Double Taxation Avoidance Agreements

7m ago
446.79 KB
48 Pages
Last View : 3d ago
Last Download : n/a
Upload by : Melina Bettis

Double Taxation AvoidanceAgreementsEstablishing internationally collaborativetaxation regimesNov 2019

OutlineRevisiting the basics3DTAA authority8Model DTAAs11Focus on Key DTAA provisions15Recent developments21Case study27Q&A342 Deloitte & Touche 2019

Revisiting the basics Deloitte & Touche 20193

Revisiting the basicsUnderstanding the conceptDouble Taxation The imposition of tax on the same income bymultiple jurisdictions. Two forms exist: Economic double taxation – the taxation ofthe same income, in the hands of differenttaxpayers, by multiple jurisdictions. Juridical double taxation – the taxation of thesame income, in the hands of the sametaxpayer, by multiple jurisdictions.Implications of double taxation Discourages international trade; Discourage foreign direct investment; and Slows economic growth. Measures to avoid double taxation Double Taxation Avoidance Agreements(DTAAs)4 Deloitte & Touche 2019

Revisiting the basicsWhat are DTAAs?Double Taxation Avoidance Agreements Bi-lateral international treaties/agreements purposed atallocating taxation rights between multiple jurisdictions. What are the objectives of DTAA’s? Eliminate double taxation Encourage exchange of tax information Promote foreign direct investment14 DTAAs since independence: France, Germany,India, Iran, Norway, South Africa, Sweden, UnitedKingdom, Zambia, United Arab Emirates, Qatar, SouthKorea, Denmark and Canada.5 Deloitte & Touche 2019

Revisiting the basicsWHT rates where Kenya has a DTAAGermany anagementor itedArabEmiratesand 55 or 10*151012101210105***Kenya Mauritius DTAA – the operation of the Kenya Mauritius DTAA was invalidated following a ruling bythe High Court of Kenya, which noted that due process was not followed prior to the gazettement of theDTAA.**Management fees or business profits? Deloitte & Touche 20196

Revisiting the basicsWHT rates where Kenya does not have a DTAAResident payee or NonResident with a KenyanPE5%Payment subject to WHTManagement feeNon-residentpayee without aKenyan PE20%Royalties5%20%Leasing equipmentN/A15%Dividend5%10%Interest from financial institutions and Government 2year bearer bonds15%15%Interest from bearer certificates20%25%Housing bond interest10%15%10%*30%10% - Pension and taxable withdrawals frompension/provident fundsInsurance commissions:Contractual feesConsultancy and agency feesSurplus Pension fund withdrawal/s*Withholding tax on rent payable to a resident person for use or occupation of immovable property was introduced with effect from 1 January 2017. Itis to be noted, however, that only persons appointed to be withholding tax agents can withhold tax on the rent.7 Deloitte & Touche 2019

DTAA authority Deloitte & Touche 20198

DTAA authorityWhere do DTAA’s derive their legal standing?International LawVienna Convention on the Law of Treaties(VCLT) Article 2 – Defines a treaty as an internationalagreement concluded between States and governedby international law. Article 27: Provides one cannot invoke internal lawfor failure to perform a treaty- Supremacy of theDTAA’s Income Tax Act, 2014Section 41 – seeks to implement DTAAs indomestic legislation.Section 41 (5) – Limitation of Benefits clause.Domestic Legislation Article 2 (6) Constitution of Kenya, 2010 The supreme law of the land. Provides – ‘Any treaty or convention ratified byKenya shall form part of the Law of Kenya underthis Constitution. Treaty Making and Ratification Act, 2012 Domestic legislation implementing Article 2 (6)Constitution of Kenya, 2010. Provides the treaty entering, ratification andenforcement process.9 Deloitte & Touche 2019

