Kenya to review details of global minimum tax

Kenya is right to demand more clarity on revenue sharing before committing to a global deal on minimum taxation for multinationals.

Companies operating in multiple jurisdictions have taken advantage of differences in tax rates, locating their headquarters and operating units in locations that help them pay the lowest overall taxes.

A series of progressive global tax reforms have been proposed under the auspices of the Paris-based Organization for Economic Co-operation and Development (OECD).

This includes introducing a minimum tax rate of 15 percent on profits for multinational companies in all countries from next year.

If a company has an effective tax rate that is below the minimum rate in a particular jurisdiction, it must pay additional taxes to the authorities at its headquarters.

The OECD estimates that the minimum tax can generate $150 billion a year in new revenue worldwide, a prospect endorsed by more than 130 countries.

But the big question is how the larger pie will be shared and whether countries like Kenya will lose out in the concessions they have to make to participate in the global deal.

The pact includes clauses forcing Kenya to cut the digital services tax from 1.5 percent of sales from tech giants like Google, Facebook and Amazon, which are among the main targets of the reforms.

The Kenya Tax Agency (KRA) says it will first assess whether participation in the agreement will result in growth in revenue collection.

This is prudent and logical, especially for countries that have been on the losing side of digitally-enabled companies that derive significant revenues and profits from the local market but report their earnings in low-tax jurisdictions like Ireland.

The introduction of the digital services tax, paid on revenue, was a means of responding to the tax avoidance ruled by multinational companies. This levy should only be sacrificed if participation in the global minimum tax framework generates more revenue.

It is therefore up to supporters of the global tax to convince holdouts like Kenya that it makes financial sense for them to join the bandwagon.