With the increasing Africa-wide trade efforts fronted by various governments, it is imperative that these governments offer supportive trade platforms for their nationals and investors by concluding Double Taxation Agreements.

At present, most of the African states do not have DTAs, making trade between and among them tax inefficient.

In East Africa, even though states have made gains in removing trade barriers among themselves, the East African DTA has not been concluded.

Kenya, for example, should aggressively seek to conclude as many DTAs with African countries, first so as to enable its nationals and residents to trade in those countries, and also to provide a springboard for investments into Africa where investments are routed through the country.

Mauritius and South Africa have concluded DTAs with many African countries.

A DTA is a treaty between states to co-ordinate the exercise of their taxing rights. It is signed by states (bilaterally or multilaterally) for several purposes, the most important being as a fiscal tool aimed at eliminating or reducing double taxation of taxpayers of those contracting states.

Since it is considered that double taxation hinders trade and the free flow of capital, goods and services between states, the conclusion of a double taxation treaty helps in eliminating or reducing this obstacle, thus fostering economic exchanges between those states.

In the absence of a DTA, a taxpayer doing business in two states would be taxed under domestic legislations of those states. Since those domestic legislations may be based on different fiscal systems, like taxing of territorial and worldwide incomes, often instances arise where there is double taxation.

This may be in the form of the same income being taxed in the hands of the same person by the two states, thus increasing the total tax burden of that person, or in situations where two different taxpayers are taxed in respect of the same income.

Where a DTA exists between these two states, it would provide taxing rights to one of the states or oblige one of the states to grant double taxation relief.

By way of a simple hypothetical example, a Kenyan company that is paid management fees by its Uganda subsidiary would be taxed as per table below.

Based on the above, it is clear that management fees payable to the company would suffer double taxation and cost the company tax of Ksh255,000, in comparison with Ksh 150,000 that the company would pay if there existed a DTA between Kenya and Uganda.

In such a case, the company’s total tax burden would be reduced. It should be noted that in most cases, a DTA would limit Uganda’s taxing rights to say 10 per cent. In such a case, the company’s total tax burden would be as per the last column.

DTAs also prevent the application of discriminatory tax treatments of one state to nationals or residents of the other state under certain situations, for example, in cases of a permanent establishment belonging to or enterprises owned by those nationals or residents, as well as on deductibility for tax of certain expenses paid to those nationals or residents.

DTA also may constitute the legal basis for co-operation between contracting states to prevent tax evasion by providing a platform for exchange of information or enforcement of the domestic laws of the contracting states.

Christopher Kirathe is the director tax services, at Ernst & Young. The views expressed here are his.