DTAA authorityDomestic Legislation vs. International LawIncome Tax Act, 2014 Section 41 (5) – Limitation of Benefits clause. Seeks to limit the application of DTAA in domestic legislation. Hierarchy of Laws Per VCLT, international law trumps domestic law. Can the Income Tax Act limit theapplication of DTAAs on the domestic level? DTAAs Post-2010 Some DTAAs post-2010 (Kenya India DTAA) – expressly note that DTAA provisions may bylimited through domestic legislation. Sec 41 (5) -2014“where an arrangement made under this section providesthat income derived from Kenya is exempt or excluded from tax, or theapplication of the arrangement results in a reduction in the rate of Kenyan tax,the benefit of that exemption, exclusion, or reduction shall not be available toa person who, for the purposes of the arrangement, is a resident of the othercontracting state if fifty per cent or more of the underlying ownership of thatperson is held by an individual or individuals who are not residents of thatother contracting state for the purposes of the agreement”.10 Deloitte & Touche 2019

Model DTAAs Deloitte & Touche 201911

Model DTAAsInternational collaboration States free to structure DTAAs in ways thatbest captures their mutual interest. The DTAA models available are: OECD Model Tax Convention onIncome and on Capital; United Nations Model Double TaxationConvention between Developed andDeveloping Countries; and US Model Income Tax Convention Which model does Kenya adopt? Should Kenya reconsider revising someDTAAs?12 Deloitte & Touche 2019

DTAA format Articles 1 and 2:Scope of the Conventiono Persons coveredo Taxes coveredArticles 3 to 5:Definitionso General definitionso Residency statuso Permanent establishmentArticles 6 to 21:Taxation of incomeo Income from immovable propertyo Business profitso International shipping and air transporto Associated enterpriseso Dividendso Interesto Royaltieso Capital gainso Income from employmento Directors’ feeso Entertainers and sportspersonso Pensionso Government serviceo Studentso Other incomeArticle 22:Taxation of capitalo CapitalThis highlights thebeneficiaries of the DTA,and taxes covered.This defines specific termsutilised in the DTA.This provides the basis fortaxation of the variousincome heads noted, aswell as allocating taxationrights to the relevantStateThis provides the basis for the taxation ofcapital.13 Deloitte & Touche 2019

DTAA format Article 23:Methods for elimination of double taxationo Exemption methodThis provides the methods through whicho Credit methodrelief from double taxation can be sought.Articles 24 to 30:Special provisionso Non-discriminationo Mutual agreement procedureo Exchange of informationThis provides for special concerns addressedo Assistance in the collection of taxesby the DTA, such as exchange of informationo Members of diplomatic missionsand non-discrimination provisions.and consular postso Entitlement to benefitso Territorial extensionArticles 31 and 32:Final provisionsThis highlights the process required in ordero Entry into forcefor the DTA to come into force as well aso Terminationtermination procedures14 Deloitte & Touche 2019

Focus on key DTAAprovisions Deloitte & Touche 201915

Focus on key DTAA provisionsPermanent Establishment - Article 5 UN Model Tax ConventionOECD Model Tax ConventionA PE includes a building site or construction orassembly project or supervisory activities inconnection therewith which exists for more than sixmonths.A PE includes a building site, a construction,assembly or installation, project which exists formore than twelve months.Provides for ‘services permanent establishments,whereas furnishing of services, including consultancyservices, for a period or periods aggregating to morethan 183 days (six months) within any 12 monthperiod.No special provision covering services‘Delivery’ does not form part of preparatory andauxiliary services.‘Delivery’ is expressly listed as a function thatconstitutes part of preparatory and auxiliaryservices.Key issues to note-Commentary to Article 5: Auxiliary nature or preparatory: The decisive criterion on activities being of a preparatory orauxiliary character is whether or not the activity of the fixed place of business in itself forms anessential and significant part of the activity of the enterprise as a whole. A fixed place of businesswhose general purpose is one which is identical to the general purpose of the whole enterprise,does not exercise a preparatory or auxiliary activity. Fixed place of business: “Again the place of business may be situated in the business facilities ofanother enterprise. This may be the case for instance where the foreign enterprise has at itsconstant disposal certain premises or a part thereof owned by the other enterprise”.16 Deloitte & Touche 2019

