Kenya is among seven countries that have not signed a deal to reform international taxation rules to ensure that multinationals pay a fair share of tax in the countries they operate.

As of July 9, 132 out of 139 members of the Organisation for Economic Co-operation and Development (OECD) had agreed to the deal which seeks to address tax challenges arising from the digitalisation of the economy.

Kenya is among dissenters Caribbean island tax havens that also declined to sign on, including Barbados, Saint Vincent and the Grenadines.

Hungary and Estonia, which are keen to preserve ultralow tax regimes, as did Nigeria, Peru and Sri Lanka.

The negotiations coordinated by the OECD over the last ten years comprises two pillars which seek to increase certainty and stability to the international tax system.

In the first pillar, countries will have some rights to tax multinational enterprises operating in their jurisdictions, including digital companies, regardless of whether they have physical presence or not.

Deal to raise Sh16.2tr globally

Previously, these rights were a preserve of their home countries only.

Secondly, the deal proposes to have a minimum global corporate tax rate set at 15 per cent, a move expected to raise over Sh16.2 trillion ($150 billion) in global tax revenues annually.

“The two-pillar package will provide much-needed support to governments needing to raise necessary revenues to repair their budgets and their balance sheets while investing in essential public services, infrastructure and the measures necessary to help optimise the strength and the quality of the post-COVID recovery,” said OECD in a statement.

The package, according to OECD Secretary General, Mathias Cormann, will ensure that large multinational companies pay their fair share of tax everywhere in the globe.

“This package does not eliminate tax competition, as it should not, but it does set multilaterally agreed limitations on it.

It also accommodates the various interests across the negotiating table, including those of small economies and developing jurisdictions,” Cormann said.

Kenya could lose out

Naomi Majale, a project officer with the National Taxpayers Association says by not signing the international framework, Kenya could lose on the revenue gains that come with making big international corporations pay their fair share of taxes.

“Kenya could miss out on the possible revenue it would get from these taxes,” Majale said.

Further, Naomi notes refusal to sign could be interpreted to mean that there was no political goodwill between Kenya and the OECD and that the country does not subscribe to the global effort to make corporate bigwigs pay their fair share of taxes.

Kenya already charges a digital service tax on companies operating in the country’s digital space charged at 1.5 per cent of their gross transactions. 

The tax, introduced via Finance Act 2020, became effective starting January 1 this year.

Initially, the tax was targeted at all businesses but was later restricted to non-resident businesses only via Finance Act 2021.

Similarly, Kenya already has a minimum tax law in place under which companies are required to remit one per cent of their turnover quarterly to Kenya Revenue Authority.

However, implementation of the controversial tax has been halted awaiting the determination of a case filed in a Machakos court challenging it.