KRA could miss out on millions in tax revenue from Zuku sale

The Kenya Revenue Authority (KRA) could miss out on tens of millions of shillings in tax revenue from the sale of Wananchi Group Holdings Ltd to Axian Telecom Ltd (ATL). 

This follows revelations last week that ATL is seeking to acquire the entire business of Wananchi Group, which includes internet service provider Zuku, in a multi-billion-shilling deal. 

Both Axian Telecom and Mwananchi Group are incorporated in Mauritius, which has raised concern that KRA could miss out on collecting tens of millions of shillings in tax revenue from the deal. 

“The parties have submitted that the transaction is an opportunity for the Acquiring Group to expand its footprint in East Africa by leveraging on an established and trusted Brand,” stated a regulatory notice on the deal seen by the Financial Standard. 

“Further, the transaction affords the Acquiring Group an opportunity to enter into new digital markets and optimise the use of the Merging Parties’ existing assets where synergies can be leveraged.”

The deal has cast the spotlight on a contentious double taxation avoidance agreement (DTAA) between Kenya and Mauritius.

The DTAA was ratified by the Kenya National Assembly in December 2020 but is yet to be ratified by Mauritius four years down the line. 

The National Treasury patched together the DTAA after the High Court nullified a previous agreement because the treaty had not been ratified by Parliament as required for bilateral treaties.  

The DTAA carries new obligations on investors registered in Mauritius to remit taxes from profits, dividends, royalties and other gains that accrue from business operations in Kenya. 

The treaty was designed to discourage profit shifting, the practice where corporations registered in multiple jurisdictions under-report the value of the profits they make in their operative country to pay little or no tax in other jurisdictions with low tax rates or incentives. 

Mauritius does not have a capital gains tax, and the country charges a 15 per cent flat corporate tax. Kenya, on the other hand, charges 30 per cent corporate tax, which is pegged at 37.5 per cent for non-resident companies. 

The DTAA provides guardrails against tax evasion or avoidance by spelling out the legal framework that KRA should use in dealing with firms registered in Kenya and Mauritius, the protections and limitations of non-resident investors and firms with a physical presence in Kenya.

Article 13 regarding capital gains tax, for instance, indicates that gains derived by a resident of either Kenya or Mauritius from a transaction on immovable property in either country may be taxed in that country. 

“Capital Gains from the alienation of movable property forming part of the business property of a permanent establishment, which an enterprise of a Contracting State has in the other Contracting State, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise), may be taxed in that other state,” states Article 13 of the DTAA in part. 

This means that an investor or entity registered in Mauritius would be subject to a 15 per cent capital gains tax when selling a stake in a business they own in Kenya. 

However, Mauritius is yet to ratify the DTAA ratified by Kenya in 2020 and this has left Kenyan tax authorities in the lurch despite the conclusion of several multi-billion shilling deals involving entities registered and operating in both countries. 

A joint parliamentary inquiry last year into the government’s Sh6 billion acquisition of Telkom Kenya in 2022 found that KRA earned no revenues from the transaction. 

The transaction revealed that a little-known firm Jamhuri Holdings Ltd, registered in Mauritius, held a majority of 60 per cent in Telkom Kenya. 

Telkom Kenya is considered a national asset owing to the sensitive infrastructure contracts it discharges for the defence and police installations.

Despite the significant stake held by Jamhuri Holdings, none of the company’s local directors turned up in Parliament during public hearings.     

In December last year, the Ethics and Anti Corruption Commission (EACC) opened investigations into the transaction, with former Treasury officials, including Cabinet Secretary Ukur Yatani and Permanent Secretary Julius Muia listed as some of the public officers with a case to answer. 

The acquisition of Mwananchi Group by Axian Telecom is still subject to regulatory approvals in Kenya, and the Common Market for Eastern and Southern Africa (Comesa) Competition Commission has given stakeholders until October 3 to make submissions relating to the transaction. 

If approved, the deal could give Wananchi Group’s Zuku a new lease of life in an operating environment that is experiencing dynamic growth and competition. 

Starlink, owned by US billionaire Elon Musk, is currently enjoying popular support in the country since launching its satellite internet kits last year.

Data from the Communications Authority indicates that satellite internet capacity in the country went up from 0.4GB per second in December last year to 48GB per second in March this year.

While this is a significant jump, fibre broadband remains the dominant mode of connectivity for both corporate and home users and leading network operators, including Safaricom, Jamii Telecom and Zuku, which maintain a dominant hold on the market. 

The fresh capital injection by Axian Telecom, which reported Sh32.6 billion in revenue last year, could provide Wananchi Group with the much-needed runway to deepen its service offering and grow its market share.