Global tech firms operating in Kenya like Facebook and Twitter are denying the country billions of shillings in taxes.
This is supported by weak tax regulations that require multinational firms to have a physical presence in the country in form of an office for it to pay taxes.
Facebook for instance reported Sh13.2 trillion in revenue in its second quarter earnings ending July while Twitter made Sh71.1 billion in revenue within the same period.
The firms were however taxed in their respective headquarter countries despite carrying out commercial activities in Kenya.
Only tech firms with a physical presence in Kenya like Google and Microsoft, are currently paying taxes. Kenya Revenue Authority is struggling to tax the firms due to the outdated laws which have failed to keep up with the growing digital economy.
“In many instances these companies are registered in other low tax jurisdictions such as Delaware in the US or Ireland in Europe.This makes it difficult for Revenue Authorities to determine the level of tax to be paid locally,” Tax Justice Africa Deputy Executive Director Jason Braganza said.
The Internet giants are exploiting these tax loopholes to pocket funds that should be going towards schools, hospitals, and development of other public services.
Efforts by the European Union Executive arm to introduce a new levy on the revenue of the tech firms has faced multiple rejections by the companies on grounds that it would affect the firms’ investments.
The union wants to levy atleast three per cent on the sales of the companies with a global annual revenue of Sh85.3 billion or more such as Facebook,Amazon, Twitter, and Alphabet.
The tax will cover companies that offer advertising services or that sell user data, let users find and interact with each other or supply goods and services directly to each other, and with annual worldwide revenue above Sh85.3 billion.
According to Braganza, the main challenge is on where the ‘real value’ is created when it comes to digital economy.
“The current discussion is attempting to determine this by arguing that value is created where the user is based and therefore that should be where tax is applied,” he said.
However, he notes that most businesses disagree with this argument for purposes of minimising tax liability in high user jurisdictions.
Currently, Facebook has at least 8.8 million users in Kenya while Twitter has 1.5 million users. About 12 million Kenyans use Whatsapp.
While KRA could not quantify the total loss made from the digital economy, the African Union High level panel on illicit financial flows estimates that the continent loses about Sh5 trillion annually.
Sixty per cent of it is from commercial activities in which the digital economy falls.