How double taxation treaties can strengthen global trade deals

Double Taxation Treaties, commonly termed DTT’s or DTA’s, refer to bilateral taxation agreements that seek to eliminate the double taxation of income that arises in one jurisdiction and is paid out to residents in another jurisdiction. Through DTT’s, governments seek to foster cooperation and coordination in tax revenue collection so as to ultimately enhance foreign direct investment.

Kenya, in a bid to enhance her image on the global stage, as well as to strengthen trade relations with her international partners, has directed numerous resources toward the conclusion of DTT’s. This is in line with the concerted effort to strengthen global trade and investment partnerships, with the message passed across being that Kenya is ready and open for business.

This pro-active stance by the Government of Kenya is to be lauded. As the world moves toward a becoming a global village, as a result of globalization, it is important for governments to formalize agreements that will not only promote international trade, but also work toward sealing loopholes in the taxation system.

However, despite the above, it is important for countries seeking to foster international trade to look after their interests as well. An important tool, such as the DTT, can easily become a liability, if not correctly structured. Particularly, imbalanced DTT’s pose the risk of tax revenue loss that may actually be higher than the gains received through Foreign Direct Investment.

In order to arrive at this balance, it is important that Governments’ negotiating Double Taxation Agreements adequately consult with the relevant governmental bodies concerned, as well as external stakeholders.

This will ensure that any tax revenue loss suffered as a result of the final concluded DTT is well expected, and appropriately balanced with the resultant Foreign Direct Investment to be attracted. Further, this will also serve to ensure that the interests of the executive, particularly in the formation of National Trade Policies, are well aligned with the interests of the relevant revenue collection authority.

It is important to note that lack of communication between the executive and the responsible revenue collection authority carries the risk of resulting in an unfavourable taxation environment – one that promises certain benefits and incentives on one hand, but unreasonably demands for tax on the other hand. This, in the long run, will reduce Foreign Direct Investment rather than promote it.

In consideration of the above, it is our duty as an active Nation on the global stage to create an internationally facing tax regime that promotes Foreign Direct Investment in a manner that does not compromise our position as well. This is more so important given increased interest in the Kenyan market – a positive consequence of the Kenya’s aggressive marketing strategy.

First published by the Star – Kenya

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