UNIVERSITY OF EMBU

BAC 401: TAX LAWS AND PRACTICE

TAXATION OF CROSS BORDER ACTIVITIES
These are the various transactions or activities that are exercised by a Kenyan resident in another
country and vice versa. The issue here is: How is the income earned or derived from such
transactions brought to charge (taxed)? This is dependent on resident status. Note the
following distinction
 Kenya resident individuals pay Kenya income taxes on their incomes from Kenya and
worldwide employment, but Kenya nonresidents pay Kenya income taxes only on their
income from Kenya.
 Where a resident person carries on a business partly in Kenya and partly outside
Kenya, all the profits are deemed to be derived in Kenya and chargeable to Kenya
income taxes. Where a nonresident person carried on a business partly in Kenya and
partly outside Kenya, only profits arising from Kenya are chargeable to Kenya income
taxes.
Double Taxation Agreements (DTA)
As stated above, Kenya resident individuals pay Kenya income taxes on their incomes from Kenya
and worldwide employment income. Employment income earned from outside the country is
therefore subject to double tax. Additionally, where a resident person engages in a cross-border
business, gains arising in Kenya and outside Kenya will be taxed in Kenya. In such as case gains
arising from outside Kenya will be subject to double taxation. To reduce the tax burden the
taxpayer is given a double tax relief. Such relief is defined by double taxation arrangements which
may take two forms:
a. Bilateral Conventions and agreements
These are bilateral agreements for relief from double taxation. This involves countries affected
negotiating an agreement with a view to minimize or eradicate effects of double taxation. Most
double taxation agreements are based on the Organisations for Economic Cooperation and

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Development (OECD) recommended models articles. Each agreement is peculiar to itself
depending on how it was negotiated.
Kenya currently has double tax relief agreements with the following countries: United Kingdom,
Germany, Denmark, Norway, Sweden, Zambia, Canada and India.
b. Unilateral relief
Due to the difficulty involving double taxation negotiations, it is possible for an individual country
to remove the burden of double taxation from international trade by opting to give relief for foreign
taxation on a unilateral basis i.e. without regard to whether the other taxing country extended relief
or not. This may be triggered by a representation by the business community.
A unilateral approach is usually a last resort where negotiations have proved difficult due to
political and other reasons. It is possible to have both arrangements in place to take care of different
income sources and persons
Why DTA
1. Attraction of foreign investors through tax incentives
2. Encouragement of mobility of labour to attract expertise
3. Tax incentives as loss of revenue to government
4. Level and areas of economic interaction between states concerned
5. Overall cost and benefit principle
6. Political climate/relations
Double tax relief
It is granted in accordance to S42 (3) of ITA which states “Double tax relief shall be granted
provided that “the tax chargeable upon the income of a person in respect of which a credit is to be
allowed ... shall be the amount by which the tax chargeable ... in respect of his total income”
Section 42 (4) provides that “The amount of credit allowed shall not exceed the tax chargeable”
With effect from 1 January 2002, a taxpayer with foreign employment income is granted double
taxation relief whether Kenya has an agreement with that other country or NOT.
Determination of double tax relief
1. Determine the tax payable in Kenya on Kenya income
2. Determine the tax payable in Kenya on total income (Kenyan and foreign)
3. Determine the Kenyan tax on foreign income [(2)-(1)]
4. Compare the Kenyan tax on foreign income and foreign tax on foreign income (tax paid in
foreign country). Whichever is lower is the double tax relief

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QUESTION ONE
Chris Ouma, a married Kenyan resident, had income of Kshs 360,000 for year of income 2007 and
also received income from Zambia net of tax Kshs180,000. The tax deducted in Zambia was Kshs
60,000. Kenya has a double taxation relief treaty with Zambia.
Required:
a) The double taxation relief in Kenya
b) The tax payable by Ouma in Kenya.
NB/ Double tax treaties are important to multinational corporations, which have international
trade spread across several countries. These corporations derive benefits by exploiting
national law so as to maximize their results. Negotiating tax treaties internationally
facilitate an enabling trade environment for companies operating in these countries.

