Law change spells end for tax-evading global firms

Multinational companies operating in Kenya will now have to provide the Kenya Revenue Authority (KRA) with income statements of their operations in the country and other jurisdictions. 

This is according to proposed amendments to the Income Tax Act contained in the Finance Bill, 2021. The law change seeks to cut revenue losses due to transfer pricing, where multinationals shift their operating costs and profits to countries with lower tax rates.       

“An ultimate parent entity of a multinational enterprise group shall submit to the commissioner a return describing the group’s financial activities in Kenya, where its gross turnover exceeds the prescribed threshold, and in all other jurisdictions where the group has taxable presence, not later than 12 months after the last day of the reporting financial year of the group,” proposes the amendment to Section 18 of the Income Tax Act. 

According to the Bill, companies shall provide the taxman with information on the amount of revenue, profit or loss before income tax, income tax paid or accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash or cash equivalents in all the jurisdictions of operations. 

The Bill also redefines a permanent establishment to include a place of management, a branch, an office, a factory a workshop, a mine, an oil and gas well, a quarry or any other place of extraction or exploitation of natural resources. It also includes a warehouse providing storage facilities, a farm, plantation or similar place where agricultural or forestry activities are carried out. 

Currently, only firms listed on the Nairobi Securities Exchange (NSE) are subject to this rigorous reporting standard, and changes to the law will further give regulators like KRA and Capital Markets Authority (CMA) power to look into the local operations of some of the largest global firms operating in the country.

If approved, the amendments will provide the KRA with the legislative ambit to go after digital giants like Facebook, Google’s parent company Alphabet and taxi-hailing platform Uber that have in the past come under scrutiny over their tax obligations.       

The amendments to the Finance Bill, 2021, which are due for tabling in Parliament in the coming weeks, further seek to redefine income accruing from the business conducted over the Internet through a digital marketplace. This follows concern from stakeholders that the administration of the Digital Services Tax introduced last year is unfeasible as it entails a broad definition of a “digital marketplace.” 

A digital marketplace has now been defined as an “online platform which enables users to sell or provide services, goods or other property to other users.”    

Currently, KRA and French oil giant Total are embroiled in a dispute dating back to 2011, where the company seeks to block Sh310 million in withholding tax, penalties and interest being demanded by the taxman. 

KRA says the tax bill is accrued from technical assistance services Total Kenya paid to its parent company Total Outre-Mer (TOM) registered in France. 

Total, on the other hand, argues it should not pay the tax bill owing to a double taxation agreement Kenya signed in 2011, and because TOM does not have a permanent establishment in Kenya.