• Withholding tax on winnings is 20 percent. But should it be imposed on the stake as well?
• It's not known if the seven remaining betting companies will pay withholding tax on the stake as well as winnings.
Different interpretations of Withholding Tax seems to lie behind the recent suspension of 27 sports betting firms.
The Kenya Revenue Authority believes that 20 percent withholding tax should be imposed on both the stake and the winnings of the punter (the player who bets).
The sports betting companies believe that withholding tax should only be imposed on the winnings of the punter. They believe that only the punter’s winnings are income and the stake is his savings and should be returned to him without deduction.
The sports betting companies argue that the KRA interpretation means ‘you can lose even if you win’.
SportPesa paid Sh400 million to the KRA in withholding tax on winnings in 2018 but was still hit in May this year with a demand for Sh3.3 billion withholding tax for the month of April alone. That is because KRA is charging 20 percent of the stake being returned to the player as well as 20 percent of his winnings.
In a letter to the KRA on May 7, SportPesa gave the example of the upcoming match between Brighton and Manchester City on the last day of the Premier League.
Brighton win -12.81 odds
Draw - 6.92 odds
Manchester City win - 1.13 odds
The odds at that time meant that if Brighton won the match, SportPesa would pay 12.81 times the stake to the punter; for a draw, they would pay 6.92 times the stake; and for a Manchester City win just 1.13 times the stake.
The odds were high for a Brighton win and low for Manchester City win because Manchester City was “the overwhelming favourite”.
As it happened, Manchester City trounced Brighton on May 12 winning 4-1.
So if a punter had backed Manchester City with Sh1,000, SportPesa would pay him Sh1,130 (1.13 times Sh1,000).
SportPesa would deduct 20 percent withholding tax from the Sh130 that they consider to be ‘winnings’ so they would pay the punter Sh1,104 and Sh26 to KRA. The player would then make a profit after tax of Sh104 on his bet.
However, KRA argues that the ‘winnings’ are not Sh130 but Sh1,130, and therefore SportPesa should pay Sh226 in withholding tax.
The problem for SportPesa is that this means that the punter would lose out, even though he won the bet. He would receive just Sh904 even though he bet Sh1,000 that Manchester City would beat Brighton. The punter would then make a loss of Sh96 even though his prediction was correct.
“The current interpretation that is used by the authority has the effect of taxing a players stake (investment) and therefore making our business completely unviable and will surely lead to business closure,” SportPesa CEO Capt Ronald Karauri wrote to the KRA on May 7.
“The player has no reason to play, he would rather play on sites that don’t charge tax, or simply go to underground betting shops where they can be paid the full amount”, he added.
Sports betting companies pay 15 percent of their Gross Gaming Revenue to the KRA. GGR made up over half the Sh15 billion paid to the KRA by sports betting companies in 2018.
The issue of whether withholding tax should include the stake or not is still in court.
Last week the Betting Control and Licencing Board used a bureaucratic route to close down 27 betting companies by refusing to renew their licences which expired on July 1. Those closed include SportPesa, Betin and Betway who between them control 85 percent of the sports betting market in Kenya.
However seven companies retained their licences - BetLion, Odibets, Betpalace, Mcheza, Kwikbet, Betika and Gamemania. The common denominator is that they are locally owned, apart from Betika which is owned by Italian businessmen in Malindi. The 27suspended companies are largely foreign-owned.
It is not clear whether the seven companies still in operation will be expected to pay withholding tax on the stake as well as the winnings. If so, they may not be long in business either.