Kenya sets new demands to unlock global tax stalemate
National Treasury CS Ukur Yatani.
Kenya has proposed a raft of amendments to a US-backed global tax deal that it refrained from signing last year, citing concerns that it would have to stop levying a digital services tax and worries about the agreement’s dispute resolution mechanism.
Only four countries — Kenya, Nigeria, Pakistan, and Sri Lanka — did not endorse the deal that ensures big companies pay a minimum tax rate of 15 per cent and makes it harder for them to avoid taxation. A total of 136 nations signed the agreement that also requires countries to repeal their digital service taxes.
In fresh submissions to the Organisation for Economic Co-operation and Development (OECD), which steered the global tax negotiations, Kenya has demanded that the revenue threshold for multinational enterprises (MNEs) to be subjected to the minimum global tax be reduced from €20 billion (Sh2.48 trillion) to €750 million(Sh93.1billion) to capture as many firms as possible.
“Out-of-scope companies will not be included in the tax brackets of market jurisdictions even though they participate in the economic life of these jurisdictions. This does not amount to fair treatment of taxpayers,” Kenya argued in a document seen by the Nation.
New rules
Kenya had initially submitted a counter proposal for the revenue threshold to be lowered to €250 million (Sh31 billion), saying that would have brought more MNEs within the scope of the new rules and accord developing countries more opportunities to receive the reallocated profits.
“The rationale for this was to only capture the MNEs that participate in a sustained and significant manner in the economic life of the market jurisdiction. Kenya opposed this proposal since it would again deny many developing countries the right to receive the reallocated profits,” Kenya said.
In its new proposals to the OECD, Kenya has also demanded that the global tax deal allows for a non-binding arbitration process and the establishment of a minimum tax on royalties.
The country is further demanding the exclusion of financial institutions and extractive industries from the global tax deal.
Kenya’s fresh submissions followed deliberations from a national tax summit held on October 13-14 last year during which its negotiators held extensive discussions with representatives from the OECD, the Inter-American Centre of Tax Administrations (CIAT), and the African Tax Administration Forum (ATAF).
Global tax agreement
During the discussions, Kenya and Nigeria presented their cases to officials of OECD, ATAF, and CIAT and the reasons for not joining the consensus in the global tax agreement.
A follow-up engagement was held between the National Treasury, the Foreign Affairs ministry, the OECD, and the Centre for Policy and Administration (CTPA) in January to try and unlock the impasse. CTPA is part of the OECD secretariat.
In vouching for the 15 per cent minimum global tax rate, the OECD had indicated that it would see countries collect around $150 billion (Sh18.6 trillion) in new revenues annually, while taxing rights on more than $125 billion (Sh15.5trillion) of profit would be shifted to countries where big multinationals earn their income.
Kenya, however, opposed the proposed a global minimum tax rate of 15 per cent on revenues of MNEs, terming it as low, and proposed a higher rate of 20 per cent. This, it argued, would prevent a race to the bottom, especially among African countries where the average corporate tax rate is 27 per cent — a demand it has since dropped.
Kenya was further opposed to the global tax deals since it would be required to stop a 1.5per cent digital service tax, which it only began implementing in January 2021 — a step it said had already helped curb tax avoidance by some multinational companies.
Under the current 1.5 per cent tax, the KRA had targeted Sh13.9 billion in three years through ending June 2024, projecting gross revenue to be generated by foreign firms in Kenya’s digital marketplace at about Sh926 billion.