Focus on key DTAA provisionsBusiness profitsUN Model Tax ConventionOECD Model Tax ConventionAllows for the taxation of certain profits notattributable to the PE such as sales of similar goodsor merchandise as well as other business activitiesof the same or similar kind carried on by theenterprise in the source country.Only profits attributable to the PE are taxable.There is a restriction on expenses/fees for the useof patents.Accorded the same right as resident enterprises todeduct the trading expenses other than restrictionsimposed on resident enterprises.17 Deloitte & Touche 2019

Focus on key DTAA provisionsOther incomeItems of income of a resident of a Contracting State, wherever arising, not dealt with in the DTAAUN Model Tax ConventionOECD Model Tax ConventionProvides for source country taxation of otherincome, as an exception to the general approachof allowing only residence country taxation ofincome not expressly dealt with in the underlyingDTAAMaintains residence taxation of income notexpressly dealt with in the underlying DTAA. Article 21 (3) of the UN Model Tax Convention provides for source based taxation of other income. Itgives States the right to tax other income where their domestic legislation provides for the taxation ofthat income. Kenya-UK DTAA – Mainly based on the OECD Model. Grants UK favourable taxation rights at Kenya’sexpense- (e.g. management fees for a PE, other income ) VS Kenya-India DTAA –Based on UN Model for some articles but revised some clauses in line with OECDModel. Attempts to balance taxation rights between the two entities (other income, deductibility ofexpense). Does management and professional fees form part of other items of income?18 Deloitte & Touche 2019

Focus on key DTAA provisionsManagement and professional fees UN Model Tax ConventionOECD Model Tax ConventionCovered under article 14Covered under article 7 following the repeal ofarticle 14Taxable as Independent Personal Services in thecontracting state unless: The independent person has a fixed baseregularly available to him in the other State forthe purpose of performing his activities; or Spends an aggregate of 183 days in a year inthe other state Taxed as business profits in the contractingstate unless a PE is created. Prior to its deletion only provided for taxationof professional income if the independentperson has a fixed base regularly available tohim in the other State for the purpose ofperforming his activitiesProfit from services- Commentary to article 5 OECD: “The profits from services performed in theterritory of a Contracting State by an enterprise of the other Contracting State are not taxable in thefirst-mentioned State if they are not attributable to a permanent establishment situated therein”.19 Deloitte & Touche 2019

Focus on key DTAA provisionsManagement/professional feesOECD Application Commentaries to the 2017 OECD Model TaxConventional note ‘The effect of the deletion ofArticle 14 is that income derived fromprofessional services or other activities of anindependent character is now dealt with underArticle 7 as business profits.’ Commentary to article 5: the profits from thesale of goods that are merely imported by aresident of a country and that are neitherproduced nor distributed through a permanentestablishment in that country are not taxabletherein and the same principle should apply in thecase of services. The mere fact that the payer ofthe consideration for services is a resident of aState, or that such consideration is borne by apermanent establishment situated in that State orthat the result of the services is used within theState does not constitute a sufficient nexus towarrant allocation of income taxing rights to thatState.KRA’s interpretation Where not expressly mentioned,management fees are taxable as otherincome. The DTAAs between Kenya andFrance/South Africa/UAE and Qatar do nothave an article on management fees.20 Deloitte & Touche 2019

