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Kenya: Cabinet of Kenya approves the Multilateral Instrument

5 April 2023
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On 21 March 2023, pursuant to the provisions of the Treaty Making and Ratification Act, the Cabinet of Kenya approved Kenya’s proposed ratification of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (commonly referred to as the MLI). The Cabinet approval comes approximately three (3) years after Kenya became a signatory to the MLI on 26 November 2019.

What is the MLI?

The MLI is a product of the Organization of Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting project (BEPS project) which was launched in 2013, and its purpose is to amend double tax treaties (DTTs) to include among others anti-avoidance measures in DTTs entered into between countries.

The BEPS project was implemented by the OECD to combat harmful tax practices such as artificial shifting of profits from high-tax countries to low-tax jurisdictions by multinational corporations, thereby reducing their overall tax liabilities. This practice results in a loss of tax revenue for governments and creates an uneven playing field for businesses that operate only within one country.

Some of the key changes the MLI will make include the inclusion of limitation of benefit clauses in treaties and amendments to the definition of permanent establishment to address concerns on base erosion and profit shifting.

In addition, the MLI seeks to solve the practical challenges that arise when amending double taxation treaties (DTTs). Amending DTTs can be a time consuming and resource intensive process since it involves extensive negotiations, consultations and reviews which could take years to complete. In addition, not all jurisdictions have the same priority or political will to amend and implement the changes required in a timely and effective manner. Therefore, the MLI offers a coordinated approach to implementing BEPS measures in DTTs since the MLI includes a standardized framework for modifying existing DTTs which reduce the need for extensive negotiations.

Why does it matter?

The MLI is important for any person relying on DTTs since the treaty could be affected by the MLI. One key area that could affect many persons relying on DTTs is the introduction of anti-treaty shopping provisions such as the limitation of benefits clause in tax treaties. A limitation of benefit clause is designed to limit the availability of treaty benefits to certain taxpayers based on certain objective criteria. Such a clause could prevent certain persons who could previously rely on the treaty from enjoying treaty benefits if they are not deemed qualifying taxpayers under the modified treaty.

How does it work?

The MLI does not function in the same way as an amending protocol to a bilateral tax treaty, where such a protocol would directly amend the text of the specific treaty. Instead, the MLI applies alongside existing treaties and modifies their application in order to implement the BEPS measures. However, the amendments will only have the effect of amending the tax treaty where both treaty partners have elected for the same amendments to apply.

Once a country has signed and ratified the MLI, it will apply to all its existing tax treaties that are covered by such MLI, unless the country has made a reservation or notified a position of non-adoption with respect to a specific provision or set of provisions.

Under the MLI, each contracting state will need to submit a list of its tax treaties that it wants to be covered by the MLI. The MLI will modify the existing double tax treaties by adding provisions to implement BEPS measures agreed upon in the BEPS project.

It is noteworthy that Kenya intends to modify its DTTs with Canada, Denmark, France, India, Italy, Norway, Qatar, South Africa, Sweden, United Kingdom, Seychelles and the United Arab Emirates. The DTTs that Kenya has entered into with Mauritius and Netherlands have been included in the list. We note that the DTT with Mauritius is yet to enter into force. For Netherlands, the DTT previously negotiated was withdrawn. For further information on this, please read our previous alert on the status of the Kenya – Netherlands DTT here.

Next Steps

The Kenyan Parliament is required pursuant to the provisions of the Treaty Making and Ratification Act to consider and approve the ratification of the MLI with or without any reservations subject to public participation. Once the ratification has been approved by the Parliament, the Cabinet Secretary in charge of the National Treasury will be required to deposit the instrument of ratification of the MLI with the OECD. The MLI will then enter into force on the first day of the month following the expiration of a period of three (3) calendar months beginning on the date of the deposit by Kenya of its instrument of ratification.