Experts criticise ‘highest tax rate in Africa’, call for urgent review

Sportpesa CEO Ronald Karauri (left) with boxer Fatuma Zarika at a Nairobi hotel on January 2, 2018. The company announced withdrawal of financial sponsorships for local sports entities and individuals after the government imposed a 35 per cent tax on gambling revenues. PHOTO | MARTIN MUKANGU | NATION MEDIA GROUP

What you need to know:

  • United Kingdom levies 15 per cent, also as a conclusive tax for remote online gaming with no further levies.
  • Treasury said it increased taxes more than four times to curb the growth of gambling.

Respected multinational professional services firm, PricewaterhouseCoopers (PwC), has revealed that Kenya’s betting tax is the highest in the region and ahead of gaming hubs like the famed Las Vegas strip.

PwC says the new 35 per cent tax on all gambling revenues is higher compared to other African countries like South Africa, which charges 9.6 per cent, Rwanda (13) and Uganda (20).

Neighbours Tanzania replaced corporate tax in the gaming industry with a conclusive 6 per cent tax on revenue as an incentive to attract more players to invest in the business.

LAS VEGAS

Las Vegas, considered the gambling Mecca in the world, charges 6.5 per cent, while developed nations such as Germany (5), and Canada (20) have significantly lower thresholds than the Kenyan rate that became effective from January 1.

United Kingdom levies 15 per cent, also as a conclusive tax for remote online gaming with no further levies, with offshore firms allowed to operate in the country.

The actual figures contrast sharply with what has been widely reported recently in local media, claiming for example; that the rate in the UK and other European nations such as Czech Republic, Belgium, Slovakia, Spain and Denmark is 50 per cent while Germany is at an astronomical 90 per cent.

To recap, the 35 per cent ceiling was contained in the Finance Bill, 2017, published on April 3, 2017, which amended various tax provisions, with gambling the hardest hit.

It increased taxes on gaming, lottery, betting and firms running competition prizes summarised as follows: Betting from 7.5 per cent to 50 per cent, lotteries from 5 per cent to 50 per cent, gaming from 12 per cent to 50 per cent and firms running competition prizes from 15 per cent to 50 per cent.

LOTTERIES

However, the ceiling was capped at a uniform 35 per cent — for lotteries on turnover, while gaming and betting firms will be subjected to the rate on their gross revenues — when President Uhuru Kenyatta signed the bill into law.

Mr Steve Okello, a tax partner at PwC, reckons that Kenya’s taxation is harsh on the nascent industry and could hurt the growth of the related sectors and government revenues, with the affected firms scaling back operations or moving their businesses.

“I feel the tax change, that is probably the highest in Africa, looks discriminatory, you know one industry is being picked out and heavily charged,” said Mr Okello.

“We are likely to see lots of cutting back on expenditures if not closures in the industry that will affect overall tax growth,” the tax partner emphasised.

Besides the blanket 35 per cent tax on revenues, lotteries pay 30 per cent corporate tax and dedicate 25 per cent of their sales to charities as a legal requirement before taking care of winnings and other operating expenses.

BETTING

Betting firms operating in the country have warned the tax hike will kill the fledgling industry and hurt supporting businesses including telecoms and media companies that benefit from daily advertisements.

The country’s leading integrated communications company, Safaricom, said phone-based betting was the biggest driver of their short message service business while the Kenya Revenue Authority warned in its presentation on the Finance Bill of 2017, of the damaging impact of the steep regime on gambling.

Already, the adverse effects of the punitive tax regime have already started hitting the market: On Sunday, Pambazuka National Lottery suspended operations.

“The effect of the 35 per cent tax on all ticket sales is that the total cost of operations rises to 115 per cent and this before deduction of operation costs,” the firm lamented in a press statement.

There is real fear that local gambling firms are being compelled to consider moving their operations to offshore tax havens, which offer low rates to attract capital investment.

REVENUE

High tax ceilings have seen renowned betting firms such as Bet365, Betway and Betfair whose services are accessible to the Kenyan market through their websites, operate from Malta and Gibraltar, who cap their rate at 1 (one) per cent of gross gaming revenue.  

Treasury said it increased taxes more than four times to curb the growth of gambling, arguing that it was hurting the young and vulnerable.

Mr Okello argues that since winners are not being taxed, with the affected firms absorbing the huge hit, the higher tax rate would do little to curtail gambling habits. He proposes a tax of 10 per cent on betting firms as ideal to stem the likelihood of the affected entities closing shop in Kenya and moving elsewhere.

“Betting is online and technology-based and firms can move to low tax jurisdictions like Malta and Gibraltar and still operate from Kenya. The country will lose revenue in this event,” Mr Okello added.

Another tax expert, Mr Mwaniki Githinji, floated a suggestion to unlock the impasse that has seen, for instance, the local sporting industry suffer, following the withdrawal of all sponsorship activities in Kenya by gaming firm SportPesa effective January 1.

REGIME

“In my view, the 35 per cent on all collections would have been proposed as a final tax like rental income.

“Otherwise if you take 35 per cent from gross collections before expenses and then another 30 per cent on net of allowable deductions, this makes it retrogressive according to principles of taxation,” Mr Githinji offered.

That mirrors the examples set by Tanzania and the UK, which replaced corporate tax with a reasonable conclusive tax that would encourage more investment in a well-regulated and controlled gambling industry.

Having lost a case challenging the implementation of the 35 per cent regime at the High Court, SportPesa has issued a notice to appeal, arguing that the higher tax rate is in breach of Article 201 of the Constitution that demands the public finance system to promote an equitable society where the tax burden shall be shared fairly.

Heavy taxes on revenue is a dangerous route for a country struggling to attract corporate investment and the move should be considered carefully because for starters, it will drive affected firms into losses.

ANALYSIS

A profitability analysis survey done last year on Kenyan blue chip firms listed on the Nairobi Securities Exchange painted a grim picture on how their profitability would suffer with a 35 per cent tax imposed on their gross earnings.

According to the study, national electricity generating company, KenGen, that generates 80 per cent of Kenya’s energy consumption would have seen its declared Sh6.7 billion profit turn into a Sh1.6 billion loss.

Insurance company, Britam with a total revenue of Sh22 billion and a handsome profit before tax of Sh4.239 billion, reported a Sh2.5 billion profit after tax that would turn into a staggering Sh1.3 billion loss of a profit dip of 152 per cent if their business would be slapped with the 35 per cent tax on revenues.

Media giant Nation Media Group, which recorded a turnover of Sh11.3 billion and Sh2.4 billion profit before tax, would see its Sh1.6 billion profit after tax (PAT) converted into a crippling Sh1.1 billion loss, representing a 162 per cent profit dip.

With revenues of sh4.8 billion and a PBT of Sh269 million, The Standard Group Limited that posted Sh198m profit would instead present to their shareholders a debilitating Sh1 billion loss.

Besides that, any company with say, a wage bill of 60 per cent of revenue would be forced to announce immediate job cuts to stay afloat before eventually, running out of business.