Recent developments Deloitte & Touche 201921

Recent developmentsBase erosion and profit shiftingBase Erosion and Profit Shifting (BEPS) Tax avoidance strategies that exploit gapsand mismatches in tax rules to artificiallyshift profits to low or no-tax locations.BEPS strategies – tax avoidance or tax evasion? Not necessarily illegal, but: Undermine the fairness and integrity oftax systems. Enable multinational enterprises(MNEs) gain a competitive edge overenterprises operating on a domesticlevel.BEPS Inclusive Framework Spearheaded by OECD in conjunction with G20. OECD has developed 15 standards Action Plans. Incorporated into the 2017 OECD Model TaxConvention. Four Action Plans directly affect DTAAs: Action 2: Neutralizing the Effects of HybridMismatch Arrangements. Action 6: Preventing the Granting of TreatyBenefits in Inappropriate Circumstances. Action 7: Preventing the Artificial Avoidanceof PE status. Action 14: Dispute resolution- Making Disputeresolution more effectiveDomestic legislation on tax avoidance/evasion Tax Procedures Act, 2015, Section 85 –introduces severe penalties (double theprincipal tax) should a tax payer be foundengaging in tax avoidance schemes. Equalpenalty for tax agent Income Tax Act, 2014, Section 23 –empowers the Commissioner to assess tax ontransactions designed to avoid or reduce taxliability.22 Deloitte & Touche 2019

Recent developmentsBase erosion and profit shifting Cont’dBEPS Action 2: Neutralizing the Effects ofHybrid Mismatch Arrangements Hybrid mismatch arrangements – arrangementsthat exploit differences in the tax treatment ofinstruments, entities or transfers betweenmultiple jurisdictions.Transparent entities- Treated as income of aresident of contracting state subject to the samebeing taxed in that contracting state.Dual residents- Competent authorities todetermine otherwise no tax relief or deduction. Aims to prevent double deduction (double nontaxation)- Exemption in both states or reducedtax rates. Refers to the interaction of domestic tax systemsthat may lead to income not being taxedanywhere.BEPS Action 6: Preventing the Granting ofTreaty Benefits in Inappropriate Circumstances’Treaty Abuse Refers to a tax avoidance mechanism purposedat taking advantage of tax relief offered byDTAAs in multiple jurisdictions. BEPS Action 6 recommends that DTAAsstructured to prevent double taxation as well asdouble non-taxation ( preamble clause). Required preamble Clause “Intending toeliminate double taxation with respect to thetaxes covered by this agreement without creatingopportunities for non-taxation or reducedtaxation through tax evasion or avoidance(including through treaty-shopping arrangementsaimed at obtaining reliefs provided in thisagreement for the indirect benefit of residents ofthird jurisdictions”.Article 29, Entitlement to Benefits (SigningMLI): An entity qualifies to the entitlement to DTAAbenefits if they meet: A principal purpose test rule: obtaining thatbenefit was one of the principal purposes of anyarrangement or transaction that resulted directlyor indirectly in that benefit. Deloitte & Touche 201923

Action 6: Preventing Tax Treaty AbusePurposes of DTAs- Pre BEPS To avoid double taxation but not exclude taxation Tax Treaty System Allocates tax rights – Includes right not to tax to prevent ‘double taxation’& encourage foreign investment.Post BEPS DTA aim to end ‘double non-taxation’ & harmful tax practices “treaty shopping” - taking advantage of “better” tax treaties to lower the total tax burden forthe multinational group.24 Deloitte & Touche 2019

Action 6: Prevent treaty abuseConsiderationOverview of ActionsA-Treaty shoppingLimitation On Benefits clause (LOB)Principal Purpose Test rule (General Anti Abuse rule)A-Cases where a person triesto circumvent the provisionsof domestic tax law usingtreaty benefitsPrecision as a general principle that the purpose of treaties is not torestrict the taxation by a State of its own residents – except for specificcases to be listed in the treaty – so allows the application of anti-abuserules by the contracting states for their residentsB - Clarification that taxtreaties are not intended tobe used to generate doublenon-taxationStatements that avoiding tax evasion and avoidance is also a purpose ofthe treaty (change of title, of the preamble and of the introduction of theModel Convention)C - Tax policy considerationsthat countries should considerbefore deciding to enter into atax treatyInsert in the Introduction to the OECD Model a section C “Tax policyconsiderations that are relevant to the decision of whether to enter into atax treaty or amend an existing treaty”25 Deloitte & Touche 2019

