Tech giants evading Sh280 billion in taxes in poor countries

Logo of Alphabet Inc's Google outside its office in Beijing, China. Treasury has introduced the digital services tax on income accrued in Kenya. [Reuters]

Global tech giants Facebook, Microsoft and Google’s parent company Alphabet Inc are avoiding paying as much as Sh280 billion in tax revenue to 20 developing countries, including Kenya.

Global charity firm, ActionAid International, in a new report says the top three tech companies use unfair global tax rules to avoid paying taxes in these countries.

“ActionAid’s new research analyses Facebook, Alphabet and Microsoft and the potential tax revenue that their market activity could generate if the tax regime and resulting corporation tax bills better reflected these companies’ economic presence,” said the report in part.  The Sh280 billion tax gap is calculated from the share of the three tech giants’ global profits, relative to their number of users and adjusted for countries’ Gross Domestic Capital (GDP) per capita, which accounts for users’ relative values across the 20 countries studied.

“India, Indonesia, Brazil, Nigeria and Bangladesh are the markets studied with the highest tax gaps from the three companies,” said the report.

“Apportioning of profits to each country is based on the estimated number of users in each country and adjusted for per capita GDP (current US dollars) to calculate the ‘value’ of users to each company in different countries, as a proxy for their economic activity,” explains the report.

The report comes in the wake of increased scrutiny by Kenyan regulators, who in recent months have sought to increase the taxes paid by tech multinationals in the country.

In July, the National Treasury through the Finance Act 2020 introduced the digital services tax, payable on income accrued in Kenya from services offered through a digital market place.

The levy is set at 1.5 per cent of the gross transaction value and is due at the time of transfer of the payment to the service provider.

The Kenya Revenue Authority (KRA) said the new tax will govern both international players and local service providers, including those offering mobile money services.

Last year, KRA invited bids for a technology firm to install a monitoring and payments system to track and audit transactions between local and international digital merchants and their customers.

The tax collection system entails an integrated payment gateway solution to identify and authorise payments through the settlement of data to and from merchants’ online portals to merchants’ banks.

Treasury has also through the VAT (Digital Marketplace Supply) Regulations 2020, proposed a new VAT levy on digital products and services.

“VAT shall be charged on taxable services supplied in Kenya through the digital market place,” explains the regulations in part. “Taxable supplies made through a digital market place shall include electronic services and downloadable mobile apps, e-books and movies.” The new law does not indicate the VAT rate but is pegged on the VAT Act, 2013 that set a 16 per cent rate, which was revised to 14 per cent in April this year following the outbreak of Covid-19.

Under the new law, subscription-based media content including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming shall also be subject to the new digital services tax.

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