How to account for withholding tax from betting and gaming

Each one of us wishes for that big lottery win, whether its entry is free or you spend some cash in the gamble. Lady luck does not smile every day and a win from betting could be viewed to be a sign of success.

In the previous years, such winnings have always gone tax-free since there were no provisions in the income tax legislation to tax them. Taxation of winnings was introduced by the Finance Bill 2011 and enacted by the Finance Act 2012 of May 5, 2012. However, the Finance Act 2012 of January 9, 2013 deleted the provisions relating to taxation of winnings from gaming and betting.

Taxation of winnings from betting and gaming was reintroduced by the finance bill 2013 and enacted by the Finance Act 2013 of October 24, 2013. Today, winnings from betting and gaming are subject to withholding tax (which is final tax) at the rate of 20 per cent, whether paid to a resident or a non-resident person. The income tax legislation provides that the term “winnings” has the same meaning assigned to it in the Betting, Lotteries and Gaming Act.

Taxman’s notice

 The Betting, Lotteries and Gaming Act defines the term “winnings” as includes winnings of any kind and a reference to the amount or to the payment of winnings shall be construed accordingly. This is not a clear definition for ordinary folk. Kenya Revenue Authority, in a public notice dated January 13, 2014, reminded taxpayers that withholding tax on winnings from gaming and betting had been re-introduced through the Finance Act 2013.

The notice went ahead to state that such winnings, whether payable in cash or in kind, shall be subject to withholding tax at the rate of 20 per cent of the gross proceeds, if paid in cash or 20 per cent of the fair market value of the winnings, if paid in kind. The income tax legislation requires that a person should deduct withholding tax upon making certain specific payments, which includes winnings from betting and gaming, to both Kenyan residents and non-residents.

If the person makes a payment to any person in respect of a winning, the amount payable is deemed to be income which accrued in or was derived from Kenya and the person making the payment has an obligation to withhold the tax and remit it to the KRA.

A number of betting and gaming events opt for cash payments to the winners and there are those that opt for payments in-kind. Such events, in most cases, are used for business promotions. The determination of the tax liability on the cash winnings can be arrived at by a basic calculation but this is not the case with the winnings in kind. Winnings may be in the form of. A ticket to the World Cup, holiday, house, car, TV, gift hampers etc.

 What is clear is that the income tax legislation does not have guidelines for valuing, and more importantly, taxation of winnings in-kind. In my view, the valuation would be largely subjective. The taxman requires that the in-kind winnings be reported at their market values in order to be able to apply the tax rate.

Before releasing the award, the channel will be to ensure that tax has been paid in respect of the winnings. Say, you win a car with a market value of Sh1,500,000 and the conditions require that you to bear the withholding tax liability, you will have to cough up tax in advance of Sh300,000.

This will be unfair to you as winner since you may not have budgeted for such an expense when entering the lottery. The alternative available is to either forego the award or ask the organiser’s to assist in looking for a buyer. In certain jurisdictions, when you win merchandise or products, rather than cash, reporting the fair market value of the items can force you to sell them to pay your tax.