Kenya firms get more than they bargained for in lotteries tax

Damaris Kariuki with Safaricom's CEO Bob Collymore when she won Sh10 million in the Tetemesha na Safaricom competition in June 2013. Promotional campaigns that feature cash and material give-aways have emerged as a cheap and effective form of marketing. Photo/Diana Ngila

By David Herbling

IN SUMMARY
Effective January 1 this year, lottery winners are required to surrender a fifth of their earnings to the Kenya Revenue Authority as stipulated by the Finance Act (2013).
Kenya had been toying with the idea of imposing a 20 per cent withholding tax on windfall gains from betting and gaming activities since 2011.
Promotional campaigns that feature cash and material give-aways have emerged as a cheap and effective form of marketing.

Kenyan companies last year ran more than two dozen marketing campaigns offering millions in grand prizes in a bid to increase brand visibility, grow sales and reward loyal customers.

What they had not bargained for in the raffle competitions was catching the attention of the taxman who saw the increased promotional sweepstakes by banks, telcos, retailers and fast-moving consumer goods producers as low-hanging fruits in revenue collection.

Effective January 1 this year, lottery winners are required to surrender a fifth of their earnings to the Kenya Revenue Authority as stipulated by the Finance Act (2013).

Kenya had been toying with the idea of imposing a 20 per cent withholding tax on windfall gains from betting and gaming activities since 2011.

Gambling activities

It was President Uhuru Kenyatta, as Finance minister in 2011, who proposed levying tax on winnings from gambling activities. The proposal was shot down after analysts said the tax move was ‘‘ambiguous.’’

Two years later, however, Treasury secretary Henry Rotich — who was the head of macroeconomics at the time Mr Kenyatta floated the idea of windfall tax — said the ambiguities had been removed and the tax could be finally charged.

“I propose to amend the Income Tax Act so as to impose withholding tax on winnings from gaming and betting. This measure should make winners to equally contribute towards the exchequer,” said Mr Rotich in his Budget speech delivered on June 13, 2013.

The proposal passed through Parliament and was assented to by President Kenyatta on October 24, 2013, effectively classifying winnings — whether cash or in kind — from lotteries as income subject to taxation at the rate of 20 per cent.

READ: Lottery winners hit as windfall tax comes into force

Initially, promoters of lotteries and casinos were only required to pay 16 per cent duty while winners were untaxed.

“The responsibility of collecting and remitting the tax is on the shoulders of the promoter. The winner shall be given a withholding tax certificate generated by the system under the iTax environment,” KRA said in a statement to the Business Daily.

Promotional campaigns that feature cash and material give-aways have emerged as a cheap and effective form of marketing.

It has also emerged that some firms were recouping all their investments in such lotteries from the fees customers are charged to enter the competitions — especially those that used premium rate short codes.

READ: New tax forces review of lottery prizes