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Kenya's digital services tax on tech giants must go, IMF says

 US e-commerce and cloud computing giant Amazon. [iStockphoto]

An International Monetary Fund (IMF) study has backed the adoption of a controversial global minimum tax rate for multinational companies.

The proposal recommends the scrapping of the digital services taxes levied on tech giants such as Google, Facebook and Amazon.

The adoption of the tax proposal is set to put Kenya on a fresh collision course with the IMF and rich countries like the United States (US).

Kenya in 2021 withheld backing US President Joe Biden’s push for the global minimum rate of tax on multinational companies as the deal would stop it from collecting taxes from tech giants such as Google, Facebook and Amazon, argued Kenya.

The Paris-based Organisation for Economic Cooperation and Development (OECD), has been leading the push for the overhaul of the global taxation rules in favour of the minimum tax plan and has already got consensus from 136 countries with an implementation target of next year.

The Kenya Revenue Authority (KRA) had earlier confirmed that Kenya was uncomfortable with clauses in the agreement that will force it to drop the country’s digital services tax of 1.5 per cent of sales.

KRA reckons the tax, which came into effect at the start of January 2021 could generate up to Sh13.9 billion in revenue over the next three years.

The tax, which is levied on the sale of e-books, movies, music, games and other digital content, also applies to foreign companies.

“Members who join... are obliged to withdraw their unilateral measures such as digital services tax and similar measures imposed on non-resident companies, which do not have a physical presence in the market jurisdiction,” said KRA earlier. 

IMF in the new staff paper released recently and seen by The Standard, however, says the new global tax plan is timely.

“This paper concludes that the agreement makes the international tax system more robust to tax spillovers, better equipped to address digitalisation, and modestly raises global tax revenues,” said the IMF paper.

IMF staff argue in the study, the proposed new regime of allocating profits by place of final destination under the global plan “not only addresses tax competition and profit shifting but also shifts taxing rights, which traditionally have been assigned to jurisdictions where multinationals have a physical presence.”

“The concurrent removal of DSTs (digital services tax) is well in line with IMF, which argued that the digital economy cannot be meaningfully ring-fenced,” says the IMF.The study was prepared by IMF staff and presented to the IMF Executive Board in an informal session on January 20, according to the IMF. 

The policy paper has, however, not been adopted by the IMF as yet.“The views expressed in this paper are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board,” said the Washington-based lender in a note accompanying the study.

The Fund’s management and board last year backed Kenya’s access to $433 million (Sh53.69 billion), bringing the total IMF support so far in a 38-month financing facility to $1.548 billion (Sh188.2 billion) under the Extended Fund Facility (EFF) and Extended Credit Facility (ECF). 

Kenya is angling for fresh IMF financial support, Central Bank of Kenya Governor Patrick Njoroge revealed recently. 

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