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Betting companies query taxing of all account deposits

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BD GRAPHIC

With just a basic phone and as little as Sh10, at least every day, somebody somewhere is trying to win something by betting on luck. And the gambling craze keeps gripping the economy.

However, the government is taking note. In the words of former US President Ronald Reagan, the government’s view of the economy can be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.

But for gambling, the Kenyan government, torn between chasing revenues and protecting children as well as vulnerable adults, wants to tax and regulate this new craze at the same time.

The latest attempt at reining in gambling is the government move to restrict all gambling advertising to between 10pm and 6am as well as banning the use of billboards in promotions.

But at the same time, the government wants to tax the industry as much as it can, especially with prevailing falling tax revenues from traditional businesses.

The Kenya Revenue Authority (KRA), having been allowed to collect withholding taxes from gamblers based on the recent ruling at Milimani Commercial Courts, estimates that the sector could be making Sh200 billion in annual revenue.

However, its interpretation of tax on winnings as was introduced by Finance Act 2018 could now see gamers pay tax on all amounts of money deposited in their e-wallets even before betting.

This has seen leading betting firms in the country such as SportPesa slapped with tax penalties, forcing them into a series of explanations with the KRA.

The taxman is calculating a 20 percent withholding tax on all the money in punters’ e-wallets, in the absence of a mechanism to differentiate between staked sum and the actual winnings.

A letter from SportPesa last month to the KRA, a copy seen by the Business Daily, shows that the industry is wary that this will see punters pay taxes on the money loaded into their betting wallets, even before they actually play and win anything.

For instance, May 12 game between Brighton and Manchester City saw one of the betting firms give 12.81 for a win in favour of Brighton and 1.13 in favour of Manchester City. This means if a gambler stakes Sh1,000 in favour of Man City and it actually wins, his or her e-wallet would reflect Sh1,130 made of Sh1,000 initial stake and Sh130 winning.

Using the KRA interpretation of tax on winnings means that the player will incur Sh226 in withholding tax, leaving them with Sh904 — a loss position despite winning. A player would incur Sh26 in tax at the rate of 20 per cent of the winning and remain with Sh1,104 if the KRA was to interpret winning as Sh130.

Calculating tax on combined stake and winning sum, the industry wrote to the taxman, means that the player “has no reason even to play” and would rather resort to underground betting shops to get paid the entire sum.

A net gain, even though lower, would still result in punters who correctly predict the game to end the other way.

“The current interpretation that is used by the authority has the effect of taxing a player’s stake (investment) and therefore making our business completely unviable and will surely lead to business closure,” SportPesa chief executive Ronald Karauri wrote to the KRA last month.

It is this divided view on the interpretation of winning that has fuelled tax disputes between the betting industry and the taxman.

This is not the first time the KRA is getting into tax tussle with firms over clauses contained in Finance Act.

It once differed with cigarette companies on assessment when taxation basis shifted from production costs to retail selling price per 1,000 cigarettes.

Last year, banks had to go to court seeking an interpretation of the clause ‘money transfer’ as KRA demanded Robin Hood tax.

Thanks to this divided interpretation, betting firms are staring at uncertain future with Interior CS Fred Matiang’i saying the industry owes the KRA Sh26 billion in tax arrears and that they should pay before their licences are renewed beyond July 1.

Many regimes in the world, which tax the gaming industry, only take a certain percentage of winnings, called gross gaming revenue (GGR), which does not include the staked sum.

Most of them charge GGR of between 15 and 20 per cent, based on winnings.

Denmark, just like Kenya, has 20 per cent withholding tax on winnings while England has 15 per cent, Finland (8.5 per cent), Sweden 18 per cent and Italy at 24 per cent.

The KRA dispute with betting firms confirms expectations of immediate former Commissioner General John Njraini in 2017 that e-commerce businesses are likely to run into tax disputes with the taxman as it tries to create a platform for taxation.

The KRA recently slapped SportPesa with a controversial tax penalty of Sh10.3 billion, deepening the interpretation dispute surrounding the term ‘winnings’.

According to Finance Act 2018, winnings include “winnings of any kind and a reference to the amount or payment of winnings shall be construed accordingly”.

Through its auditors PricewaterhouseCoopers (PwC), Pevans East Africa operating as SportPesa — says that the KRA’s tax assessment is based on a wrong definition of winnings likely to slice into punters’ money.

“Pevans avers that the definition of winnings under the Betting, Lotteries and Gaming Act, is vague and ambiguous and difficult for a taxpayer to construe what payments were in the nature of winnings,” PwC says in a letter to the KRA objecting the alleged tax arrears.

It adds that the taxman’s demand notice did not provide numbers used in computing the assignment or breakdown of winnings paid to resident and non-resident players, making it difficult for a betting firm to evaluate merits of the assessment.

According to SportPesa records, it paid Sh400 million last year as withholding tax on winnings. This was in addition to Sh3.6 billion betting tax, Sh1.12 billion corporate tax, Sh722.9 million withholding tax, Sh183.4 million withholding value-added tax and Sh269.6 million pay-as-you-earn for its 367 employees. This amounted to Sh6.29 billion in taxes up from Sh3.63 billion paid in 2017.

Betting tax jumped from Sh1 billion to Sh3.6 billion while withholding tax on winnings was introduced last year, leading to the jump.

In an industry that has evolved at a rapid pace to the concern of many stakeholders who view it as a threat to the youth, the government has also had it difficult to rein in unlicensed firms.

This means that a tax that will hit gamblers’ own stakes is likely to drive them to unregulated firms that do not pay withholding tax.

Many unlicensed international operators, the KRA has stated before, are not easy to track and tax.

It comes at a time the craze has evolved to the new levels, where some people, an equivalent of stockbrokers, are even offering betting advice at a fee.