Multinational companies operating in Kenya will, from
May 2025, face hefty fines and penalties if they transfer profits they
make locally to other tax-friendly
jurisdictions.
This is after the country deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies used by multinational corporations to exploit gaps and mismatches in tax rules across different jurisdictions.
These strategies aim to artificially shift profits to low- or no-tax locations, where little or no actual economic activity takes place.
As a result, corporations significantly reduce their tax liability, eroding the tax base of higher-tax jurisdictions.
According to PwC, the ratification with the Organisation for Economic Cooperation and Development (OECD) aims to prevent tax treaty abuse, promote economic substance, and improve tax dispute resolutions.
The provisions of the MLI will take effect for Kenya’s tax treaties starting May 1, 2025. PwC senior associate Moses Maraga said that the treaty finalised on January 8, 2025, signals Kenya’s commitment to aligning with the OECD’s Base Erosion and Profit Shifting objectives.
“We expect that Kenya will work with matched treaty partners to create synthesized texts that combine the provisions of current treaties with applicable MLI modifications. These will clarify how treaties are adjusted under the MLI framework,” said Maraga.
The MLI is a multilateral agreement endorsed by over 100 jurisdictions and allows signatories to modify existing bilateral tax treaties without requiring extensive renegotiations.
Kenya’s ratification of the MLI will impact both its existing and pending tax treaties.
Currently, Kenya has 15 treaties in force and 34 others at various stages of negotiation or ratification. Kenya’s current MLI-matched agreements include treaties with Canada, Denmark, France, India, Italy, Korea, Seychelles, Sweden, South Africa, Qatar, and the United Kingdom.
The MLI provisions will introduce additional rules to existing treaties, often taking precedence over domestic tax legislation.
For example, anti-treaty abuse measures included in the Kenya-UK tax treaty under the MLI are expected to override similar provisions in Kenya’s domestic laws.
“To ensure mutual alignment between the jurisdictions to a tax treaty, both jurisdictions must agree on the specific provisions of the MLI to be included in a matched agreement. Upon agreement by the tax jurisdictions to a treaty, the MLI introduces an additional layer of rules and provisions to sit alongside the existing treaties,” added Maraga.
By implementing the MLI, Kenya strengthens its ability to curb
tax avoidance, protect its tax base,
and foster a fairer international tax
system.
