A New Era for Tax Treaties: Kenya Ratifies the Multilateral Instrument (MLI)

In a significant step toward modernizing its tax treaty framework, Kenya has deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), commonly known as the Multilateral Instrument (MLI). This marks Kenya's formal commitment to adopting measures aimed at curbing tax avoidance, enhancing transparency, and aligning its tax treaties with global standards.

What is the MLI?

The MLI is an OECD-driven agreement designed to combat Base Erosion and Profit Shifting (BEPS) by updating and modifying existing bilateral tax treaties without the need for individual renegotiations. For Kenya, this means its tax treaties with signatory countries will now reflect provisions aimed at preventing treaty abuse, ensuring fair taxation, and improving dispute resolution.

The Significance of Ratification

By ratifying the MLI, Kenya has undertaken the following:

1. Formal Acceptance: Ratification signifies Kenya’s legal agreement to be bound by the MLI’s provisions, completing the domestic procedures necessary for approval.
2. Binding Commitment: Kenya is now obligated to adopt and enforce the measures outlined in the MLI across its network of tax treaties.

Key Impacts on Kenya’s Tax Treaties

1 Automatic Updates to Tax Treaties

The MLI introduces critical changes to Kenya's tax treaties with other signatory countries, including:

• Revising the definition of permanent establishment to address challenges posed by digital economies.
•  Adding measures to counter treaty shopping and other forms of tax avoidance.

2. Incorporation of BEPS Action Plans

Kenya’s tax treaties will now align with global best practices, implementing measures such as:

• Action 2: Introducing global minimum tax rules and measures to address the challenges of the digital economy, ensuring that profits are taxed where economic activities and value creation occur.
• Action 6: Preventing treaty abuse by ensuring treaty benefits are only available to entities engaged in genuine economic activity.
• Action 7: Addressing artificial avoidance of permanent establishment status, especially in digital and remote business operations.
• Action 14: Enhancing dispute resolution mechanisms, including the Mutual Agreement Procedure (MAP), to reduce instances of double taxation.

3. Enhanced Compliance for Multinational Enterprises (MNEs)

Stricter rules will now apply to MNEs operating in Kenya, ensuring taxes are paid where economic activities and value creation occur.

4. Global Collaboration and Investment Confidence

Ratifying the MLI strengthens Kenya’s reputation as a cooperative jurisdiction in global tax matters, fostering greater investor confidence.

Challenges

While the MLI introduces much-needed updates, it also brings challenges:

• Kenya must ensure smooth coordination with treaty partners who may have differing reservations or implementation timelines.
• Domestic tax regulations and administrative processes will require updates to align with the MLI provisions.
• Training tax administrators and stakeholders will be essential to effectively enforce the changes.

Kenya’s ratification of the MLI signals its commitment to global tax reform and transparency. While this move strengthens Kenya’s tax framework and aligns it with international standards, it also demands robust implementation strategies to overcome the associated administrative challenges.

At BDO East Africa, we are committed to helping businesses navigate these changes. Contact us for guidance on how the MLI impacts your operations and ensures compliance with the updated treaty provisions.

This article is for informational purposes only and is not intended as tax advice or a professional opinion. For guidance specific to your situation, consider consulting your tax advisor