Kenya is on the right track by raising taxes for multinational firms: Research

NAIROBI, Kenya - A Paris-based Organisation for Economic Cooperation and Development (OECD) has revealed that Kenya is on the right path in raising high taxes for multinational firms to a minimum of 15 percent.

In its report, OECD says that the country has made tremendous progress in securing a favorable revenue-sharing deal with wealthy nations over the contentious global minimum tax rate on multinationals ahead of the January 1, 2024 enforcement date.

Kenya Revenue Authority senior officials recently revealed to the media that there has been a “major development in the talks with the OECD team.

According to Maurice Oray, KRA’s deputy commissioner for corporate policy“A lot has been achieved on taxation issue and I can authoritatively say that countries like USA who are members of the OECD have changed their tune and are now embracing the idea of higher taxes for multinationals operating in Kenya.”

This new deal seeks to introduce a global minimum corporate tax rate of 15 percent to end what has been dubbed a “race to the bottom” where multinationals channel profits through low-tax jurisdictions.

Currently, 135 countries have endorsed the tax pact aimed at ensuring the world’s largest companies pay their dues on profits made in jurisdictions where they have little or no physical presence, but derive substantial revenues.

However, these new global corporate tax reforms come at a time when Kenya and Nigeria are planning to heavily tax global tech firms as a way of raising the tax baskets.

Kenya has been dragging its feet and has been reluctant in putting pen to paper the OECD deal on grounds that it could end up eroding projected revenue from foreign tech giants through digital services tax (DST) if the global revenue-sharing formula does not protect its current winners.
“The fear we have is that we already have a framework for the taxation of the multinationals, particularly for the digital economy. So if we were to move from our current position to another position, we must understand what the implications are.”

At the moment, Kenya charges multinationals such as Amazon, Netflix, Twitter, and PayPal – which derive revenue from Kenya without a physical presence – a digital tax at the rate of 1.5 percent of the value of their transactions.

If the new administration goes ahead and signed the OECD-led international tax agreement, then the result of decade-old negotiations will force Kenya to drop DST on the sale of e-books, movies, music, games, and other digital content by foreign companies.

Mr. Oray explains that “We might move from a bad position to a worse position, but we believe that with the engagement that we are having, everything will be fine. The fear is we might lose out (on revenue) and that’s why the engagements we have been having have yielded a lot of fruit in terms of looking at solutions differently.”

According to OECD this two-pillar tax deal was designed to cut companies’ incentives to shift profits to low-tax offshore havens and could bring hundreds of billions of dollars into the government coffers of countries such as America.

Kenya is largely seeking clarity on the ‘Pillar One of the deal on the taxing rights of over $125 billion (Sh15.18 trillion) worth of multinational profits that would be available for reallocation to nations every year.

According to OECD, the minimum tax applies to multinationals with revenue above 750 million euros and would generate around $150 billion in additional global tax revenues annually, covered under ‘Pillar Two’ of the agreement.

All of the Group of 20 major economies, including China and India, which previously had reservations about the proposed overhaul, have backed the US-driven global minimum tax on multinational corporations.

Mr. Oray argues that “What we all know is that the 15 percent tax rate is focusing on the minimum multinationals should pay in a jurisdiction. It doesn’t say that now you cannot, for example, pay 20 percent they will be sharing taxes. How will they be sharing? You find that the state where, for example, the multinationals are residents are entitled to a certain level of tax and, the other participating countries also have their share. So how this sharing is done is the issue.”

The OECD in July this year pushed back the enforcement date for the two-pillar global tax overhaul from 2023 to January 1, 2024.

This was meant6 to allow greater engagement with citizens, businesses, and parliamentary bodies which will ultimately have to ratify the agreement.

OECD Secretary-General Mathias Cormann was quoted during a meeting with G20 Finance ministers and central bank governors earlier in the year.
“These rules will shape our international tax arrangements for decades to come. We will keep working as quickly as possible to get this work finalized, but we will also take as much time as necessary to get the rules right.”

GAROWE ONLINE