BEPS, Digital Economy and Tax Dispute Resolution

BEPS, Digital Economy and Tax Dispute Resolution

Syllabus tag: KASNEB CPA | Advanced Level | CA35S1 Advanced Taxation

1. BEPS — Base Erosion and Profit Shifting

The OECD/G20 BEPS Project addresses tax avoidance strategies that exploit gaps in international tax rules to shift profits from high-tax countries to low-tax jurisdictions. The BEPS Action Plan (15 actions) covers areas including: hybrid mismatches, interest deduction limitations, harmful tax practices, treaty abuse, transfer pricing, and disclosure requirements.

Kenya has adopted many BEPS recommendations, including through: the Multilateral Instrument (MLI), CbCR requirements, transfer pricing documentation standards, and the strengthened GAAR.

2. Pillar One and Pillar Two

The OECD's two-pillar solution addresses the digital economy:

Pillar One (Amount A): reallocates a portion of the residual profits of the largest multinationals (revenue >EUR 20bn) to market jurisdictions, even where no PE exists. This is particularly relevant for digital businesses that generate profits from users in countries where they have no physical presence.

Pillar Two (Global Minimum Tax): introduces a global minimum corporate tax rate of 15% for multinational enterprises with consolidated revenue above EUR 750m. Countries can impose a top-up tax to bring effective tax rates up to 15% using an Income Inclusion Rule (IIR) and an Undertaxed Profits Rule (UTPR). Kenya is expected to implement Pillar Two.

3. Digital services taxation

Where Pillar One has not yet been implemented, many countries — including Kenya — have introduced unilateral digital service taxes:

• Kenya's Digital Service Tax (DST): 1.5% of gross transaction value on digital services provided by non-residents to Kenyan consumers. Applies to: streaming, software subscriptions, online advertising, ride-hailing, food delivery, and similar platforms.

4. Tax dispute resolution mechanisms

Objection: a taxpayer who disagrees with a KRA assessment must lodge a written objection within 30 days, stating grounds and providing supporting documentation. The KRA must determine the objection within 60 days.

Appeal to Tax Appeals Tribunal (TAT): if dissatisfied with the KRA's objection determination, the taxpayer may appeal to the TAT within 30 days. The TAT is an independent body with specialised tax expertise.

High Court and Court of Appeal: further appeals from the TAT lie to the High Court (on law), and then to the Court of Appeal.

Alternative Dispute Resolution (ADR): the KRA operates an ADR programme allowing taxpayers to resolve disputes through facilitated negotiation, faster and less costly than formal litigation.

5. Mutual Agreement Procedures (MAP)

Under DTAs, where a taxpayer considers that actions of one or both contracting states result in taxation not in accordance with the treaty, they may request MAP from the competent authority of their country of residence. The competent authorities of both states then endeavour to resolve the case. MAP is particularly relevant in transfer pricing disputes.