Kenya’s tax treaties generally follow the provisions of the OECD Model Tax Convention. However despite the expectation under the OECD Model that only profits acquire or accumulate from Kenya and attributable to the permanent establishment should be taxed, Kenya has been assessing to tax more profits than would normally be attributable to a permanent establishment (PE).
The KRA (The Kenya Revenue Authority) has therefore introduced the “force of attraction” rule in assessing PEs to tax. Under the force of attraction rule, where a multinational enterprise carries out business in Kenya through a permanent establishment, taxation will be imposed in Kenya on its business profits attribute of the permanent establishment and on profits from activities that are similar to those conducted by the PE but occur from activities conducted by other parts of the enterprise. This income will therefore be “attracted” to the PE. A significant number of tax evaluations have been issued on this basis. In the case of treaty countries it might be possible to find out the problem through the Mutual Agreement Procedures (MAP). Multinational groups with operations in Kenya should therefore look at their activities in Kenya and transactions undertaken by the head office and other group companies. They may need to change the way in which they do business in Kenya.
