Kenya treads carefully as global tax plan looms

Mburu, who is filling a top position at the OECD starting from next year, will now become a key advocate lobbying countries to join the global 15% minimum tax plan and cooperation among tax authorities across nations.

On the flip side, KRA, which Mburu currently leads, will be forced to continue implementing a parallel 3% Digital Service Tax (DST) on tech firms if Kenya fails to incorporate the OECD-backed global tax rate policy in the upcoming 2023 Finance Bill.

The KRA’s commissioner general will be forced to walk a tightrope between the two tax approaches, a move that many tax jurisdictions, especially in Africa, will be closely watching. Some 139 countries have so far ratified the deal, with Kenya, Nigeria, Pakistan, and Sri Lanka yet to take a position on it.

Caution

Kenya’s Cabinet Secretary (CS) for National Treasury Njuguna Ndung’u insists that the East African country is still cautious about ratifying the pact, citing urgency to revise all the tax instruments to optimise revenue collection. The National Treasury has already started engagements to review its tax policies that will apply in the 2023/2024 fiscal year.

“I can’t say whether we are behind or ahead, but I do believe that this [15% global tax plan] is an area that we have to relook […] and find out where we are. I think we need an empirical analysis to see the data across countries,” he tells The Africa Report, responding to a question on the country’s progress in negotiating a revenue-sharing deal with OECD.

Ndung’u says Kenya will have to assess other countries’ experiences to see whether it is likely to benefit more from the deal in terms of revenue. KRA is targeting to triple revenue collection to KSh6.831trn ($55.85bn) by the end of financial year 2023/2024, more than triple the Ksh2.031trn collected at the end of June 2022. The government did not meet the Q1 target for tax collection by the end of September.

“We are going to relook […] all the tax instruments and how we compare with our neighbours, internationally, and in terms of objectives of the revenue we want to collect and how we want to collect it,” he says.

‘Protracted discussion’

The thriving digital economy has created challenges in taxation as some firms have perfected tax avoidance strategies since they might not need physical offices in certain jurisdictions. There are talks focused on overhauling international tax rules.

The proposed global minimum tax plan aims at curbing the alleged “race to the bottom”, where big firms channel profits through low-tax jurisdictions. It will see the world’s largest tech firms pay their dues on profits derived in jurisdictions where they have little or no physical presence, yet generate substantial revenues.

Analysts have poured cold water on Kenya’s possibility of striking the deal in the near term despite mounting international pressure, especially from big economies where Kenya enjoys good bilateral relationships.

A possible balance is to have Kenya review its policies to ensure it continues collecting the current DST from companies that do not meet OECD’s minimum revenue threshold of €750m ($774m), tax experts suggest.

“It is going to be a protracted discussion. Probably Kenya is going to be forced to sign up, but only in the long term, not in the short term,” says Sandeep Main, associate tax director at international advisory firm KPMG. “They must be pushed to implement that [global tax] after putting in the necessary infrastructure.

“Given that only a few companies meet the revenue threshold, Kenya can align its domestic tax framework to continue collecting digital tax [from] other firms; but again, whatever Kenya does must reflect the international practices and standards.”

‘Onerous clauses’

Countries like Kenya are fretful that the deal is unlikely to match their interests, and with KRA’s commissioner general at the helm, Kenya could push for more disclosure on revenue distribution. KRA had earlier this year demanded an explicit revenue-sharing plan as an ultimatum for joining the global tax framework.

Robert Waweru, a tax expert at Ichiban Consultant, agrees with Main that Kenya will have to re-engage OECD for changes in areas like arbitration mechanisms, which, as it stands, could make taxing nations lose their sovereign powers by having disputes resolved in foreign countries.

“There are very onerous clauses around dispute resolution for example. I’m sure they [KRA and OECD] are advising the treasury about these [global] policies so there might be some change in the Finance Bill if Kenya is to implement it [the 15% global rate],” says Waweru.

The OECD framework, supported by the US and other big economies, promises availability of an estimated $125bn (Ksh15trn) worth of multinational profits for distribution among members.

“Maybe he [Mburu] will use that position to sort of drive greater transparency around this 15% rate, sharing of information across Africa, and the revenue allocation because that is the biggest problem that Kenya and Nigeria have,” says Waweru.

US tech giants, such as Amazon, Google, Netflix, and Facebook, are currently paying 3% digital service tax in Kenya, but this will be scrapped if the East African nation joins the global tax plan. This means Kenya will also not collect taxes levied on the sale of games, e-books, movies, music, and other digital content from foreign companies.