Proposed changes Income Tax Bill onDTA Proposal to expand the limitation on application of DTA by excluding the below persons (in theother treaty partner state) from benefiting from a double tax treaty: A holding company; Supervision or administration of a group of companies; Entities providing group financing (including cash pooling); or Entities making or managing investments. DTA Would not apply where a company is formed to just provide financing or administrationsupport e.g. a shared service centre (SSC).Kenya India DTA Amended The Kenya India DTA, initially concluded in 1985, was revised, with an effective date of 01January 2018 incorporated BEPS action plans. E.g. PE definition now includes sales outlets andwarehouses providing storage facilities for others and service PEs.26 Deloitte & Touche 2019

Recent developments Action 7 aims to prevent the artificial avoidance of PE through redefining the threshold forcreating a PE including a focus on the use of commissionaires The term “permanent establishment” includes especially:a) A place of management;b) A branch;c) An office;d) A factory;e) A workshop, andf) A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.27 Deloitte & Touche 2019

Role of the PE ConceptCountry of residenceCountry of sourceBusinessactivityEnterpriseArt. 7(1): source statemay only tax businessprofits if the businessactivity constitutes a PEArt. 5: definitionof permanentestablishmentArt. 7: rules onprofit allocation28 Deloitte & Touche 2019

Article 5 OECD Model (2014) – Pre BEPSArt. 5(1)Fixed place of business PEArt. 5(2)Positive list (examples)Art. 5(3)Construction PEArt. 5(4)Negative list (exceptions)Art. 5(5)Dependent agent PEArt. 5(6)Independent agentArt. 5(7)Subsidiary29 Deloitte & Touche 2019

Article 5 OECD Model (2017) – Post BEPSArt. 5(1)Fixed place of business PEArt. 5(2)Positive list (examples)Art. 5(3)Construction PEArt. 5(4)Negative list (exceptions)Art. 5(4.1)Anti-fragmentation ruleArt. 5(5)Dependent agent PEArt. 5(6)Independent agentArt. 5(7)SubsidiaryArt. 5(8)Closely related enterprises30 Deloitte & Touche 2019

Action 7: Avoidance of PE StatusPE typeChangeHow?TargetFixed place of businessArt. 5(1)Auxiliary/Prep. ExceptionsArt. 5(4)Making all subparagraphs subject to a“preparatory or auxiliary” condition Digital businesses (warehousing) Exempted “core functions” (e.g.purchasing for sales entities)New Art. 4.1.New Anti-fragmentation rule Segmentation of cohesivebusiness operations,complementary functions insupply chain structuresConstruction PEArt. 5(3)OECD CommentarySAAR as example Split up of contractsAgency PEDependent Agent DefinitionArt. 5(5) Extends definition to an agent who“habitually plays the principalrole leading to the conclusion of contracts that are concludedwithout material modification” bythe principal contracts are performed by theprincipal Independent AgentDefinition 5(6)No independence if one actsexclusively or almost exclusivelyon behalf of one or more enterprises towhich it is closely related Independent agents who arepractically dependent agentsCommissionairesSales/marketing service providersRep officesContracts negotiated in thesource state butapproved/finalized online31 Deloitte & Touche 2019

BEPS Implications Commissionaire arrangements: commissionaire arrangements, where the sales takes placewithout a substantive change in the functions performed in that country on the basis on nonbinding contracts Commissionaire activities intended to result in conclusion PE. Auxiliary or preparatory activities/character: each of the exceptions included therein isrestricted to activities that are otherwise of a “preparatory or auxiliary” character. preparatory or auxiliary can create a PE Anti-fragmentation: fragmenting a cohesive operating business into several small operationsor splitting contracts in order to argue that each part is merely engaged in preparatory. Not possible to avoid PE status by fragmenting or splitting contracts32 Deloitte & Touche 2019

