Kenya scores big in bid to raise taxes on global firms – Business Daily
Some 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. PHOTO | SHUTTERSTOCK
Kenya has reported a major breakthrough in ongoing talks to secure a favourable revenue-sharing deal with a club of rich countries over the contentious global minimum tax rate on multinationals ahead of the January 1, 2024 enforcement date.
A top official at the Kenya Revenue Authority told the Business Daily that there has been a “significant development” in the talks with the Paris-based Organisation for Economic Cooperation and Development (OECD) on rules to tax profits of the world’s largest global firms, but did not disclose specifics of the deal they have hammered two months to the deadline.
“We have achieved a lot with the discussions we are having with OECD and even key member States [which includes the US]. A lot has changed and that discussion is still going,” Maurice Oray, KRA’s deputy commissioner for corporate policy, told the Business Daily.
The 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.
Read: KRA gives ultimatum to Biden’s global taxation plan
Some 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.
Countries such as Kenya and Nigeria are, nonetheless, fearful that reforms in the international tax system are unlikely to reflect their interests in taxing the giants especially tech behemoths.
Nairobi has, for instance, been reluctant to sign 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.”
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.
Read: Kenya to double tax on Big Tech
KRA fears the OECD-led international tax agreement, 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.
“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,” Mr Oray said. “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 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.
Read: Why Uhuru rejected Biden’s global tax plan
According to OECD, the minimum tax applies to multinationals with revenue above 750 million euros (Sh89.13 billion) and would generate around $150 billion (Sh18.22 trillion) 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.
“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,” Mr Oray said.
“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.”
The OECD in July pushed back the enforcement date for the two-pillar global tax overhaul from 2023 to January 1, 2024 “to allow greater engagement with citizens, business and parliamentary bodies which will ultimately have to ratify the agreement”.
“We will keep working as quickly as possible to get this work finalised, but we will also take as much time as necessary to get the rules right,” 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.”
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