Kenya ratifies treaty aimed at preventing multinationals from exploiting tax loopholes
One common strategy used by multinationals to sidestep taxes is the manipulation of profit-sharing arrangements.
Kenya has officially ratified an important international treaty aimed at preventing multinational companies from exploiting tax loopholes.
The Organisation for Economic Co-operation and Development (OECD) confirmed the country's ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS Convention), a move that will tighten regulations on tax avoidance practices by large corporations.
The treaty, which was ratified on Wednesday, updates Kenya's 15 existing double-taxation agreements (DTAs) with other countries.
These updates are designed to close potential loopholes that some multinationals have previously used to avoid taxes.
According to the OECD, the BEPS Convention strengthens Kenya's commitment to preventing tax treaty abuses by multinational enterprises.
"Today, Kenya deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS Convention), underlining its strong commitment to prevent the abuse of tax treaties and base erosion and profit shifting (BEPS) by multinational enterprises," the OECD said in a statement.
DTAs are bilateral agreements between two countries that determine how income will be taxed when it is generated across borders.
Prevent double taxation
These agreements aim to prevent double taxation, ensuring that individuals and companies, especially multinationals, are not taxed twice on the same income.
The primary goal of DTAs is to eliminate tax evasion and avoidance, encouraging tax compliance across international borders.
However, concerns have arisen over the years regarding the misuse of these agreements, with some multinational corporations finding creative ways to avoid paying taxes.
One common strategy used by multinationals to sidestep taxes is the manipulation of profit-sharing arrangements.
For example, a company with operations in Kenya may transfer ownership of its project to another firm just before it becomes eligible to be taxed as a permanent resident in Kenya (after six months).
This can allow the company to avoid paying Kenyan income taxes, even though the project continues to generate revenue in the country.
Although such practices are not technically illegal, they are seen as unethical and a form of tax avoidance.
With the ratification of the BEPS Convention, Kenya aims to address these practices by updating its DTAs and aligning its tax framework with international standards.
The changes will make it more difficult for multinationals to exploit gaps in the system, ensuring a fairer taxation system for both individuals and businesses operating in Kenya.
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