Court Judgment

The Kenya-Mauritius Double Tax Agreement (the DTA) was published by the Cabinet Secretary for Treasury on 23 May 2014 through Legal Notice 59 of 2014 (the Legal Notice). On 3 October 2014 the Tax Justice Network (the TJN or Appellant) filed a petition before the Constitutional, Judicial Review and Human Rights Division of the High Court (the Court) seeking orders against the Cabinet Secretary for Treasury, the Kenya Revenue Authority (KRA) and the Attorney General (the Respondents) that the court invalidate the DTA on the grounds that:

1. it violates the Constitution of Kenya, 2010 (the Constitution); and
2. it was not approved by the Cabinet and the National Assembly.

The relevant Articles of the Constitution cited as violated by the Respondent include:

1. Article 10 which provides for national values and principles of governance which includes, as the crux of TJN’s argument, public participation;
2. Article 20 which provides for the application of the Bill of Rights;
3. Article 114 which provides for the dealing of money Bills; and
4. Article 201 which provides for the principles of public finance.

The Court, in making its judgment, identified the following issues for determination:

1. whether the making of the DTA was in violation of the Constitution;
2. what are the laws that govern the making of DTAs; and
3. whether the petition is merited.

On issue (a) the Court concedes that, being a constitutional court, it will only limit itself to matters touching on the violations of the Constitution as alleged in the petition. In coming to its conclusion, the Court pointed out that TJN did not indicate any specific violations or provide any statistical data that would demonstrate a violation of any constitutional provisions.

On issue (b) the Court found that TJN failed to show which law specifically provides for the involvement of Parliament in the process of making or entering bilateral agreements (such as the DTA).

The petition lacked merit on the two (2) issues above.

The DTA was, however, invalidated and found to be void on the basis that the Legal Notice, which gives effect to the DTA, was not tabled before the National Assembly pursuant to the Statutory Instruments Act, Act No. 23 of 2013, Laws of Kenya.

Putting it into Perspective

DTAs are generally bilateral agreements designed to allocate taxing rights between multiple jurisdictions.  DTAs aim to eliminate taxation of the same income in more than one jurisdiction and so effectively reduce schemes to avoid tax, encourage exchange of tax information and promote foreign direct investment.

The judgment of the Court in this Petition has been limited to issues of procedure in bringing the DTA into effect. This notwithstanding, there are a number of issues worth noting that were raised by the Appellant in their submissions on the substance of the DTA, that the judge did not address, since no attempt to substantiate the alleged potential loss in revenue for the KRA was made. The issues include:

1. the Appellant was challenging the reduction of source withholding tax rate on interest to 10% in the DTA as opposed to the non-DTA withholding tax rate of 15%;
2. the Appellant was challenging the reduction of source withholding tax rate on royalties to 10% in the DTA as opposed to the non-DTA withholding tax rate of 20%;
3. the Appellant was challenging the reservation of the right to tax capital gains on the transfer of shares to the state where the transferor is resident; and
4. the Appellant was challenging the reservation of the right to tax all other income not otherwise specifically provided for in the DTA to the resident State.

These provisions of the DTA are standard in most DTAs and perhaps the reason they were raised, is that Mauritius is a low tax jurisdiction. 

Conclusion

The above ruling demonstrates the importance of the following of proper procedures in bringing into force DTAs that Kenya enters into. The Kenya-Mauritius DTA is quite important to foreign investment in Kenya as a huge number of investments, particularly from Europe, are made through Mauritius. The Cabinet Secretary for Treasury should now table the Legal Notice giving effect to the DTA before the National Assembly pursuant to the Statutory Instruments Act to bring it into force.