Companies

Global tech giants give KRA income tax avoidance headache

KRA

KRA says it is studying policy proposals from the Organisation for Economic Co-operation and Development (OECD) on how to tax the digital economy. PHOTO | FILE

Kenya Revenue Authority (KRA) is grappling with the difficulty of taxing global technology firms that have employees and earn income in the country, blaming outdated laws for failing to keep up with the growing digital economy.
The taxman says only a few of the international tech giants with a local presence, like Google and Microsoft, are currently paying taxes in Kenya.

This has left most other multinationals such as Facebook, Uber, Amazon and Twitter out of the tax net despite earning significant income locally.

“The digital economy is growing fast but the tax code has not kept up,” said Patrick Chege, a manager at KRA’s Large Taxpayers office.

The admission comes at a time when more tax authorities, including in the UK and Italy, have managed to wring out hundreds of millions of dollars from multinationals like Google and Apple, which have put up structures meant to avoid or reduce taxes in the countries where they operate.

The taxman has not yet quantified the potential revenues that can be generated from full taxation of the digital economy, whose value stood at Sh66 billion in 2014.

Mr Chege noted that local taxation of multinationals is currently based on the requirement that the firms must have a permanent establishment, meaning physical presence in the form of an office or factory.

Tech firms without a physical presence but which have local reach through the Internet are technically exempt from paying local taxes, Mr Chege said.

KRA says it is studying policy proposals from the Organisation for Economic Co-operation and Development (OECD) on how to tax the digital economy.

The OECD has published a report on tax challenges of the digital economy, proposing new laws that can help mitigate tax avoidance and aggressive tax planning.

These include introduction of withholding taxes on digital transactions, value added taxes on cross-border transactions and imposition of corporate taxes if a multinational has a local sales force that habitually signs contracts with large clients.