How Trump executive orders will affect Kenya's tax revenues

President Donald Trump displays one of the executive orders after signing at the Oval Office. [AFP] The National Treasury could face a dilemma in implementing some of the taxes introduced late last December by the Tax Laws Amendment Act. The Act introduced new tax measures largely targeted at the Kenyan units of multinational firms but it is now in doubt as to how the government will implement this as the US pursues its "America first" policy that could see tax revenues from US firms in Kenya dwindle. The Tax Laws Amendment Act, 2024 introduced the three per cent significant economic presence (SEP) tax and the domestic minimum top-up tax targeting giant multinationals. Treasury's plan to grow tax revenues from the two taxes has, however, been dealt a blow by one of US President Donald Trump's executive orders. After assuming office on January 20, Trump issued an executive order and declared a global tax deal backed by the Organisation of Economic Cooperation and Development (OECD) as having "no force in the US". Trump said the deal allows "extraterritorial jurisdiction over American income but also limits our nation's ability to enact tax policies that serve the interests of American businesses and workers." The OECD Global Tax Deal requires multinationals to pay a minimum tax of 15 per cent in the country they operate in or derive revenues and not necessarily where they are physically headquartered. The Biden administration had backed the tax deal but the country never ratified it. Analysts now say Trump's withdrawal from the deal could complicate the manner in which Kenya taxes American firms operating locally, including the administration of the two new taxes. "One of the (Trump's) executive orders that affects the Kenyan economy is the move to pull US out of the OECD global tax deal," said Lena Onyango, a partner at law firm Cliffe Dekker Hofmeyr (CDH), adding that there is the risk for US firms operating in Kenya seeing their tax on income made in Kenya doubling as both Kenya and the US demand a share. "Taxes like SEP tax would be deemed extraterritorial leading to the imposition of double taxation on Kenyan entities with operations in the US. The orders may deter US-based companies from investing in Kenya, impacting FDI inflows." Kenya towards the end of last year started implementing the three per cent SEP tax that is seen to target multinationals, especially those with digital operations in the country, following enactment of the Tax Laws Amendment Act. The tax replaces the 1.5 per cent Digital Services Tax. The new tax law that came into effect on December 27 last year also introduced a 15 per cent minimum top up tax, also targeted at multinationals and requires the firms to pay at least 15 per cent tax on their income derived in Kenya. When introducing the minimum top-up tax, the National Treasury explained that it would align the Kenya taxation of multinationals with the "global best practice that prevents tax base erosion by providing that these companies pay a minimum effective tax rate of 15 per cent". Target entities for the tax, the ministry said, should have a consolidated annual turnover of Sh100 billion. Analysts at CDH noted that the new Trump approach and Kenya's bid to grow tax revenues with a focus on international firms could be a possible area of conflict between Nairobi and Washington. "The SEP tax is supposed to ensure that the revenues by multinationals, especially from digital operations, get taxed in Kenya," explained Alex Kanyi, a partner at CDH. "The intention of the minimum top-up tax is to ensure that profits are not shifted to lower tax jurisdictions. "If income has been derived from Kenya and the effective tax paid by a firm is less than 15 per cent, then Kenya will want to insist that the entity tops up the tax so that at least 15 per cent is paid in Kenya." He noted that the new taxes could be a source of conflict between US and Kenyan tax authorities. "It will be interesting to see how the (Kenyan) government will implement SEP tax on American companies. We see this as an area where there might be a form of tussle. "What we see from the measures that are being proposed is that if, for instance, Kenya does not back down, then the US might threaten Kenya or Kenyan firms with some form of retaliation," Kanyi said. "This is what can be deciphered from the kind of talk that we see but we hope that sometimes after Trump has settled in, there will be more clarity around how to interact with the US from a tax perspective." The US move has been criticised. The Tax Justice Network noted the move is akin to Trump demanding that countries surrender tax sovereignty at economic gunpoint. "In effect, this requires countries to cede their tax sovereignty over multinationals operating within their own borders - or face serious countermeasures," said the organisation.

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