Kenya withheld backing for US President Joe Biden administration’s push for a global minimum rate of tax on multinational companies because the deal will stop Nairobi from collecting taxes from tech giants such as Google, Facebook and Amazon.
The Paris-based Organisation for Economic Cooperation and Development (OECD), which hosted the talks on the overhaul of taxation rules, revealed five days ago that Kenya was missing from the list of 136 countries that have backed the agreement.
Wednesday, the Kenya Revenue Authority (KRA) confirmed that Kenya was uncomfortable with clauses in the agreement that will force it to drop the digital services tax of 1.5 percent of sales.
“Members who join the statement are obliged to withdraw their unilateral measures such as digital services tax and similar measures imposed on non-resident companies which do not have physical presence in the market jurisdiction,” said Terra Saidimu, the KRA Commissioner in charge of Intelligence and Strategic Operations.
This would have forced Kenya to drop its own digital services tax, which came into effect at the start of January.
It is levied on the sale of e-books, movies, music, games and other digital content and applies to foreign companies.
The KRA says the tax could generate up to Sh13.9 billion in revenue in the next three years.
Backing the agreement would also put at risk the collection of other taxes from multinational companies.
“There is a concern that ‘other relevant similar measures’ might extend to cover withholding taxes on fees for technical services and royalties which are generated by multinationals without physical presence,” said Dr Saidimu.
“In short this would hamper future revenue mobilisation for market jurisdictions.”
The tax standoff comes as negotiations for a free trade deal between Kenya and the United States face fresh hurdles after the expiry of a key legislative tool for getting faster Congress approval, dimming the prospects for its conclusion.
Today, President Uhuru Kenyatta is set to meet Mr Biden at the White House and the tax issue is expected to form part of their discussions.
“President Joseph R. Biden, Jr. will host President Uhuru Kenyatta of Kenya at the White House. The leaders will discuss the strong US-Kenyan bilateral relationship and the need to bring transparency and accountability to domestic and international financial systems,” said a White House statement on the meeting.
All of the Group of 20 major economies, including China and India, which previously had reservations about the proposed overhaul, have backed the US-driven global minimum tax on multinational corporations.
Kenya, Nigeria and Algeria are among the top African economies that have yet to back the deal. Major African economies that have backed the agreement are Egypt, South Africa and Morocco.
“Africa did not present a joint position on the OECD proposal and this does not bode well for the continent,” said Dr Saidimu.
A statement on the US Treasury Department’s website touting the deal reveals the “removal of all Digital Services Taxes, and other relevant similar measures, on all companies.”
Levied on revenue rather than profit, the taxes have become an increasingly popular way for countries to balance their budgets.
Facebook and Google have been quick to praise the Group of Seven rich countries’ agreement to create a global minimum 15 percent corporate tax rate. Their approval is the product of the clause demanding countries scrap the digital services taxes.
The minimum tax deal was designed to reduce companies’ incentives to shift profits to low-tax offshore havens and could bring hundreds of billions of dollars into government coffers of countries like the US.
Without the international agreement, the Biden administration’s planned tax increases could lead to companies relocating their headquarters to low-tax countries. With global minimum taxes, companies would have fewer options outside the US to get lower rates, and that reduces the potential risks of raising taxes.
Negotiators hope that the detailed overhaul will get the backing of leaders from the G-20 at their October summit, with the aim of implementing the new rules in 2023.
Talks on the overhaul stalled in the final years of the Trump administration, but received fresh momentum in April when the US presented new proposals that quickly gained the support of other members of the G-7, who ultimately came on board this month.
The OECD says the 136 countries that have backed the agreement account for more than 90 percent of global GDP.
The minimum corporate tax deal does not require countries to set their rates at the agreed floor but gives others the right to apply a top-up levy to the minimum on companies.
Kenya wanted to do a deal with the US before the expiry of the Africa Growth and Opportunity Act (Agoa), which allows sub-Saharan African countries to export thousands of products to the US without tariffs or quotas until 2025.
President Biden allowed the Trade Promotion Authority (TPA), which delegates powers to the US head of state to fast track trade negotiations with the Congress, to expire on July 1.
In the absence of a TPA, any deals reached would be subject to amendments by US legislators and would face difficulties getting ratified.
This will affect trade deals already in the works like the negotiations with Kenya, which had hoped for a speedy conclusion of the talks that were officially opened in July last year.
When protected by that legislation, trade deals such as the one Kenya is negotiating are effectively “fast tracked” through the US Congress, with lawmakers unable to make substantial changes or amendments to the text of the deal.
President Biden did not ask for the renewal of the authority, with his administration saying that it was reviewing progress of talks with Kenya to make sure that potential accords are consistent with his pledge to prioritise workers.