By charging excessive taxing small and micro enterprises, the government is strangling its future sources of tax.

| File | Nation Media Group

Kenya adamant about rejecting global tax regime, cites arm-twisting

Kenya is adamant that it will not sign an agreement seeking to create a uniform tax policy for multinationals, meaning that 87 per cent of global technology firms operating in Kenya will do business untaxed.

The deal, championed by the Organization for Economic Co-operation and Development (OECD) and G20 countries, suggests, among other things, denying governments the powers to tax digital multinationals by their domestic tax policies and instead giving way for a common tax policy.

It was finalised last week and has been signed by 136 countries that are members of the Inclusive Framework on Base Erosion and Profit Shifting, with four countries refusing.

The refusal comes amid claims that during negotiations on how the multinationals would be taxed, some powerful countries exerted pressure on small economies, using trade sanctions and the risk of souring diplomatic ties as threats to have them agree to the terms.

If such a policy were adopted by Kenya, 78 of the 89 companies now filing the Digital Service Tax (DST) in Kenya will be left off the hook, with the country losing revenues.

“The introduction of the Digital Service Tax in Kenya had helped curb tax avoidance by multinational firms engaged in digital enterprises. With the growing revenues generated from such (enterprises), Kenya will consider the benefits of the Inclusive Framework cautiously,” said Kenya Revenue Authority (KRA) Commissioner-General Githii Mburu.

At the KRA annual tax summit yesterday, Kenya and Nigeria maintained their position that they would not relent on their push. They argued that the original idea was meant to prevent tax erosion and profit shifting by multinationals and that the agreement has not addressed the challenge.

The OECD last week announced that reforms to the international tax system had been finalised and they would ensure that multinational enterprises are subjected to a minimum 15 per cent tax rate starting in 2023.

The discussions on taxing the digital economy among the countries started in 2018, to prevent Base Erosion and Profit Shifting (Beps). Countries were required to develop programmes to reduce profit shifting, particularly by technology platforms, and Kenya went ahead to implement DST.

The KRA commissioner for intelligence and strategic operations, Dr Terra Saidimu, said the rules in the agreement on determining companies to be taxed and the amount to be shared were unfair, prompting Kenya’s refusal.

“For you to be taxed in these new rules, you must be earning 40 billion euros (about Sh5.1 trillion in gross turnover) and profitability of earnings over turnover of at least 10 per cent,” Dr Saidimu said.

“After you qualify for the two steps, you go for the third one, which is having a substantial presence - meaning transactions or turnover of one million euros (about Sh128 million) within that financial year.”

The agreement also proposes that of the profits made by a multinational technology firm that is to be taxed under the rules, 10 per cent of turnover goes back to its home country, with 75 per cent of the remaining profits taken by the parent company.

Other market jurisdictions where such a company has a presence share the remaining 25 per cent - subject to 30 per cent corporation tax.

“Kenya was trying to give out an alternative that the parent companies retain 50 per cent of the profits and the remaining half is distributed to the market jurisdictions, but finally they agreed on 75 per cent retention and distribution of only 25 per cent,” Dr Saidimu said.

This would mean that Kenya would make little in taxes from companies such as Google, Facebook, Netflix and others with huge operations in the country, as opposed to the taxes the corporations would have paid under DST.

Of the 100 companies placed in the tax net in the agreement, only 11 have a presence in Kenya.

“If you are making a profit of 9 per cent, you are out of scope. The agreement says that if you are out of scope, Kenya should not tax such a company, but our request is that if you are out of scope, allow us to tax domestically,” Dr Saidimu said.

KRA says it is reviewing figures to establish the impact of adopting the unilateral policy, which will be in force over the next seven years once signed, as Kenya pushes for its position to be adopted.

Mathew Gbonjubola, with Nigeria’s Federal Inland Revenue Service, said little or no money would go to developing countries under the terms of the agreement finalised last week. Developed economies hijacked the process to their favour, he said.

“This programme favours some few players and some small jurisdictions signed the agreement because of fear. Nigeria raised several concerns which were not accommodated in the final agreement,” he said.

“In the course of negotiations, some countries were being considered as being superior to others yet it was supposed to be an all-equal engagement. There were threats of sanctions and whipping some countries to line. The outcome did not take cognisance of the peculiarities of developing countries. Some of the measures don’t work for developing countries.”

The OECD/G20 Inclusive Framework agreed on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.

But Kenya and Nigeria argue that arm-twisting by some powerful countries with threats of trade sanctions made many developing countries sign the document, even though it does not stop the habit of profit shifting and base erosion.

“Although we have not signed the agreement, Kenya is fully aware of the developments, and I can confirm that we are party to these engagements, as a trendsetter on matters of digital taxation,” Mr Mburu said.

“We have already shared our technical concerns on the all-inclusive framework thresholds, and we will continue engaging to ensure that we have a win-win outcome.”

Of the 140 countries in the all-inclusive framework, only 24 are from Africa.

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