Another day, another international agreement signed: a double taxation agreement. It is easy to gloss over these headlines, dismissing them as diplomatic formalities. But the recent pact Kenya signed with Belgium to eliminate double taxation is different.
This is not just a photo opportunity. It is a strategic move that can directly boost Kenya’s tax revenue and strengthen our economy.
Really?
How can an agreement that prevents taxing the same income twice actually lead to more tax collection? Let’s break it down, but first off.
What is a Double Taxation Agreement?
Kenya has signed double taxation agreements (DTAs) with many countries. Imagine Esther is a Kenyan software developer working remotely for a company in Belgium. Under normal circumstances, both governments could lay claim to the tax on your income.
You will be taxed in Kenya because you live and work here. You will also be taxed in Belgium because the company paying you is based there. This is “double taxation”. You will be taxed twice on the same income. It is a significant disincentive to cross-border business.
The DTA is a bilateral treaty (between two countries) that addresses this issue. It clearly sets out which country has the right to tax specific types of income. This can be from business, employment, or investments.
DTAs create a predictable and fair set of rules in the business environment. This predictability enables taxpayers to be certain about the tax they will pay. They will not be caught in the middle when countries lay claim to tax your income. Ultimately, in these tax claim rights, it is the taxpayers who suffer the most.
DTAs are essential in any form of investment because they create certainty in where an investor will pay tax and how much they will pay. That certainty is essential.
How Does a DTA Attract Investment and Boost Tax Revenue?
In any DTA, clarity and fairness are the magic ingredients that lead to a larger tax revenue pie for the countries.
Here is how:
a. Attracting Foreign Direct Investment
In the global investment arena, it is a known fact that DTAs attract foreign direct investment (FDI). No investor desires to pay taxes everywhere. Although the tax burden is not a direct investment factor, it is a critical input for informed investment decisions. Tax certainty is an essential aspect of investment decisions.
For example, a Belgian company considering setting up a factory in Kenya will assess the total cost, including tax implications. Without a DTA between Kenya and Belgium, the investor faces the scary prospect of their profits being taxed in Kenya and Belgium.
The taxation will eat into their investment returns. This will make Kenya a less attractive destination for tourists. With a DTA in place, the investors know exactly what their tax obligations will be in Kenya.
This certainty will make them much more likely to invest in Kenya. The new factory will pay corporate income tax on its Kenyan profits, create jobs (resulting in PAYE), and purchase local supplies (generating VAT). These are new economic activities that would not have existed otherwise.
b. Encouraging Kenyan Businesses to Go Global
The same principle works in reverse. A Kenyan agricultural export firm wanting to establish a sales office in Brussels can do so without the fear of its profits being wiped out by double taxation.
As the companies expand and become more profitable internationally, their overall value and the taxes they pay back home in Kenya increase. They are certain of where they will pay tax and how much.
c. Curbing Tax Evasion and Promoting Transparency
Modern double taxation agreements, like this one with Belgium, include provisions for the exchange of tax information. This means that the Kenya Revenue Authority (KRA) can request financial details from Belgian authorities about Kenyan citizens or companies.
.Kenya and Belgium are signatories to the OECD’s Agreement on Exchange of Information on Tax Matters
The tax agreement signed by many countries promotes international tax cooperation between countries through information exchange. The information exchanged is relevant to tax assessment, collection, enforcement, and administration.
The information pertains to persons (entities and individuals) suspected of stashing wealth abroad to evade taxes. This powerful tool helps the KRA bring hidden assets and income into the tax net. This directly increases the country’s tax revenue.
d. Transfer Pricing Certainty
Multinational companies often trade with their own subsidiaries in other countries. The subsidiaries act as branches, though they are fully operational. Without rules, they may artificially shift profits to jurisdictions with lower tax rates. This practice is known as transfer pricing abuse.
This DTA will provide a framework to ensure that when a Kenyan subsidiary does business with its Belgian parent company, the prices charged are fair at arm’s length. It will also ensure that the profit reported in Kenya reflects real economic activity. This creates certainty that Kenya will get its fair share of corporate taxes.
A Real-World Example: The Tech Consultant
Let us go back to our Kenyan software developer, Esther.
Without a DTA
Esther, based in Kenya, earns €50,000 from her Belgian client. Belgium might withhold 15% as a withholding tax. Kenya will then tax the full amount of €50,000 at her income bracket. She will lose a significant chunk of her earnings, making the contract less appealing.
With a DTA
If the treaty states that her income is only taxable in Kenya, her country of residence, Belgium will either reduce or eliminate its withholding tax. Esther now gets to keep a larger portion of her earnings. She will spend or invest in Kenya, thus contributing to the local economy. She also pays her full income tax to the KRA, as required.
The Bigger Picture
By building a network of double taxation agreements with key economic partners, such as Belgium, Kenya is not giving away its tax rights. It is strategically positioning itself as a stable, predictable, and attractive investment hub in East Africa.
This encourages more international businesses to set up shop here, more Kenyan companies to expand, and less capital flight.
In the long run, fostering this ecosystem of legitimate cross-border trade creates a much broader and more sustainable stream of tax revenue than aggressively taxing a limited number of existing taxpayers. This is a classic case of playing the long game for a stronger, more prosperous economic future.
Other Related Articles:
a. Double Taxation in Kenya: The Secret Tool to Unlocking Tax Revenue
b. Tax Tips for Corporate Taxpayers
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