M-Pesa split will increase taxes, Safaricom tells Parliament

Safaricom, whose petition before the National Assembly's Finance and National Planning Committee was presented yesterday by audit firm PricewaterhouseCoopers (PwC), argued that the split will force the telco to create a new company to run M-Pesa with the new entity taking with it both financial and physical assets which will incur a 30 per cent income tax.

This, Safaricom argues, will disadvantage both the new firm and its shareholders.

PWC's Associate Director Edna Gitachu pleaded with the committee to utilise the Finance Bill to amend the Income Tax Act to allow for related companies to transfer their assets at written down values so as not to trigger a tax incident.

"This transfer has not been occasioned by Safaricom, it's actually been occasioned by regulatory pressure by Central Bank of Kenya," she said.

"These two companies will ultimately be owned by the same shareholders so our prayer is that as the transfer of assets is happening, it should be at a tax neutral position, so that we do not have tax being a hindrance to the regulatory requirement by the Central Bank of Kenya."

Safaricom further argued that once the split happens, the subsidiary company and those owned by other similar service providers will be at a competitive disadvantage with users set to incur higher transaction costs.

The cost will be as a result of provisions in the Finance Bill 2023 that propose to harmonise excise duty on money transfer by lowering the duty on bank transactions from 20 per cent to 15 per cent and raising duty on mobile money transfers from 12 per cent to 15 per cent.

PWC, through Tax Partner Job Kabochi, argued that the increase could be detrimental to the newly formed mobile money service operators, saying the service should be ring fenced from higher charges as mobile money is an enabler of financial inclusion for low income earners.

"In our view there was a reason why the special rate of 12 per cent vis a vis the 20 per cent that applies to transfers by banks and other money agents was there," he said.

"It was all about financial inclusion. I don't think we've sorted out the problem as a country.

"On the one hand we've seen proposals to reduce the excise duty rate on transfers by banks, as well as other agencies from 20 per cent to 15 per cent and on the other we are seeing a proposal to increase the duty rate on transfers through M-Pesa and other mobile platforms from 12 per cent to 15 per cent.

"This is going in the opposite direction."

Mr Kabochi said that while there is a reduction in the excise duty rate for transfers by banks and other agents, the class of individuals who are supposed to be served by the special rate of 12 per cent are going to pay more in excise duty.

"We should consider ring fencing of this entity and similar type entities which by regulation are then required to provide this money transfer outside the ambit of cell phone service provider."

Beyond the splitting of its services, Safaricom raised concerns on the taxation of the key enabling devices that facilitate service delivery, which incur excise duty.

This includes SIM cards that incur a Sh50 excise duty alongside mobile phones, which incur 10 per cent excise duty.

The argument is that excise duty is a consumption tax whose application on imports is meant to encourage local production, but for both SIM cards and mobile phones there is little to no local production.

"The rational as to why excise duty is applied on supply of goods, is to protect local industries as well as to curtail the consumption of a product or service that is seen to be harmful," PwC said.

"SIM cards are just enablers for the application of tax such as excise duty on M-Pesa, talk time, data for browsing and the likes."

They said given that excise duty is a tax on consumption, it should be restricted to use of the services and how the individual chooses to use them as opposed to the actual purchase of the SIM card.

"Even if you apply the rational that you're trying to protect the local industry, we are only able to as a country to provide five per cent of the SIM cards that are needed by our market, in the telco space, so you then miss the point if duty is introduced to protect the local industry."

In regard to the 10 per cent excise duty on the purchase of mobile phones, Safaricom Head of Venture Development Karanja Gichiri argued that access to smartphones will be akin to a human right with the government migrating its services to digital and online platforms.

"However, six out of 12 Kenyans do not have access to this type of a smartphone. About 5,000 government services will be deployed through the phone and if nearly 50 per cent of our population will have smartphones, then we are actually creating a form of discrimination and that digital divide in our society."

The Departmental Committee on Finance and National Planning will continue to hear the views of the different stakeholders before making its submissions and recommendations to the Budget and Appropriations Committee.

The views presented by both companies and individuals are expected to be considered in the final budget on June 15.