Proposed changes Income Tax Bill - PEs Proposal to expand definition to include a warehouse, a farm or plantation, a sales outlet,supervisory activities in connection with a project site Service PE: The provision of services through employees who are in Kenya for more than 91days in a given year. A branch to be taxed in the same way as a local company. @30% for taxable income up toKES 500 million; and @35% for income above KES 500 million. Proposal for 10% tax on the repatriation of branch income (a summation of the after-taxprofits and any reduction in the net assets of the PE.) Payments made by a PE to head office not subject to WHT only if treated as a non deductibleexpense for the branch.33 Deloitte & Touche 2019

Base erosion profit shifting cont’dBase erosion and profit shifting Cont’dBEPS Action 14: Dispute resolution-MutualAgreement Procedures MAPs are procedures that allow CompetentAuthorities from the governments of theContracting States/Parties to interact with theintent to resolve international tax disputes. BEPS Action Plan aim to strengthen theeffectiveness and efficiency of the MAP process-e.geffective and timely resolution of disputes MAPs provides an alternative for resolving taxdisputes giving rise to double taxation. Issuesresolved through MAPs: Permanent establishment issues; Characterisation and classification of income; Residency of a taxpayer; Applicability of specific withholding tax rates;and Adjustments arising from transfer pricingassessments.34 Deloitte & Touche 2019

Action 15: Multilateral Instrument(“MLI”) Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS– MLI Signed on 7 June 2017 by 68 countries 11 African countries signed the MLI Burkina Faso Cameroon Cote d’Ivoire Egypt, Gabon, Mauritius Nigeria Senegal Seychelles South Africa Tunisia EAC countries still did not sign – expected to sign 2018/201935 Deloitte & Touche 2019

MLI - PE Provisions Article 12 – Artificial Avoidance of Permanent Establishment Status through CommissionaireArrangements and Similar Strategies‒ Notifications‒ Reservations Article 13 – Artificial Avoidance of Permanent Establishment Status through the SpecificActivity Exemptions‒ Notifications‒ Options (A – B)‒ Reservations Article 14 – Splitting-up of Contracts Article 15- Definition of a person closely related MLI has 17 articles – and commentary on options36 Deloitte & Touche 2019

Overview of PE Options Taken under theMLI by African CountriesCountryArticle 12Article 13Article 14Article 15Burkina FasoOpted inOpted in - AOpted inOpted inCameroonOpted inOpted in - AOpted inOpted inCote d’IvoireOpted inOpted in - AOpted inOpted inEgyptOpted inOpted in - AOpted inOpted inGabonOpted inOpted in - AOpted inOpted inMauritiusOpted outOpted outOpted outOpted outNigeriaOpted inOpted in - AOpted inOpted inSenegalOpted inOpted in - AOpted inOpted inSeychellesOpted outOpted outOpted outOpted outSouth AfricaOpted outOpted in - AOpted outOpted inTunisiaOpted inOpted in - AOpted inOpted in37 Deloitte & Touche 2019

Matching principal - Option country Xversus Option country YArticlesNLNigeriaImpact on treatyArticle 12 - Artificial avoidance of PE CommissionaireOpted inOpted inArticle 12 would applyArticle 13 - Artificial avoidance of PE activity exemptionsOpted in - AOpted in - AOpted A would applyArticle 14 - Splitting up of contractsOpted inOpted inArticle 14 would applyArticle 15 - Définition closely relatedperOpted inOpted inArticle 15 would applyArticle 12 - Artificial avoidance of PE CommissionaireOpted inOpted inArticle 12 would applyArticle 11 - Restrict a party’s right totaxOpted outOpted outArticle 11 would not applyArticle 8 – Dividend transferOpted inOpted outArticle 8 (1) would not apply38 Deloitte & Touche 2019

