Absurdity of a tax regime whose execution beats even the taxman

PHOTO | FILE In a tax law passed last year, gamblers as well as winners of promotional drives, lotteries and raffles are required to pay 20pc of their winnings in tax. There is confusion on how in-kind prizes like goats would be taxed, especially if winners cannot raise the 20pc in cash.  NATION

In Summary

• Regulation covers lotteries, raffles and promotions with monetary or in-kind prizes
• The withholding tax was introduced to the Income Tax Act in amendments to the Finance Act 2013. Under the new law, every cent a Kenyan wins in lotteries, gambling or raffles is taxable at the rate of 20 per cent.
• According to the Betting and License Control Act any activity where there is a prize to be won and where there is an element of chance in selecting a winner, falls under the umbrella of the tax.

By MUTHOKI MUMO
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It is a slow evening at a casino in the Central Business District, Nairobi, when this reporter walks in to try her luck on the American roulette tables. Thirty minutes later, she decides she’s gambled enough and walks out with Sh1,000 in winnings. Technically, Sh200 of this – 20 per cent of gross winnings – belongs to the taxman.

But this casino, like many others, is yet to implement new tax measures imposed by the government that were supposed to begin on January 1 on winnings from betting and gaming.

“I do not know of any casinos collecting the tax yet. How do you collect something for which there is no framework?” said David Moshi, chair of Association of Gaming Operators, Kenya in an interview on January 14.

On Friday, Mayfair Group chairman, Ludovico Gnecchi Ruscone, told Sunday Nation that trying to implement the tax at any of the firm’s casinos would be “absurd”, and that the associated logistics would see the industry “lose all customers”.

The withholding tax was introduced to the Income Tax Act in amendments to the Finance Act 2013. Under the new law, every cent a Kenyan wins in lotteries, gambling or raffles is taxable at the rate of 20 per cent.

KRA DELIVERS WARNING

On January 13, the Kenya Revenue Authority warned the industry to ensure that they remit all the taxes deducted since 1 January 2013 by February 20.

Failure to comply with these regulations could see casinos face a penalty of 10 per cent on the amount of tax they should have paid and an interest charge of two per cent a month on the principal withholding tax, as well as the penalties.

Despite this directive, casinos are adamant that it is nearly impossible to implement the tax as it is. The crux of the problem, they contend, is the nature of the gambling business.

In deducting withholding tax, firms are required to collect personal details of payees. These include the Pin (Personal Identification Number). A certificate is also supposed to be issued to the person from whose earnings the tax has been deducted.

The gambling industry in Kenya exists on the fringes of morality. Demanding these details from casino-goers could possibly have an adverse effect on the business.

“Withholding tax has the potential of slowing down business,” said Deloitte Tax Partner, Nikhil Hira.

Mr Moshi further argues that keeping track of all the gamblers on a casino floor as well as their winnings would become administratively costly for the casinos. “We are not necessarily opposed to taxation. We oppose the manner in which we are required to implement it.”
KRA, in a statement, insists there ought to be no confusion over the manner in which the gambling outlets will deduct the tax from winnings.

Guidelines, the taxman has said, are already available in the existing regulatory framework. However, in acknowledgement of the confusion that has emerged in the industry, KRA says that it will invest in “sensitising all stake holders and businesses engaged in gaming and similar activities. One such engagement is a meeting that has been called by the Commissioner to clarify and discuss any challenges that the agents may be facing.”

On Thursday last week, the Kenya Charity Sweepstakes, Safaricom and the the gaming association all confirmed they would consult with the revenue authority.

Beyond the casinos, tax experts point out that implementing the tax law could be challenging given the variety of activities that could be rightly deemed as betting and gaming.

According to the Betting and License Control Act any activity where there is a prize to be won and where there is an element of chance in selecting a winner, falls under the umbrella of the tax.

The taxman says that there is no minimum threshold for the withholding tax. Theoretically, this means that a child that wins a textbook in a school raffle or a shopper who wins a goat in a supermarket promotion will be subject to the 20 per cent tax. Additionally, marketers running promotions and SMS lotteries are also subject to the tax.

“…the amendment, though seemingly targeted at casinos and betting establishments, extends to all other activities which constitute betting or gaming, regardless of the promoter,” said Mr Hira.

Safaricom, in a statement to Sunday Nation, said it would seek clarity from the taxman on which among its promotions fall under the new tax regime.

The mobile firm’s corporate affairs director, Nzioka Waita, last week told Business Daily the firm might have to veer away from in-kind prizes to make it easier to deduct and remit the tax.

Audit firm PricewaterhouseCoopers estimates that Kenya’s gambling market generated revenues worth about Sh1.7 billion in 2013, and projects that the industry is set for robust growth.

By 2017, casinos are expected to raise Sh2.83 billion in revenue, earning Kenya Revenue Authority up to Sh429.25 million in taxes.