Can Caesar collect his dues from the betting millions?

Barring any major disruption of parliamentary business, Kenya could have a new betting law by end of May when the 11th Parliament’s term comes to a close.

The proposed law, the Betting, Lotteries and Gaming (Amendment) Bill, 2016, has sparked debate as to how Kenya’s fast-growing gambling industry should be regulated and taxed.

Gem MP Jakoyo Midiwo, the sponsor of the Bill, has accused the industry’s bookmakers of using legal loopholes to evade or avoid taxes.

Industry players and regulator have, however, denied the allegations, compounding the confusion surrounding taxation of the gambling industry.
In particular, punters (players) have been left wondering whether they are required by law to account for tax on their winnings.

Many ordinary Kenyans who have been caught in the sports betting craze are often asking whether they would be required to pay any tax were they to win one of the many multi-million shillings jackpots.

In order to answer this question, it is important to understand how the tax regime for the gambling industry has evolved in Kenya.

The first attempt to tax betting and gaming winnings was first made in mid-2012 through the Finance Act. That law introduced a 20 per cent withholding tax on winnings from betting and gaming.

But even before the provisions could come into effect, they were deleted via a second Finance Act, 2012 published in January of 2013.

The 20 per cent withholding tax on winnings was however reintroduced through the Finance Act, 2013. The 20 per cent withholding tax was introduced as a final tax and took effect on January 1, 2014.

This re-introduction of withholding tax on betting and gaming, forced the Association of Gaming Operators to file a High Court petition contesting that the new Income Tax Act amendments enacted by the Finance Act, 2013 were unconstitutional as they were introduced without public participation.

The association also claimed that implementation of the tax was impractical but the petition was dismissed by Justice Majanja, perhaps cementing the Kenya Revenue Authority’s (KRA) long held view that tax is due irrespective of any difficulties with implementation.

Outside the corridors of justice, other industry players claimed that the law was not clear as to who was supposed to account for the withholding tax.

However, like any other withholding tax mechanism, withholding tax is always accounted for by the person making the payment. Thus, the betting and gaming companies were required to deduct 20 per cent tax from the winnings of the punters and remit it to the KRA.

But ambiguity still remained as to whether the tax was applicable on the gross amount of winnings or the net winnings.

Nevertheless, in an attempt to address the implementation challenges, the government introduced further amendments to the Income Tax Act in 2015.

Through the Finance Act, 2015, withholding tax was now applicable to the gross winnings payable by bookmakers to punters. The withholding tax was also fell from 20 per cent to 7.5 per cent. This change took effect on January 1, 2016.

Despite these clarifications and changes, some of the industry stakeholders still held the view that application of the law was impractical at least from an administrative viewpoint.

Others claimed that the law was unfair and departed from international best practice.

Internationally, different countries have adopted various modes of taxing the gambling industry. For example, for bookmakers, some countries tax them as any other trading company, while others ascribe different taxes depending on the various gambling activities.

Some countries tax winnings as any other ordinary income, others attach a final withholding tax on the payments while others do not tax the winnings at all.

In the US for example, gambling winnings are fully taxable and a winner must disclose these winnings in their tax return. In the United Kingdom, gambling winnings are not taxable on the punters.

The bookmakers are, however, liable to a 15 per cent tax of gross profits. In Europe, outside of the UK, tax on punters’ winnings is rare.

Through the Finance Act, 2016, and in a bid to further streamline taxation of the industry and encourage compliance, the Government removed the taxation of the industry from the provisions of the Income Tax Act to the ambit of the Betting, Lotteries and Gaming Act.

With effect from January 1, 2017, Kenya adopted the UK model of taxing the gambling industry. This model lays the tax burden on the bookmakers and not the punters.

The Finance Act, 2016 introduced a monthly betting tax of 7.5 per cent on the bookmakers’ gaming revenue. Gaming revenue is defined as the bookmakers’ gross turnover less the winnings paid out to the punters. Also, there will be a monthly lottery tax of five per cent chargeable on the lottery turnover.

Casinos will now be liable to a monthly gaming tax of 12 per cent of gaming revenue. For prize competitions and promotions, these are now chargeable to a monthly prize competition tax of 15 per cent on total gross turnover.

Ensuring compliance and collection of taxes across the gambling industry is laudable. But these new changes are still bound to face challenges when it comes to practical implementation.

For instance, it remains to be seen whether a betting company’s net profit is still liable to the 30 per cent corporation tax, now that a betting company is liable to the 7.5 per cent tax on its monthly gross profit.

There is no doubt that taxing the gaming industry is one of the initiatives the government is taking to broaden the tax base.

It will be interesting to see how the government reacts to these practical challenges, including how to license and net into the tax bracket the slot machine operators that are now sprouting in the slums.

What is clear is that the taxation of the gambling industry remains a murky affair — especially as the industry continues to evolve on new platforms such as online sports betting.