A Kenyan High Court on Wednesday declared unconstitutional a tax agreement signed by Kenya with Mauritius, saying the pact failed due process requirements.
In his ruling, the High Court Judge, Weldon Korir, declared the Double Tax Avoidance Agreement (DTAA) sealed between the two countries unconstitutional, noting the Kenyan government failed to follow constitutional requirements for ratification.
The DTAA was signed on May 11, 2012 by the two countries.
A DTAA, which allows residents of a third country to design business structures to avoid paying tax, is a treaty signed by two or more countries to help taxpayers avoid double taxation on income.
Earlier before the latest court ruling, a pan-Africa civil advocacy group, the Tax Justice Network Africa (TJNA), had challenged the constitutionality of the Kenya-Mauritius DTAA signed on May 11, 2012.
The TJNA, which promotes accountable and progressive taxation systems in Africa, pointed out that Kenya failed to subject the tax agreement to the due ratification process in line with the Treaty Making and Ratification Act.
Based on the provisions of the DTAA, taxes payable by Mauritius enterprises were reduced tax rates, but the agreement did not come into force before it was challenged in 2014, because Kenya had not notified Mauritius of completion of ratification procedures.
In the ruling delivered on March 15, Justice Weldon Korir, granted TJNA’s plea, declaring Legal Notice No. 59 of 2014 null and void.
The government had argued that the treaty would increase investment and jobs, but analysts claimed it would complement other string of agreements signed between Mauritius and other African countries to reduce Kenya’s taxes.
TJNA in its submissions before the court, claimed that investors and local companies could potentially use the agreement “to evade tax by round tripping their investments illicitly through a Mauritius shell company”.
The group’s Executive Director, Alvin Mosioma, while reacting to the latest court ruling said “it is the first step in ensuring proper and wider stakeholder consultation on matters of national interest.’’
He maintained that the judgment validated the call for African countries to review all their tax treaties signed with tax havens to plug revenue leakage.
Over the past years, fiscal policy analysts and tax experts have continued to maintain that agreements signed with tax havens constitute avenues for tax evasion, thereby denying many African countries the revenues to finance development.
According to them, double tax avoidance agreements have a direct bearing on taxing rights of states and pose serious risks to most countries’ resources, particularly to oil and gas sector producing economies’ revenue base.