KRA Tax Raise on Foreign Companies Following OECD International Tax Agreement

Recently, the Organization for Economic Co-operation and Development (OECD) proposed reforms on the global corporate tax regime. These reforms seek to end the “race to the bottom” which allows multinational corporations to exploit jurisdictions with weak tax regulatory frameworks so as to minimize tax burdens while maximizing profits. The proposals also seek to create uniformity in the global corporate tax regime. OECD strives to achieve this through elimination of provisions relating to taxes like Digital Service Tax which is normally levied on corporations offering services in jurisdictions where they have no physical presence.

The OECD seeks to achieve these reforms through the use of two pillars: –

1. The first Pillar of the agreement seeks to ensure that taxing rights on more than $125 billion of profit is to be reallocated to market jurisdictions each year. Developing countries are expected to make significant gains from this since their revenue earning is expected to be much greater than those of advanced economies.
2. The second pillar introduces a minimum global corporate tax at the rate of 15%. This minimum tax will only be levied on a corporation with a revenue of more than 750 million Euros and is estimated to generate around $ 150 billion in additional global tax revenues annually.

This proposal has faced backlash due to the fact that it may eliminate the Digital Service Tax that is levied by KRA on multinational corporations operating in Kenya without a physical presence in the country. In addition to this, there is uncertainty on how the taxes will be shared between the country where the corporation is resident and where it operates without a physical presence. Due to these issues, the OECD has pushed the implementation of its proposals from January 1^st 2023 to January 2024 so as to allow more participation and debate on the grey areas.