Executive summary

Kenya ratified the Multilateral Convention to implement tax treaty-related measures to prevent Base Erosion and Profit Shifting (BEPS) and deposited the Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD) on 8 January 2025.

The MLI is a multilateral agreement reached by members of the OECD Inclusive Framework, allowing for the modification of current treaties to better align with the tax treaty elements of the BEPS initiative.

Kenya became part of the OECD/G20 Inclusive Framework on BEPS in January 2017, signed the MLI on 2 November 2019, and has now completed the ratification process.

Following the deposit of the ratification instrument with the OECD, the MLI is set to come into effect on 1 May 2025. It will address key BEPS project components related to double tax agreements, including hybrid mismatches (BEPS Action 2), tax treaty misuse (BEPS Action 6), artificial avoidance of permanent establishment status (BEPS Action 7), and enhanced dispute resolution processes (BEPS Action 14).

Detailed discussion

Background

The MLI was developed as a key component of the BEPS project to help prevent multinational enterprises (MNEs) from exploiting gaps and mismatches in tax rules and artificially shifting profits to low or no-tax jurisdictions where there is little or no economic activity, thereby eroding the tax base of higher-tax jurisdictions. The BEPS project resulted in a detailed 15-step action plan to address these strategies, which includes recommendations for modifying bilateral tax treaties.

Bilateral tax treaties were developed to address key aspects and objectives in international taxation, such as double taxation and the promotion of cross-border trade and investment. To address concerns over potential "loopholes" that could be exploited, it was necessary to update the bilateral tax treaties. The MLI is meant to simplify the process of updating existing bilateral treaties.

The MLI addresses BEPS by implementing, in a coordinated and efficient manner, tax treaty-related measures developed through the BEPS project in existing bilateral tax treaties.

Highlights

Kenya currently has 17 active tax treaties and an additional 34 treaties at various stages, including proposal, consideration, negotiation, conclusion, awaiting signature and awaiting ratification. According to the MLI-matching database, Kenya has 11 agreements that are currently matched, namely with Canada, Denmark, France, India, Italy, Korea, Seychelles, Sweden, South Africa, Qatar and the United Kingdom.

To achieve mutual alignment between the jurisdictions involved in a tax treaty, both parties must concur on the specific MLI provisions to be included in the matched agreement. Once the tax jurisdictions reach an agreement on a treaty, the MLI adds an extra layer of rules and provisions that complement the existing treaties.

Kenya is expected to work with its matched tax treaty partners to establish a consolidated text of the bilateral treaties, merging the existing tax treaty language with the relevant provisions of the MLI. Notably, Kenya excluded treaties with Germany, Iran, Norway, the United Arab Emirates and Zambia from the list of Covered Tax Agreements

Implications

Kenya's depositing the ratified MLI with the OECD is an indication of the country's intention to align its international tax framework with international standards. This alignment should provide a more predictable environment for MNEs with business interests in Kenya.