QUESTION TWO
Mr. Alex Magambo works partially in Kenya and partially` in canada . His family is based in
Kenya . During the year ended 31st December 2017, Mr Magambo earned an equivalent of
Ksh3,500,000 from his employment in Canada. He paid an equivalent of Ksh.480,000 as tax on
the income.
He also earned Ksh.1,800,000 as consultancy fee in Kenya in addition to employment of Ksh.
1,200,000 (PAYE KSh. 400,000). His employer in Kenya provided his family with
accommodation. The monthly rent on the accommodation was Ksh. 60,000per month which was
paid by the employer
Required: His tax liability for the year ended 31st December 2017
Most Favoured Nation Status Concept
This arises where one country in a particular region is given a preferential tax treatment by another
country. The country that is favoured is considered as a strategic trading partner. Usually new
favourable rules regarding the flow of trade between the two countries are introduced e.g. China is
given the most favoured status by the U.S.A.
The aims of this status are:
a. To facilitate trade between the two countries
b. Ensure faster exchange of goods and services
c. Foster economic co-operation.
d. Facilitate exchange of technical expertise and increased investments in the two countries.

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Off shore taxation (Tax havens)
This refers to a country that offers foreign individuals and businesses little or no tax liability in a
politically and economically stable environment. Tax havens also provide little or no financial
information to foreign tax authorities. Individuals and businesses that do not reside a tax haven
can take advantage of these countries' tax regimes to avoid paying taxes in their home countries.
Tax havens do not require that an individual reside in or a business operate out of that country in
order to benefit from its tax policies
Some of the benefits extended to investors include:
 Tax free bank interest
 Tax free dividends paid by companies domiciled in these countries.
 Fixed corporate tax based on level of capital investment.
 Attractive corporate tax rates including nil tax for specified periods
 No capital gains tax
 Tax free profit repatriations etc
The countries most involved in utilizing the principle of tax haven are those with resources
requirement and depend on the financial investment attracted:
Examples of tax havens:
-- Seychelles -- British Virgin Islands -- Panama
-- Gibraltar -- Isle of Man (UK) -- Netherlands
-- Bahamas -- Channel Islands (UK) -- Cyprus
COMESA Tax Treaty
COMESA in an economic integration standing for Common Market for East and Southern African
countries. Its members include: Egypt, Kenya, Zambia, Botswana, Uganda, Malawi, Mozambique.
The COMESA Tax treaty is an agreement among the countries, which calls for reduction of tariffs
between the member countries with the objective of achieving uniform custom tariffs or a zero rate
tariffs. However, this treaty has not been respected by several member countries thus creating serious
problems in trade.

The Benefits that Accrue from this Tax Treaty Include

a. Increased trading between the member countries due to a larger export market.

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 b. Increased labour mobility and investment among the countries.
c. Prevention of tax evasion and fraud since custom tariffs are harmonized.
d. Fostering economic corporation and growth.
e. Prevention of economic smuggling across the borders
f. Foster exchange of goods and services including technical expertise.

Disadvantages of Trade Treaties

a. Loss of revenue to the government. This may lead to increased taxation on the citizens of the
country to compensate for lost revenue.
b. Loss of industry competitiveness as a result of imports on preferential rates.
c. Loss of economic sovereignty of the country e.g. a country may pursue fiscal, monetary and
economic policies to fulfil the conditions necessary for economic integration at the expense
of its economic growth.
d. Collapse of local industries due to increased importation of goods; especially where one
country is considered to have a competitive edge over others hence can engage in mass
production and export to the trading partners. (Trade wars between Egypt and Kenya).
e. It could lead to dumping of goods.
f. Wider and expensive use of verification mechanisms and post-import audit techniques to
target goods purported to be from COMESA countries in order to limit the preferential entry
of non- qualifying goods.
Tax Objectives under COMESA Treaty
a. Free movement of goods and services within the region including harmonization of tariffs
and internal tariff elimination.
b. Encourages development in the region.
c. A customs union under which goods and services imported from Non-COMESA countries
will attract an agreed single tariff in all COMESA states.
d. Same rules of origin of goods apply in the region.

Rules of Origin Provisions under COMESA

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They are five rules and only one must be complied with for any goods to qualify for COMESA
tariff treatment.
i. Goods wholly produced or obtained in a member state (that is, no materials from outside
the Common Market have been used);or
ii. Goods produced in the members states and the CIF value of any foreign (that is, non-
COMESA) materials used does not exceed 60% of the total cost of all materials used in
their production.
iii. Goods produced in member states whose valued added resulting from the process of
production accounts for at least 35% of the ex-factory cost of the goods;
iv. Goods purchased in member states and are classified or become classified under a tariff
heading other than the tariff heading under which they were imported; or.
v. Goods of particular importance to the economic development of the member states and
containing not less than 25% value added notwithstanding the provision in (c) above.
.

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