Corporate Tax

Why Kenya and Nigeria did not comply with a historic international corporate tax treaty

Buildings in the central business district of Nairobi.

Last month, the Organization for Economic Co-operation and Development (OECD), an intergovernmental economic organization, announced that 136 countries and jurisdictions had signed an agreement requiring global corporations to pay a minimum tax rate of 15%. Kenya, Nigeria, Pakistan and Sri Lanka did not agree to the agreement, the OECD announced.

Now the two African countries have expressed concern about the deal, including Kenya, that it could lead to the suspension of the new digital services tax (DST), and both countries are raising issues with the deal’s dispute settlement requirements.

The global minimum tax treaty applies to multinational corporations with a worldwide turnover of at least 20 billion euros and a profit before tax of at least 10%. According to Terra Saidimu, the commissioner of the Kenya Revenue Authority (KRA), there are only 11 companies operating in Kenya that meet this requirement, but the country currently has 89 companies that pay the DST which targets such companies.

“You need to know exactly what you are getting so you can forego what you already have,” said Saidimu, the commissioner for intelligence and strategic operations, at a recent tax forum for the agency.

Digitization requires changes in tax regulations

Digitization has presented taxation with challenges. As companies operate digitally, but not physically, in different jurisdictions, some companies avoid taxes, and the question arises of how international tax regulations, which are typically based on a “stationary” economic environment, can be adapted to the current global economy.

The global minimum tax rate aims to change international tax rules to ensure that multinational corporations pay a fair share of tax wherever they operate. A total of 140 countries and jurisdictions, including 23 from Africa, have negotiated to combat tax avoidance, improve the coherence of international tax regulations, ensure a more transparent tax environment and address the tax challenges posed by the digitization of the economy.

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The agreement is scheduled to enter into force in 2023. It has two main goals or minimum corporate income tax rates.

Kenya has a digital services tax

Kenya took its first steps to tax the digital economy with the introduction of a DST of 1.5% in January this year.

Joining the new global tax treaty would mean stopping the DST, Saidimu said, but “one bird in hand is worth two in the bush” as there is “uncertainty that we don’t know or may not know exactly how much we are ” will get.”

He cited Uber and Booking.com as failing to meet the revenue and profit requirements of the tax treaty but paying DST in Kenya.

“Allowing them to trade and not pay their fair share of taxes would not only be fair to local businesses, but would also be unfair in terms of trade practices,” he said of such businesses.

Only six companies would be covered by the new deal in Nigeria, said Mathew Gbonjubola, group leader for the country’s Federal Inland Revenue Service.

“The truth is that neither Pillar 1 nor Pillar 2 flows into developing countries,” he said at the KRA tax forum. “We shouldn’t be mistaken.”

Global tax treaty with mandatory and binding arbitration

Both Saidimu and Gbonjubola said another obstacle was the settlement agreement’s arbitration mechanism, which is mandatory and binding and can result in tax jurisdictions losing their sovereignty by resolving tax issues in companies’ home countries.

Describing the agreement as “once in a century”, Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the OECD, stressed at the forum that it will benefit countries, saying the decision of Kenya, Nigeria, Pakistan and Sri Lanka not to register is “very frustrating”. Kenya, he said, is missing out on raising another $ 50 million – the country’s tax authority has not disclosed how much it has raised through the DST.

Saidimu said Kenya is still working with the OECD on the country’s disputes and a way forward, including a request to retain the powers to implement the DST for the companies not covered by the agreement.

“We’re not out of the discussion yet,” he said. “We largely support the process. What we don’t 100% agree on is the essence of the agreement, because such numbers require some questioning. “

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