Gaming tax forces firms to shift from asset to cash prizes

Mr Nzioka Waita, Safaricom corporate affairs director. FILE 

By David Herbling, hdavid@ke.nationmedia.com

In Summary

• Safaricom said on Tuesday it plans to move away from giving non-cash prizes in its lottery competitions for fear that winners of goods and services may not afford to pay the withholding tax.
• KRA on Monday said that all winnings will now be considered as income and thus taxable at the rate of 20 per cent of the worth of the windfall.
• The taxman has backdated the effective date of the new legislation to January 1, 2014 in what could prove to be a logistical nightmare for gaming promoters to trace past winners and remit the taxes.

Consumers may no longer be offered material prizes during promotions as sponsors turn to cash following the enactment of a law that slaps a 20 per cent tax on all winnings.

Safaricom said on Tuesday it plans to move away from giving non-cash prizes in its lottery competitions for fear that winners of goods and services may not afford to pay the withholding tax.

“Majority of winners may not be in a position to raise the stipulated 20 per cent. Due to this challenge, the industry is very likely to move away from giving non-cash prizes,” said Safaricom corporate affairs director Nzioka Waita.

The Kenya Revenue Authority (KRA) on Monday said that all winnings will now be considered as income and thus taxable at the rate of 20 per cent of the worth of the windfall.

“Since the burden of the tax falls on the winners, it will be difficult to withhold the tax in situations where the winner cannot afford the 20 per cent tax, ” Mr Waita said.

The taxman has backdated the effective date of the new legislation to January 1, 2014 in what could prove to be a logistical nightmare for gaming promoters to trace past winners and remit the taxes.

“Payers of the winnings will be required to deduct the withholding tax with effect from January 1, 2014 and remit the tax deducted to the commissioner by 20th of the subsequent month,” says KRA.

READ: Lottery winners to surrender 20pc of earnings to taxman

Kenya’s gambling business is regulated by the Betting Control and Licensing Board (BCLB), which issues firms with permits to run public lotteries and validates the selection of winners in gaming competitions.

The agency is yet to develop regulations on how the newly introduced windfall tax will be implemented.

Kenya’s betting industry is dominated by casinos, SMS lotteries run by mobile phone service providers, sports betting, promotions by corporate firms and lotto firm Kenya Charity Sweepstakes.

Like Safaricom, promoters of betting competitions are expected to go slow on offering non-cash prizes such as mobile phones, apartments, plots, holidays and gift packs in favour of cash – for easy calculation and remittance of withholding tax.

If the legislation on windfall tax was in place last year when Safaricom ran a lottery dubbed ‘Tetemesha Na Safaricom’, the ultimate jackpot winner would have bagged Sh8 million in cash and paid KRA Sh500,000 to drive away with the pick-up valued at Sh2.5 million.

In the event winners are unable to afford the windfall tax, businesses face the challenge of deciding whether to gross up the tax or sell the item and pay the withholding tax to KRA and give the remaining 80 per cent of the value to the winner.

Take the example of Nation Media Group’s ‘Utahama Roundi Hii’ competition held last year where Daily Nation readers won three apartments at Next Gen, a mixed use development located off Mombasa Road.