In recent years, the global tax landscape has undergone significant transformation as governments seek to address challenges posed by the digital economy and the evolving dynamics of multinational enterprise (MNE) taxation.
Driven by initiatives like the OECD's Base Erosion and Profit Shifting (BEPS) project, and the increasing adoption of a global minimum tax (GMT) under Pillar Two of the OECD/G20 Inclusive Framework, tax authorities across the world are reforming domestic laws to secure taxation of multinational corporations and prevent tax avoidance.
The 2024 Tax Laws (Amendment) Bill (the Bill) reflects this trend, incorporating proposed provisions to ensure that MNEs pay tax on income sourced from Kenya. Through measures such as the Significant Economic Presence tax (SEPT) and the Minimum Top-Up Tax (MTT), Kenya aligns itself with global efforts to tax digital services and safeguard domestic revenue from tax base erosion.
In this evolving context, it is crucial for MNEs with operations in Kenya to stay informed and proactive in adapting their compliance strategies to meet these new requirements. This alert highlights key provisions in the Bill that will directly impact MNEs, particularly in areas related to digital services, crossborder transactions and minimum tax requirements.
1.Minimum Top-Up Tax
The Bill proposes to introduce a minimum top-up tax (MTT) to be paid by a covered person, defined as a person whose combined effective tax rate is below 15%, and is part of a MNE group whose annual consolidated annual turnover is EUR 750 million or more in the consolidated financial statements of the ultimate parent entity in at least two of the last four years of income preceding the tested year of income.
In December 2021, the OECD / G20 Inclusive Framework on BEPS released the GloBE Rules as part of its ongoing efforts to address the tax challenges arising from globalisation and digitalisation.
The GloBE rules apply to multinational groups that have consolidated revenues of EUR 750 million or more in at least two out of the last four years. Multinational groups in the scope of the rules will be required to calculate their GloBE effective tax rate for each jurisdiction where they operate. If the blended GloBE effective tax rate for all companies in a specific jurisdiction is below the 15 percent minimum rate, then they will be liable to pay a top-up tax for the difference.
In many cases, the group company liable for the top-up tax (such as the ultimate parent company) will differ from the group company that triggered it (often a company located in a low-tax jurisdiction or a company benefiting from government subsidies reducing its effective tax rate below 15 percent).
The proposed MTT allows Kenya, as the country where low-tax profits may arise due to tax incentives or other measures, to collect the top-up tax directly, rather than allowing it to be collected by the MNE headquarter or other jurisdiction.
The MTT shall be calculated as the difference between fifteen percent of the net income or loss for the year of income for a covered person, and the combined effective tax rate for the year of income, multiplied by the excess profit of the covered person.
In this context, key terms are defined as follows:
Adjusted covered taxes: Taxes recorded in the financial accounts of a covered person for the income, profits or share of the income or profits of a covered person where the covered person owns an interest, and includes taxes on distributed profits, deemed profit distributions under this Act subject to such adjustments as may be prescribed.
Combined effective tax rate: the sum of all adjusted covered taxes, divided by the sum of all net income or loss for the year income, multiplied by a hundred.
Net income or loss: the sum net income or loss for the year of income after deducting the sum of the losses of a covered person as determined under recognised accounting standards in Kenya.
Excess profit: The net income or loss of a covered person for the year, reduced by 10% of the employee costs and 8% of the net book value of tangible assets. The employee cost and book value of tangible assets may be adjusted as prescribed in the regulations.
The MTT shall not apply to
- A public entity not engaged in business;
- A person whose income is exempt from tax under paragraph 10 of the First Schedule;
- A pension fund and the assets of that pension fund;
- A real estate investment vehicle that is an ultimate parent entity;
- A non-operating investment holding company;
- An investment fund that is an ultimate parent entity;
- A sovereign wealth fund; or
- An intergovernmental or supranational organization including a wholly owned agency or organ of the intergovernmental or supranational organization.
2.Significant Economic Presence Tax
As economies become increasingly digital, multinational enterprises (MNEs) are able to conduct business in these countries with little or no physical presence. This shift in business models complicates traditional tax approaches, making it difficult to capture tax revenues from digital activities.
Chapter 7 of the OECD Action 1 BEPS Final Report addresses nexus and the ability of a company to maintain a significant economic presence in a market jurisdiction without being subject to tax. In recent years, several African countries, including Kenya, Uganda, Tanzania, Mauritius, Ghana, and Nigeria, have introduced unilateral digital taxes (both direct and indirect) to address these challenges.
The Bill proposes to repeal the provisions relating to Digital Service Tax (DST) which applies at 1.5% of the gross turnover turnover on provision of services carried out over the internet or an electronic network including through a digital marketplace, and replace it with SEPT.
SEPT will apply to a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over a digital marketplace. The taxable profit will be deemed to be 10% rate on the gross turnover. This taxable profit will be subject to tax at 30%. Effectively, the gross turnover will be subjected to SEPT at the rate of 3%, an increase from the current DST rate of 1.5%.
SEPT and the corresponding tax return will be due for filing and payment respectively by the twentieth (20th) day of the month following the end of the month in which the service was offered.
SEPT will not apply on the following:
- A non-resident person who offers the services through a permanent establishment;
- Persons whose income is subject to withholding tax or derived from the business of Business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communication; and
- A non-resident person providing digital services to an airline in which the Government of Kenya has at least forty-five percent shareholding.
The Bill has not defined what would constitute "significant economic presence" but authorizes the Cabinet Secretary for Treasury and National Planning to make regulations for the implementation of SEPT. The regulations will be essential in helping non-resident entities establish whether they have a tax obligation in Kenya.
3.Taxation of digital income
The Bill proposes to tax payments made by owners and operators of a digital marketplace or platform in respect of digital content monetisation, goods, property or services earned by a resident or non-resident person.
"digital marketplace" means an online or electronic platform which enables users to sell or provide services, goods or other property to other users.
"digital platform" is defined as a digital platform or website that facilitates the exchange of a short-term engagement, freelance or provision of a service, between a service provider, who is an independent contractor of freelancer and a customer
With this proposal, persons offering goods or services through a digital marketplace or platform will be brought into the tax net.
The Bill proposes that the owners and operators of digital marketplaces and platforms withhold 5% on payments made to resident individuals and 20% on payments to non-residents. This introduces an additional compliance layer, requiring impacted MNEs to implement tax withholding processes on all relevant transactions within scope of the proposed provision.
Actions for management to take now
- Determine if the company may be subject to the SEPT and MTT;
- For MNEs operating digital marketplaces or platforms, assess if the new 5% withholding tax on payments to resident individuals and 20% for non-residents applies to your business model;
- Evaluate whether group companies benefiting from tax incentives, exemptions, or substantial tax deductions might end up with an effective tax rate below 15% in Kenya;
- Engage with tax professionals to conduct impact assessments and develop compliance strategies; and
- Collaborate with users to establish the necessary level of disclosures for both interim and annual financial statements.
The above proposals will have a direct impact on MNEs operating in Kenya. It is advisable for MNE Groups to assess the impact on their Kenya operations for a smooth transition.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.
