Treasury takes its pound of flesh from betting companies

The Treasury has moved to claim its share of the betting industry’s runaway success with the introduction of new taxes expected to yield billions of shillings in additional revenues.

The tax measures, set to come into force in January, are contained in the Finance Act 2016 and will see betting firms part with a sizeable chunk of their revenues every month besides paying the annual corporate tax.

Under the new legal regime, companies will pay a 7.5 per cent betting tax, 12.5 per cent gaming tax and five per cent lottery tax on revenues earned in lotteries and raffles.

The provision on betting requires firms to deduct customer winnings from total revenues earned and then charge a 7.5 per cent tax on the residual amount. Gaming companies will similarly deduct customer winnings and pay a 12.5 per cent tax on the remaining amount. Gaming refers to competitions whose outcomes are determined by chance rather than those that depend on the skills of a player such as roulette. 

The competition tax is chargeable on the cost of entry into a competition, which is premium rated at 15 per cent of the gross turnover. Premium rated competitions are those where participants are charged an entry fee.

Tax experts described the measures as punitive, indicating that the government may have overreacted to a recent public uproar over the rapid growth of betting and gaming in Kenya in the past couple of years.

“Apart from being punitive to the infant industry, the taxes are complicated and unclear, a fact that goes against the canon law of taxation that demands certainty and simplicity,” said Samuel Njoroge, a tax manager at Taxwise Africa Consulting LLP.

“The taxes are payable by the 20th of each month, which further impacts on the cash-flows of entities involved in gaming, betting and lottery.”
Pain from the new taxes has, however, been tempered by removal of the 20 per cent withholding tax on customer winnings. Industry players have since introduction of the Withholding Tax in 2014 complained that it is impractical and difficult to implement.

Frustrated by the slow pace

Peter Karimi, the chief executive of Mcheza, a betting firm, however welcomed the new taxes, saying they have made clear the industry’s tax obligations.

“What we are happy with is that with this new taxation regime, the rules and requirements are clear for all participants and entrants. The burden of compliance now shifts to those who run the betting companies who must keep the playing field level,” he said.

President Uhuru Kenyatta’s recent assent to the Finance Act came as a major victory for the Treasury, which has been trying to charge the betting and gaming firms higher taxes through the Betting, Lotteries and Gaming (Amendment) Bill, but has been frustrated by the slow pace of its movement through Parliament. 

Majority Leader in the National Assembly Aden Duale withdrew the Betting, Lotteries and Gaming Bill on the same day the Finance Bill was passed, having achieved the objective of levying the industry higher taxes.

Consultancy firm PricewaterhouseCoopers (PwC) estimates that casinos had gross revenues of Sh2 billion in 2014. Mobile phone-based sports betting firms have, however, become more popular and are believed to be raking in more money than casinos.

The firms have been riding on football’s (especially the English Premier League) fanatical following in Kenya.

The betting companies’ money-spinning success has attracted the Treasury and Parliament’s interest - setting in motion the quest to extract more tax revenues from the industry as part of the measures to slow down its growth.

Mr Duale told Parliament that the Bill he ultimately withdrew from the House was meant to discourage gambling.
“Either we gamble and pay huge taxes so that we build roads and provide better healthcare (or stop),” he said.

Adding corporate taxes to the just introduced tax measures makes the betting industry the most taxed industry in Kenya – a reality that may cool off the recent clamour for additional regulations on the industry.

“The taxes are not final taxes, meaning that the profits by the companies or any person earning betting, gaming, lottery revenues will be paid at 30 per cent. The important thing is that the new taxes will not be offset against the 30 per cent corporation tax,” Mr Njoroge said.

Mr Njoroge said the government will need to publish some regulations to clarify which tax rate will apply in cases where one firm holds more than one licence.

“There is need for release of guidelines on how the taxes will apply before the new laws come into force in January to avoid confusion.”

The Kenya Revenue Authority has a Sh1.33 trillion revenue target with the government seeking to bolster the agency’s ability to raise more money to fund the budget by raising taxes.

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