Kenya must assess details of global minimum tax


Kenya must assess details of global minimum tax

Monday June 20 2022

Kenya is right to demand greater clarity on revenue sharing before committing to a global agreement on the minimum taxation of multinational companies.

Enterprises operating in multiple jurisdictions have used differences in tax rates to their advantage, setting up their head offices and operating units in locations that help them pay the lowest taxes overall.

A series of progressive global tax reforms have been proposed under the auspices of the Paris-based Organization for Economic Cooperation and Development (OECD).

These include the establishment of a minimum tax rate of 15 percent on profit for multinationals in all countries starting next year.

Where an enterprise has an effective tax rate below the minimum in any particular jurisdiction, it will be required to pay top-up tax to the authorities in the head office location.

The OECD estimates that the minimum tax can generate new revenue of $150 billion per annum globally, a prospect that has seen more than 130 countries sign up.

But the big issue is how the larger pie will be shared and whether countries such as Kenya stand to lose out in the concessions they are required to make to participate in the global agreement.

The pact has clauses that will force Kenya to drop the digital services tax of 1.5 percent of sales by tech giants such as Google, Facebook and Amazon which are among the main targets of the reforms.

The Kenya Revenue Authority (KRA) says it will first look to see whether participating in the agreement will lead to growth in revenue collection.

This is prudent and logical, especially for countries that have been on the losing side of digitally-enabled businesses that draw substantial revenue and profit from the local market but report their income in low-tax jurisdictions such as Ireland.

The introduction of the digital services tax, paid on revenue, was a means of responding to the tax avoidance mastered by multinationals. This levy should be sacrificed only if participation in the global minimum tax framework will yield more revenue.

It is, therefore, incumbent upon proponents of the worldwide tax to convince holdouts like Kenya that it makes financial sense for them to join the bandwagon.

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