Recent developmentsKenya India DTAA revised The Kenya India DTAA, initially concluded in 1985, was revised in 2016 and later ratified on 29 June2017, with an effective date of 01 January 2018. The revised Kenya India DTAA introduced a number of key changes, including:IssueChangeResidencyIntroduces the ‘Place of incorporation’ as a determinant for residency.PermanentestablishmentExpands the definition of a PE to include sales outlets and warehousesproviding storage facilities for others. Additionally, services companiesincluding consultancy firms will be deemed to have a PE after an aggregateof 90 days.Business profitsGives the contracting parties the right to limit the allowability of executiveand general administrative expenses through domestic legislation. Similarly,the revised DTAA expressly disallows head office expenses (royalties, patents,commissions and interest).Limitation of BenefitsGives contracting parties the right to use domestic legislation to address taxavoidance and evasion issues.DTAA guaranteed WHTratesReduces the applicable WHT rates in relation to certain payments.StudentsExempts remuneration earned by a student from an employment which he orshe undertakes for six consecutive years during his or her full time educationin either of the contracting states.Previous DTAA covered students and apprentices while the new DTAA strictlyencompasses students. Deloitte & Touche 201939

Case study Deloitte & Touche 201940

Case studyA US based manufacturing company, ManCo, wishesto expand its business to the Sub-Saharan region.ManCo wishes to set up a legal entity in Kenya,ManKE, as well as a holding company, HoldCo, in theUnited Kingdom (UK). Further, ManCo will set-up aShared Services Centre (SSC) in South Africa (SA).ManKE will be ManCo’s trading entity in Kenya. It isintended that ManKE will receive funding as well asmarketing and managerial services from the SSC inSA. Additionally, ManKE will receive professionalservices from HoldCo.Noting the existence of a Kenya-UK Double TaxationAgreement (DTAA), ManCo expects to takeadvantage of the lower effective tax rates offered bythe DTAA on the repatriation of profits (throughdividend payments) from ManKE to HoldCo. Similarly,noting the Kenya-SA DTAA, ManCo expects to takeadvantage of the lower effective tax rate to reduce itswithholding tax (WHT) liability when making interestpayments to SSC.41 Deloitte & Touche 2019

Case studyApplicable WHT rates are as follows:United KingdomManagement andProfessional feesSouth AfricaNon-Residents12.5%Taxed as business rest15%10%15%42 Deloitte & Touche 2019

Case study cont’dThe proposed organisational structure is set out below:43 Deloitte & Touche 2019

Case study – Part IManCo intends on utilising the SSC based in SouthAfrica to fund its various sub-Saharan regionalentities, inclusive of ManKE. Further, the SSC willalso be tasked with providing the regional entitieswith marketing and management services.Questions: Noting the existence of the KE-SA DTAA, what arethe applicable withholding tax rates on interestpayable by ManKE when making interest paymentsto SSC? Assuming that SSC advances interest free loans toManKE, what are the arising WHT implications? In relation to the fees payable by ManKE to SSCfor management and marketing services, arethese taxable as business profits, or liable towithholding tax? Consider Section 41 (5) – can domestic law limitDTAA applications where the payments are toIndia? Consider BEPS and discuss the positions44 Deloitte & Touche 2019

Case study – Part IIManKE receives payroll services from HoldCo, based in the UK.Additionally, ManCo expects to repatriate ManKE’s profits(through dividend payments) to HoldCo. Given the existenceof the KE-UK DTAA, ManCo expects to benefit from the taxreliefs guaranteed in the underlying DTAA.Questions: Are fees paid by ManKE to HoldCo for payroll servicesrendered subject to withholding tax? If yes, at what rate? Seeking to give more substance to HoldCo, ManCo opts toincrease the services provided to ManKE by HoldCo. HoldCoand ManKE enter into a contract for services wherebyHoldCo provides legal support during contract negotiations.In the provision of this service, HoldCo employees travel toKenya from time to time, for an aggregate period of sixmonths in one year. While in Kenya, HoldCo employees willbe provided with an office in ManKE’s premises. Given the arrangement above, is HoldCo likely totrigger a PE in Kenya? If yes, what are the implications on the repatriation ofprofits from ManKE to HoldCo. What is the position on the payments of Interest andmanagement

Double Taxation Avoidance Agreements Bi-lateral international treaties/agreements purposed at allocating taxation rights between multiple jurisdictions. What are the objectives of DTAA’s? Eliminate double taxation Encourage exchange of tax information Promote foreign direct