By Joseph Owande
That the world is now a global village is a cliché concept, not so much has been done to optimally tap into its rich opportunities. Globalization and cross-border trade accounts for a considerable portion of every country’s GDP.
Even more noteworthy is the emergence of the digital economy, which steadily continues to become the economy itself. Unless the Certified Public Accountants of Kenya (CPAKs) are prepared to meet new challenges in the cross-border trade front, Kenya risks slighting many of its opportunities and subsequently lagging behind its global counterparts.
One of the major considerations for cross-border trade is taxation. For every business transaction, there are various tax implications. Different countries have different tax laws, meaning there are about 190 tax laws in the world. However, since crossborder trade involves trading in more than one country, tax implications for all relevant countries of trade need to be considered.
Due to these differences, there have arisen enough collision in tax laws of different countries, necessitating international tax laws. In the recent years, Kenya has been a destination for major foreign direct investments (FDIs), with several multinational enterprises (MNEs) setting up shops here. The aforesaid has created the eminent demand for international tax practitioners. Many CPAs who posture as such do not possess the requisite training and expertise.
This is partly because the Kenyan University Education system does not currently offer any courses on taxation and one or two units in the business schools in taxation is all there is. And even with this, the units are offered in specialized courses and no topics in international taxation are covered. Many Kenyan CPAs wishing to obtain such training have sought the same abroad. Also, the CPAs qualification training and examination do not provide for a paper in international taxation.
Whereas there are international taxation-related contents under the Advanced Taxation unit of the CPA exams, the same are too basic to provide for this lack. As a result of these gaps, many CPAs do not have sufficient professional proficiency to advice businesses in international taxation matters.
Except for a handful “Big 4” accountants, a vast majority of tax and general accountants have merely speculative ideas of the principles of international taxation.But even the Big 4 accountants do not possess the full professional proficiency in this field, and mostly make up for this gap by enough disclaimer pages attached to their advisories.
“there has been increased vigilance by various tax authorities on cross-border transactions of
MNEs comply with these laws at an additional cost in penalties and interest, besides unforeseen cash
This has led to major challenges and associated risks – especially by MNEs who hire local CPAs – a few of which I discuss herein. Firstly, the CPAs of the affected businesses are not positioned to provide the sound advice on the tax implications of any cross-border transactions. We have seen instances where businesses sign commercial and financial contracts for cross-border transactions, but do not include any clauses on the tax.
This is because they are ignorant partly of the existing laws and of the international tax implications of such transactions. In most cases, the categorization and characterization of the instruments of the transactions as well as the wording used in the contract have international tax implications, most of which these entities are oblivious.
As a result of such omissions, businesses have had to bear the tax burden of their cross-border
transactions when the same could have been avoided, shared or even altogether borne by their trade partners, which instances add to their cost of crossborder business. Secondly, many MNEs have suffered civil and criminal charges for failing to comply with the tax laws of the countries in which they trade.
Recently, there has been increased vigilance by various tax authorities on cross-border transactions of MNEs, giving rise to tax audits by these authorities. Most businesses have been caught flat-foot and have had to comply with these laws at an additional cost in penalties and interest, besides unforeseen cash flow costs.
The other challenge posed by this gap is the potential loss of business in the global trade arena. Without a proper understanding of international tax laws, many businesses, in setting up in different jurisdictions, would consider only the conventional factors such as the legal & regulatory requirements and the general cost of business in those countries.
However, few, especially the medium-sized MNEs that may not have the financial muscle to hire the Big 4s, do not consider the tax regimes of their target jurisdictions and available tax treaties. When all is set and business operations begin, the tax burdens of operating in these jurisdictions emerge. Some of the tax burdens may be so heavy, forcing the business to close shops. As a profession, we cannot afford turn a blind eye to the inherent risks of releasing into the market CPAs with little or no sufficient professional proficiency in international taxation.
To this end, therefore, the Kenya Accountants and Secretaries National Examinations Board (KASNEB) should revise the CPA examinations syllabus and find a way of introducing an independent paper in International Taxation to curb these challenges and their attendant risks. As my contribution to this, I propose the following five topics to be covered under the Paper: International Taxation;
- Topic 1: Principles of international taxation and tax treaties: This will be the most comprehensive topic of this paper. Its contents will cover tax havens and preferential
tax regimes; intercompany crossborder dividends and capital gains; taxation of corporate groups; cross border interest deduction and other financial payments; controlled foreign company (CFC) regimes; hybrid mismatches; double taxation; distributive rules; and preventing treaty abuse.
- Topic 2: Multilateral treaties: This topic will cover the Organization for Economic Co operation and Development’s (OECD) and United Nation’s (UN) Model Tax Convention
o n income and on capital; and the action plans on Base Erosion and Profit Shifting (BEPS) 1 & 2 projects.
- Topic 3: Principles of Transfer Pricing
- Topic 4: The East African Community (EAC) tax laws: This will focus largely on the income tax and the value added tax laws of the EAC member states.
- Topic 5: International tax planning and ethical issues. This will not only bring legitimacy to
the professional proficiency of CPAKs in supporting businesses in their cross-border trades but will also add numerous benefits both to the CPAs and the Country.
“One of the immediate benefits of this introduction will be enhanced confidence by the MNEs on CPAKs’ technical abilities. This has a ripple effect of demand for CPAKs and consequently better remuneration for the profession. Further, CPAKs with this training will be highly marketable within the region and the Continent at large. Most MNEs across the continent have CPAKs as their Heads of Finance or Heads of Tax departments. With the introduction of this paper, there will be a great value addition in their services, making them highly valuable and improving their earnings consequently“
Further, this introduction will position Kenya as an MNEs destination of choice. This will be partly due to the availability of the relevant technical skills in global trade and because the country will have
sufficient technical minds to formulate international tax policies which align with the global best practices in taxation.
In negotiating Double Tax Agreements (DTAs), Kenya will have international tax experts with full practical and relevant professional proficiency in this field to shield the country from unwarranted loss of tax revenue. To the KASNEB as an examination body, introducing a paper on international taxation will position the CPA exams as professional exams of choice across, especially, the EAC region, if not the continent.
As such, it is expedient for the Profession to consider an independent CPA paper on international taxation if CPAKs are to compete in the global trade arena and if Kenya is to take optimal advantage of the
gains and opportunities of globalization.
The writer is Joseph Owande. Partner, Tax and Legal Kelde & Co.LLP