And, in a red flag to regulators and politicians, he said the different layers of complexity of tax laws that were a feature of most East African countries, were impeding the easy growth of regional business and investment.
“When you are selling a company, there are certain taxes that apply to you, the most typical being Capital Gains Tax (in Kenya 5%) but, in many instances, this is the least of the seller’s concerns.”
In most instances, a sale transaction, especially one that is publicised, would often trigger an audit by the revenue authorities. Therefore, a seller needs to ensure that the business being sold has no underlying tax problems or issues with the revenue authority which would arise post-completion as typically the buyer would want conditions and warranties in place before the deal could go through, he explained, and may result in a “clawback” of the consideration the seller received.
“A large part of the work that needs to be done is transaction structuring – how do you, as a seller, exit in a tax efficient manner, and, also, identify issues emanating from undertaking the deal after trading for so many years? It is important to clean all this up as this will impact on the indemnities and warranties you give and ultimately, the consideration you receive on the sale.”
In certain instances, amounts could be held back until issues were sorted out – especially the case when a business had been trading for a long time and where the buyer has identified issues through a buyer due diligence process prior to undertaking the transaction.
For the buyer, there were transaction taxes which in East Africa started with Stamp Duty, he said.
But here Daniel explained it was critical the buyer understood the consequences of decisions around how the deal was structured as these too would have big tax implications.
“If you get the structure wrong (at the point of purchase) unwinding or exiting becomes very difficult in the future.”
If the purchaser was a foreign entity, the purchaser also needed to know whether there were double-tax agreements in place as this impacted the taxing of returns due to it.
“For example, a dividend paid from Kenya to a company in a country where there is no double-tax treaty advantage will suffer a 15% withholding tax. However, this same transaction to a DTA country, means the applicable tax could be lower.”
Additionally for future exit or future joint venture considerations, and also for reasons of strategic expansion to other African countries, it is important for a purchaser to think about where to base their acquiring entity.
“If I am a big international company in the UK, do I buy directly using my UK entity or do I buy using an intermediary holding company in a second jurisdiction (with a wide double tax treaty network) like Mauritius.”
Another place where many investors/purchasers became unstuck was thinking they could easily spread across a region, like East Africa, from their first base.
Here, Daniel explained, was where governments needed to do better if they wanted to encourage regional growth and investment.
For example, the tax implications for a company based in Kenya but wanting to open in Uganda or Tanzania were enormous, making it more worthwhile to look at placing the holding company in a tax neutral jurisdiction.
Shockingly, the East African Community Double Tax treaty, which was first published 11 years ago in East Africa, was yet to become effective with some East African countries “holding out”. Additionally, Daniel observed that the East African Community protocols of free movement of labour and other trade issues were yet to be fully implemented in Africa.
Heartening was that a recent regime change in Tanzania, now under President Samia Suluhu Hassan, was already showing signs of introducing a more liberal business agenda, he added.
This had brought renewed hope that friction on many of these issues within the East African Community would be reduced and that East Africa would, at last, be able to bring down many of the economic barriers that had impeded trade and growth.
“Kenya has done a lot in the last few years, trying to update its laws every year, but I do feel more needs to be done to give certainty to tax-payers.”
This certainty centred on the revenue authorities finding a balance between constantly shifting the tax “goal posts” with new regulations and laws (and then conducting tax audits) and allowing companies to get on with their business.
“Almost all international companies in the region have had disputes with the revenue authorities of one type or the other.” It has become, he says, an uphill battle to stop revenue authorities “killing the very goose that lays the golden egg”.
On a personal note, Daniel shared that his journey to becoming a tax lawyer started when he left school (he was born in Kiambu near Nairobi). He studied law at the University of Nairobi while at the same time, studying to become a certified public accountant on a part time basis. He then went to University College London (Queen Mary) for his LLM where he majored in Corporate Commercial Law and Tax. He had a spell with PricewaterhouseCoopers in Nairobi and with KPMG in the Channel Islands before joining A&K in 2009, where he now leads the tax practice.
His decision to be a tax lawyer followed a conversation with one of the directors of a big bank in Kenya while a student back in 2000 who mentioned what a challenge it had been for him to find a Kenyan tax lawyer who could give advice on a complicated tax point.
Daniel took that discussion to heart going to become one of Kenya’s first dedicated tax lawyers and now heads up East Africa’s biggest tax practice in a law firm, which includes 14 lawyers, and which endeavours to support businesses and investors in their projects across Africa.
To join Africa Legal's mailing list please click here