Safaricom is wary that the Kenya Revenue Authority (KRA) might use the current tax laws to hit it with taxes such as the capital gains tax (CGT) if it goes ahead with the internal reorganisation process to split M-Pesa from its telco business.
The telco says it will pursue government tax waivers before proceeding with the plan to create a new group structure that will see M-Pesa and telecommunications business run as separate entities.
Safaricom CEO Peter Ndegwa says in a transcript of the telco’s investor call made on November 11 last year that the listed firm would need government support “in terms of tax reliefs and so on to be able to go that direction.”
“There is clearly quite a lot of work to do in terms of tax and legal structures that would need to be overcome, in particular tax, because the current tax law almost treats internal reorganisation as if there were external disposals,” said Mr Ndegwa.
“We do need approvals if we're going in that direction so that we don't have to pay VAT (value added tax) or withholding tax or whatever in order for us to be able to reorganise the way we intend to.”
Mr Ndegwa says while the board is yet to approve the transaction to separate the two businesses, it has given support to the management to work towards that.
Business Daily understands that some insiders who were initially opposed to the split, have been gradually warming up to the reorganisation plan, which they see as an opportunity to directly take on banks with Mpesa as a digital bank.
The reorganisation involves transferring assets from one company in a group to another within the same group. Such assets could be subjected to capital gains tax (CGT).
Potentially, there could also be a 16 per cent VAT consequence on the transfer of any business within Safaricom as a going concern.
Tax laws on CGT offer several exemptions, for instance when a firm is doing group restructuring and no third party is involved.
However, the KRA will still have to receive an application from Safaricom and determine which exemptions to grant at a time President William Ruto has vowed to be strict on granting any tax waivers.
President Ruto said Wednesday in a press interview that his administration will “collect every collectable revenue” in Kenya and ensure everybody pays their full share of taxes.
He has tasked the KRA to collect an additional Sh500 billion in the financial year ending June 2023, an extra Sh1 trillion in 24 months and double the tax collection by 2027.
“Everybody is going to pay tax. This is not Animal Farm where some animals are more equal than others,” said President Ruto.
“There will be no waiver for anybody. You saw people waiving taxes for their businesses… you buy this bank, you sell that bank and you waive taxes. It is not going to happen under my administration.”
Safaricom has been receiving a push, especially from Parliament, to split M-Pesa and telecommunication business and create two separate entities. However, it is favouring an internal reorganisation.
An internal reorganisation as opposed to a permanent hive-out of businesses would mean having M-Pesa, telecommunications or any other entity as separate subsidiaries within the same firm.
The actual relationship between the businesses will be housed within Safaricom and the synergy benefits of the group will continue to accrue to those businesses, according to Mr Ndegwa.
These businesses currently operate separately and with different teams but an internal reorganisation will allow Safaricom to introduce formal structures.
Mr Ndegwa says the formal structures will allow the separate businesses to raise money or co-invest with others if such a need arises in future.
Safaricom chief believes some MPs calling for Safaricom split to tighten the telco’s supervision are missing the point.
“I think there has been a misunderstanding about how we are regulated. Some of the parliamentarians said it will make it easier for the regulators to regulate Safaricom if the businesses were split,” said Mr Ndegwa.
Currently, the Central Bank of Kenya regulates Safaricom’s mobile money business while the Communication Authority of Kenya regulates the connectivity business.
A recent spirited attempt by Parliament to make the split a reality flopped in early 2021 after MPs snubbed debate on the Kenya Information and Communications (Amendment) Bill.
The bill had targeted to address concerns that Safaricom has become too big through its dominant market share in voice, mobile data, and mobile money.
M-Pesa’s stature in Safaricom has continued to grow even as voice and text messaging revenues continue to come under pressure.
Safaricom in the half year ended September 2022 booked Sh39.8 billion from the voice service while revenue from M-Pesa hit Sh56.8 billion or 41.2 percent of Sh138.1 billion total mobile service revenue.
Airtel Kenya last October completed the process of separating its mobile money business from the telecommunications arm, with the new entity now operating as Airtel Money Kenya Ltd.