TAX NEWS - June 2010

Kenya Tax: EAC double tax removal opens doors to investors

Kenyan firms with operations across the region will only be taxed once on their annual incomes in a raft of reforms announced last week to lay ground for free trade under the East Africa Community common market that comes into force next month.

The move is expected to significantly lower the tax burden and encourage cross-border movement of capital, helping companies expanding into the region to grow and create jobs.

Finance minister Uhuru Kenyatta said the Government had agreed on the double taxation policy and how to implement it with its partners in the East African community.

"A double tax policy is good but we can't cheer until the Government ratifies and starts implementing it," said Mr Vimal Shah, the managing director of Bidco Oil Refineries.

While the treaty would have no impact on the cost of doing business, he said, it would act as a magnet for investors from countries with which Kenya has signed the agreements .

A double taxation treaty — such as the ones Kenya has negotiated with Mauritius, Iran and Kuwait — means that an income which has already attracted any form of taxation in the signatory country cannot be subjected to another levy by any of the countries involved.

This, for instance, would mean that companies such as Akamba Bus, KCB or Bidco, which are incorporated in Kenya but have operations across the region, will merely produce letters of credit issued by revenue authorities in countries where they have branches to prevent Kenya Revenue

 Authority from demanding corporate, personal and withholding taxes on the portion of their annual incomes derived from the region.

Indian firms have invested trillions of dollars in Mauritius just because of the existing double taxation treaty which assures them that net incomes made from the African nation will attract no more taxes once repatriated back home.

"Kenya is already a business hub and the notion that investments made in the country will not attract tax back home will make it an investment destination of choice," said Mr Shah.

Mr Kenyatta said priority would be put on signing more treaties in the coming fiscal year.

"In the fullness of time, these will shield our investors from any double taxation and enable exchange of valuable tax information with our treaty partners," he said in this year's budget speech read on Thursday.

In a pre-budget survey carried out by Deloitte and Touché, the tax and audit firm, the business community called for the signing of a double tax treaty by EAC partners to lower their cost of doing business.

"Such reforms will enhance the regional competitiveness and ensure ease in the flow of business", said Mr John Kiarie a partner at Deloitte and Touché.

Currently, businesses with operations across the region pay similar taxes in all the countries where they do business.

Experts say a double tax treaty will be an incentive to firms to expand their operations through the region, creating numerous jobs in the process.

"Our feeling is that once there is a double taxation treaty in the region, it is possible to apply uniform corporate, withholding and personal taxes," Mr John Thindi, a tax director at PKF, an audit firm told Business Daily in an earlier interview.

In a budget speech seen as the most pro-regional integration in the country's history, Mr Kenyatta also restored the duty remission scheme which had lapsed in January this year.

The window allowed local manufacturers and producers – deemed to be too fragile to withstand cutthroat competition – to import some 135 inputs duty-free for purposes of producing goods sold in non-member states.

The products include wood free paper, newsprint, cover paper and white lined chip board used in the manufacture of texts and exercise books; industrial sugar for making bread and biscuits and complete knock down kits (CKDs) used in the assembly of motorcycles and bicycles.

Concern has been rising among industrialists that a legal vacuum created by the expiry of the duty remission scheme may negatively impact on the flow of inputs needed to produce critical goods for export.

"One of the key drivers of regional integration is the building of a strong industrial base which ultimately will make products competitive hence supports the EAC industrialisation policy," said Mr Kenyatta.

In the EAC common market, each country has undertaken to track and collect own custom revenues after failing to agree on a common collection mechanism.

The region has finalised plans to roll out one-stop border posts to allow national revenue officials to work under one roof at all border points, each tracking revenues that accrue to their country.

Mr Kenyatta said KRA will introduce an Automated Valuation Database System to strengthen the customs valuation function for assessing and collecting international trade taxes.

KRA will also roll out the Electronic Cargo Tracking System to enable effective monitoring of all transit goods to curb the diversion of such goods into the local market.

This system is meant to eliminate the need for cargo escorts and fast-track the movement of goods across borders, the minister said.

In yet another official signal that Kenya is set for a common market, Mr Kenyatta increased the development budget for the East African Community ministry from Sh90.9 million to Sh130 million.

EAC permanent secretary David Nalo said the increased allocation will be used to set up regional integration centres, monitoring and evaluation services and publicity drive.

According to the 2010/11 budgetary estimates, integration centres, which had a previous allocation of Sh21.5 million were given another Sh24 million.

The centres will act as the regional offices of the EAC ministry from where the common market implementation process would be monitored.

The centres will be set up in Lunga Lunga, Isebania, Malaba/Busia and Namanga.

Another move set to appease the East African Cement Manufacturers Association is the removal of import duty on petroleum coke— a raw material used in the production of cement.

The move, which will lower the cost of producing cement in the region, comes just weeks after the association complained that lower external tariffs have allowed cheaper cement from outside the bloc to swamp the region's market.

By lowering production cost instead of discouraging imports, Mr Kenyatta appears to have heeded calls from the landlocked countries which have been fighting for the elimination of import duty so as to lower costs in their construction sectors. Kenya is the leading producer and supplier of cement in the region.