct Investment (FDI). The objective of this agreement was to make the competitiveness of Kenyan companies be at par with those of other African countries already having tax treaties with Mauritius and to streamline tax effectiveness.
On analysing the treaty Tax Justice Network Africa (TJNA), a pan-African research and advocacy organisation, had a contrary opinion on the Kenya-Mauritius DTAA despite the claims of mutual benefits by both governments. This was on the premise that the DTAA would undermine tax revenue mobilisation.
First, several definitions of terms within the DTAA, for example what it means to be ‘resident’, opens the treaty to abuse by conduit companies primarily formed to siphon money out of the country.
Secondly, the treaty includes clauses on issues such as: business profits; dividends; interest; capital gains tax and others, that are inconsistent with the UN Model Convention of what is the benchmark for DTAA negotiations in developing countries. These clauses will directly weaken Kenya’s ability to achieve revenue targets due to stipulations within them.
Thirdly, the country’s ability to tax the profits of foreign enterprises is further limited if these companies set up a subsidiary within Kenya that trades with a parent company in Mauritius as its host country or country of origin. This legally allows foreign companies to avoid sales taxes contrary to the UN Model Convention rules.
Lastly, the exclusion of potential sources of revenue and creation of loopholes from taxes such as Capital Gains Tax (CGT) through swapping of assets with no real value created allows for deceitful reporting on sales activities. This violates accounting principles and encourages a lot of more speculative ventures over productive activity that Kenya desperately needs for its structural transformation in attaining the Sustainable Development Goals (SDGs)
DTAA Court Ruling
Notwithstanding, these technical arguments TJNA further questioned the constitutionality of the DTAA with respect to public participation; and adherence to the Treaty Making and Ratification Act of 2012 by lodging a case in the High Court of Kenya against the Government of Kenya (GoK) in 2014.
TJNA stated that the failure of the GoK to subject the DTAA to the Treaty Making and Ratification Act (2012) contravened Articles 10 (a, c, and d) and 201 of the Kenyan Constitution; and that the Court should order the Cabinet Secretary to withdraw legal notice 59 of 2014 and commence the ratification process afresh in line with provisions of the Treaty Making and Ratification Act (2012).
The case sought to demonstrate that the Government of Kenya (GoK) decision to sign onto this agreement carried both technical risks as well as constitutional shortcomings for the Kenya. TJNAs principal aim was to show the court that there are inherent risks undermining Kenya’s ability to tax both individuals and multinational corporation (MNCs) because of the DTAA therefore harming current tax revenue collection efforts.
The High Court therefore ruled in March 2019 that the DTAA between Kenya-Mauritius was void in accordance with section 11 (4) of the Statutory Instruments Act 2013. In making the ruling the High Court limited its judgement to the constitutionality of the arguments presented by TJNA.
In so doing, the High Court did not dismiss nor disagree with technical arguments about the potential revenue losses that may accrue by implementing the DTAA. Indeed, the High Court stated that it is important to show how much the country stands to lose after signing the agreement with examples of companies that are evading taxes.
Lessons for Civil Society
This High Court ruling is a significant outcome for the examination of the DTAA issue in Africa. It sets a precedent for further scrutiny of DTAAs on a technical and constitutional basis for consideration across the continent and other developing countries.
It offers hope for public litigation as a policy advocacy strategy in speaking out against the different methods of capital flight from Africa in current times. The High Court ruling also offers significant lessons for civil society actors on the need for evidence in mounting the technical arguments.
Going forward civil society first needs to continue pointing out both technical and legal aspects of the challenges posed by DTAAs in their public interest litigation and advocacy. This should be explicit and clear when submitting to court and in the mobilization of public awareness.
Secondly, civil society needs to engage in the production of data, and analysis of current evidence, by examining available statistics because these are important elements in any case and need to be presented to convince the court on the dangers of DTAAs to tax revenue mobilisation.
Thirdly, civil society advocacy needs to champion for greater transparency by governments in its consultations with the public, that includes, civil society, media, researchers, and not limited to a select group of state agencies as was argued by government in this case. Lastly, there should be further engagement with the parliamentary, media, and others to raise awareness on this issue and its importance in the wider fight for fiscal justice.