MPs hand multinational tech firms tax reprieve in changes

Multinational tech firms that earn revenues locally without a physical office in Kenya got relief after the Finance Committee halved their significant economic presence (SEP) tax to three percent of their turnover levy proposed by the Treasury.

The digital service providers, such as taxi-hailing firms, were expected to pay a SEP tax of 30 percent of the deemed taxable profit that is contained in the Finance Bill 2024.

The taxable profit of a company liable to pay SEP is deemed to be 20 percent of the gross turnover, which puts SEP at 6.3 percent.

However, the Finance Committee has slashed the taxable profit to 10 percent of gross turnover in its review of the Finance Bill, halving the SEP rate to three percent.

This is a relief for companies such as Uber and Bolt, which had decried the six percent SEP proposed by the Treasury in the Finance Bill 2024. In their submissions to the Finance Committee, the ride-hailing companies warned that some of them would be forced to relocate should the new tax be implemented.

The three percent SEP tax is still double the 1.5 percent digital service tax the firms are paying. The Bill proposes to scrap DST and replace it with SEP.

“The committee notes that the profit margin for digital service providers is usually higher because such providers do not incur large expenses compared to companies with a physical presence,” said Finance Committee chairperson Kimani Kuria in his talking notes.

“Therefore, the purpose of the increase is to align the deemed profit with what would have been the profit if the companies were not enjoying the lower production cost. Nevertheless, the Committee proposed to reduce the rate of deemed income from 20 percent to 10 percent of gross turnover,” added Kimani.

However, the powerful committee has halved the taxable profit, or deemed income, from 20 to 10 percent.

Netflix, a video streaming company, is the other company that would be affected. Others are Amazon, an e-commerce company and Paypal, a payment service provider.

But the digital service providers that would be hit the hardest are taxi-hailing companies such as the US-based Uber, which does not have a physical presence here and thus does not pay corporation income tax.

This means foreigners such as America’s Amazon and China’s Alibaba, both of which are e-commerce companies, will now pay more than 13 times the 1.5 percent digital service tax.

Kenya is also expected to ratify a new global taxing mechanism aimed at fighting tax avoidance by requiring large multinationals to re-allocate part of their profits to countries where they have operations.

This global taxing mechanism is being championed by the Organization for Economic Co-operation and Development (OECD), and was supposed to replace the digital service tax.

President William Ruto announced last year that the digital service tax would be aligned with the OECD framework.

“The growth of digital commerce has forced many countries to impose Digital Services Tax measures on income derived in their tax jurisdictions. Kenya has also done the same,” said President Ruto during the 2023 American Chamber of Commerce Regional Summit.