Kenya’s DST Part 2

KEY READING FOR THE WEEK

Last week’s newsletter was on Kenya’s Digital Services Tax (DST) and estimated the amount of tax revenues the Kenyan Revenue Agency (KRA) could expect. This week we’re investigating the how much Kenya could expect from the OECD digital tax deal that was signed on the 8th of October. These two tax deals are in competition because one of the conditions of the OECD deal is that all unilateral digital taxes have to be withdrawn. Kenya has participated in the negotiations for the OECD deal but has decided not to sign it. It’s not clear why Kenya has not signed the OECD deal, though one reason could be that Kenya believes it will get more revenues from the DST than from the OECD Framework.

The raison d’être of the OECD deal is to create a fair tax regime where all countries get their share, unlike the current regime where a small number of countries get all the tax revenues. This is directly targeted at digital companies whose revenues can come from anywhere in the world. The OECD deal has two pillars and in 2021, 137 members signed the two-pillar plan to reform international taxation rules.
Pillar 1 allocates taxing rights to USD 125 billion of the profits of Multi-National Enterprises (MNE). Of course, this profit has to shared with all the other countries where that MNE has operations. The way the calculation works is that 25% of the total profit above a 10% profit margin (called the residual profit by the OECD) is shared amongst countries as long as the MNE has global revenues in excess of USD 20 billion and country revenues of more than USD 1 million.

Pillar 2 sets the minimum tax rate for corporations to 15%. This may seem unimportant to Kenya where the CIT is 30% but it closes one of the gaps where MNEs would transfer their profits to tax havens to avoid paying tax.

Unfortunately, the OECD has not released any country specific data so we don’t know exactly how much Kenya could expect in terms of tax revenue. However, we do have a good proxy: the amount of digital services Kenya exports. Table 1 shows that Kenya exported USD 1.4 billion in 2019 for a global share of 0.04% of global digital services. The OECD deal would give Kenya taxing rights on USD 55 million of global residual profits from digital companies. Kenya’s CIT is 30%, so that would mean tax revenues of USD 16.4 million. In last weeks post, we calculated that Kenya could expect tax revenues from the DST of around USD 22 million. The revenues from the DST look marginally better, but this needs to be weighed against the possibility of retaliatory trade measures from other countries, specifically the USA. That will be the subject of next week’s post.

Table 1: Share of exports of digital services to allocate residual profits

2019USD millionShareTaxing rights
USD million
(of USD 125
billion in
residual
profit)
CIT %Estimated
tax revenues 
World3,225,140
Africa27,7480.86037%1,075.528.5%306.5
Kenya1,4120.04378%54.730%16.4
Tanzania3140.00974%12.230%3.7
Uganda2670.00827%10.330%3.1
SourcesUNCTADCalculation

Other weekly news from around Africa

  • MTN: The telecom group is gradually exiting the Middle East. It has already divested from Syria and now Yemen. Iran is next on the list.
  • Zimbabwe: Operators in Zimbabwe say that their tax burden is too heavy. Heavy taxes mean that there is little scope for investment. Operators claim that they spend a third of total revenue on taxes.
  • South Africa: ICASA has delayed the release of the consultation document on the Wireless Open Access Network that was due on the 19th of November. In the interim, ICASA says it will “engage other international jurisdictions to draw lessons from their experiences on the licensing of a typical WOAN”.
  • Ethiopia: Ethio Telecom’s revenues have fallen by 12%. The operator ascribes the fall in revenues to the ongoing civil war in Ethiopia.