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Digital taxes could upset Kenya-America FTA talks

By Noel Wandera
Monday, August 24th, 2020
Workers at Shona Enterprise in EPZ, Athi River, Machakos county making face masks to that will be distributed by the government to curb the spread of Covid-19 in the country. Photo/PD/CHRISTINE MUSA
In summary
    • Kenya-US  FTA negotiations started in July 2020, with Lederman saying if a trade deal is struck, it will provide more permanence in Kenya’s ability to export to the US, duty-free, Kenyan apparel and other products.
    • US is currently Kenya’s second largest export market, absorbing 9 per cent of the country’s exports, dominated by apparel through the African Growth and Opportunity Act (Agoa), which grants duty-free imports from sub-Saharan African countries, whose sun-set is 2025.
    • Though the FTA has been billed as a platform that could foster deals with other African nations, Kenyan negotiators must not  wreck regional trading bridges like the East African Community and the Common Market for Eastern and Southern Africa, and implementation of the African Continental Free Trade Agreement (AfCFTA).

Kenya’s attempt to tax online revenue generators threatens to put the country at crossroads with powerful US forces with interest in the country.

The newly introduced bill -Finance Act 2020- signed by President Uhuru Kenyatta which comes into effect in 2021 will target local tech companies on the one hand, but will also target the likes of Google, Facebook and Netflix with a 1.5 per cent tax on the gross transaction value of digital services.

This is coupled with a 14 per cent Value Added Tax (VAT) on digital goods and services consumed locally even if they were procured elsewhere.

In its wisdom, the government introduced the bill to ramp up revenue collection, hoping to increase tax collection by $19 million (Sh2 billion) annually, to help fund Kenya’s Sh3 trillion budget for financial year 2020/21.

Coming at a time Kenya and the US are mulling a Free Trade Agreement (FTA) worth Sh2 trillion in export revenue, equivalent to five per cent share of Kenya’s products in the US Market, experts warn that this tax could affect Kenya’s ambitions.

US international tax regime

Last week, Bloomberg quoted Alan S. Lederman, a US tax law expert saying that though the Kenya-U.S FTA negotiations elicited interest by prospective US investors, exporters and importers, contentious issues  abound.

He warned they are likely to create obstacles during negotiations of a trade deal.

Lederman said the extent to which the prospective US investors will embrace the FTA will depend on the U.

International tax regime, which govern repatriation of profits such as the Base Erosion and Anti-Abuse Tax (BEAT), Foreign-derived intangible income (FDII) and the global intangible low-taxed income (GILTI) which limit tax liabilities from incomes generated by US subsidiaries in foreign countries.

Trump’s wrath

“These include the timing and extent of Kenyan tariff liberalisation on US agricultural exports; Kenyan rules on data protection, intellectual property rights and foreign investment, and Kenyan level of labor and environmental protections.

Further, Kenya’s 1.5 per cent tax on digital services revenue, scheduled to take effect in 2021, has already prompted calls by US internet companies for possible trade sanctions against Kenya,” said Lederman, adding that US companies will need to consider how their GILTI, FDII and BEAT situation will affect Kenyan transactions.

Google’s regional public policy and government relations leader Michael Murungi was recently quoted by a local newspaper saying the move could invite the wrath of President Donald Trump, due to his protectionist measures to shield US companies.

“The risk with this is as we see happening in France after its decision to impose a unilateral tax on international firms on digital platforms,” said Michael Murungi.

Gerrishon Ikiara, a senior economics lecturer at the University of Nairobi’s institute of diplomacy and international studies told Business Hub it is now the onus on the Kenyan delegation to analyse the advantages and benefits each will offer the country.

“I am hoping that the Kenyan team is properly represented in all those sectors, and need not be restricted on things that will prevent our trade from global reach,” said Ikiara, noting that countries currently benefiting from the global economy are not protectionist in nature.

“Our commitment with the US must not create antagonism, but a win-win situation to allow American goods, but not damage our relationship with our regional trading partners,” said Ikiara.