The Kenya Revenue Authority (KRA) said it stands to lose up to Sh2.45 billion in taxes from Safaricom annually if Parliament approves a proposal to cut the mobile termination rates (MTR) further from Sh0.58 to Sh0.12 per minute.
MTRs are the charges levied by a mobile service provider on other operators for terminating their voice calls on its grid.
The Communications Authority(CA) revised MTR in August 2022 from Sh0.99 per minute to Sh0.58 per minute on an interim basis for 12 months as it conducted a network cost study. The MTR cut came into effect on August 1—which means it lapsed more than three months ago, leaving telcos in limbo.
CA proposes to further chop the MTR to Sh0.12 per minute, a development that would add headwinds to the voice revenue, which is already on the decline alongside text messaging revenue that is facing pressure as mobile data usage grows and customers turn to Voice over Internet Protocol (VoIP) services.
Rispah Simiyu, the KRA Commissioner for Domestic Taxes told the National Assembly’s committee on ICT that the planned reduction of the MTR and the fixed termination rate will hit Safaricom’s contribution to the value-added tax (VAT), excise duty tax, corporation tax remittances as well as dividend to the government.
Ms Simiyu said that the reduction of the MTR will deny the KRA Sh647.2 million annually or Sh53.9 million monthly on the 16 percent VAT charged on Safaricom call revenues.
She said the KRA will also miss out on Sh606.7 million annual excise duty collection or Sh50.56 million monthly. Excise duty is charged at 15 percent.
Further, KRA expects to lose Sh1.2 billion in annual corporate tax from Safaricom if the tariff cut is implemented.
“We have used the 2022/23 financial year revenue to demonstrate the impact of the reduction in the mobile termination rate,” Ms Simiyu told the Parliamentary Committee chaired by Dagoreti South MP John Kiarie.
She said Safaricom generates about Sh5.1 billion annually from termination of calls and this would be hit by the MTR cuts.
“The expected reduction in rate is Sh0.46. Based on the approximate termination revenue per year of Sh5.1 billion, the expected revenue loss per year is Sh4 billion or Sh337 million per month,” she said.
KRA said that the MTR cut would also affect the dividend payable to shareholders, including the State which has a 35 percent stake in the telco.
Ms Simiyu said that the reduction of the MTR would have a positive impact on Airtel Kenya and Telkom Kenya revenues and give them greater price flexibility hence effective competition.
She said Airtel and Telkom will experience a reduction in termination costs payable to Safaricom and a corresponding reduction in their input tax.
The KRA official pointed out that a reduction in operation costs, specifically termination costs is expected to translate into an increase in their chargeable income, hence higher instalment tax.
“However, both Telkom Kenya and Airtel Kenya are currently in loss of Sh103.5 billion and Sh57.2 billion respectively,” Ms Simiyu said.
“The impact of the reduction in termination charges will not be felt immediately but in the future when both companies exhaust the current loss carried forward” she added.
Ms Simiyu said the reduction in MTR charges will impact end-users if the Sh4 billion paid to Safaricom by Airtel and Telkom Kenya is removed.
“KRA will not dictate to the entity what they will charge their clients. We will only collect our 16 percent VAT and 15 percent Excise Duty. One would expect Airtel and Telkom Kenya will reduce their charges to the end user.” she said.
The Competition Authority of Kenya (CAK) has recommended that there is a need to review the termination rates downwards as proposed by the CA.
Adano Wario, the acting CAK director general, told the committee that the asymmetric termination rate between large and small operators can result in higher retail prices for calls to smaller operators, which harms their competitive position.
“Further, it can result in market distortions with fixed networks subsidising mobile networks and therefore asymmetric fixed and mobile termination rate ought to be set for Kenya,” Mr Wario told the committee.
“Lowering these rates will have the overall effect of reducing barriers to entry in the market which will prevent abuse of dominance by an incumbent, narrow differences between on-net and off-net (and therefore reduced tariff-mediated network effects), increase customer choice, reduce cost of doing business, increase voice traffic and operator revenues and thus increase government tax revenues.”