KRA Could Be a Stumbling Block to Safaricom, M-PESA Split

Safaricom is concerned that the Kenya Revenue Authority (KRA) may impose taxes, such as capital gains tax (CGT), on the company if it proceeds with its plan to split M-PESA from its telecommunications business.

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Safaricom CEO Peter Ndegwa

The possibility of splitting Safaricom, Kenya’s leading telco, into separate entities has been a topic of debate among lawmakers and other interested parties.

Safaricom’s internal teams and leadership have disputed the idea, with former CEO the late Bob Collymore stating that the company should not be punished for its success.

However, it has been suggested that Safaricom’s mobile money product, M-PESA, could be more efficiently run as a separate entity from the carrier business.

An evaluation by British firm Analysys Mason, commissioned by the Communications Authority, found that the majority of Safaricom’s carrier and mobile money business gave the company an advantage over smaller competitors. Analysys first proposed the idea of splitting Safaricom in 2017.

In 2020, Kenyan senators proposed splitting Safaricom into separate entities in order to level the playing field and allow other companies, such as Telkom and Airtel Kenya, to better compete with Safaricom.

The proposed separation would have put the carrier business under the Communications Authority (CA) and M-PESA under the Central Bank of Kenya (CBK).

However, a majority of Members of Parliament later rejected the proposal, choosing not to explore the Safaricom split.

The proposal, called the Kenya Information and Communications (Amendment) Bill was sponsored by MP Elisha Odhiambo.

It has recently been announced that the Safaricom split will be pursued in 2023, but there are tax issues that may impact the speed of the process according to Business Daily.

Safaricom is concerned that the Kenya Revenue Authority (KRA) may impose taxes, such as capital gains tax (CGT), on the company if it proceeds with its plan to split M-PESA from its telecommunications business.

As a result, Safaricom plans to seek government tax waivers before moving forward with creating a new group structure that would operate M-PESA and the telecommunications business as separate entities.

CEO Peter Ndegwa has since stated that there is a significant amount of work to be done in terms of tax and legal structures in order to split M-PESA from the telecommunications business.

He noted that the current tax law treats internal reorganization as if it were external disposals and that Safaricom would need approvals to avoid paying value-added tax (VAT) or withholding tax in order to reorganize as intended.

The CEO has also revealed that the board has not yet approved the plan to split the M-PESA and telecommunications businesses, but it has given support to the management to move forward with the separation.

READ MORE: John Ngumi Exits Safaricom As Board Chair

The reorganization of Safaricom involves transferring assets from one company to another within the same group, which could be subject to capital gains tax (CGT).

There is also the potential for a 16% value-added tax (VAT) consequence on the transfer of any business within Safaricom as a going concern.

While tax laws on CGT offer exemptions for group restructuring without third-party involvement, the Kenya Revenue Authority (KRA) would still need to review an application from Safaricom and determine which exemptions to grant.

President William Ruto has stated that he will be strict on granting tax waivers.

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Kenn Abuya is a friend of technology, with bias in enterprise and mobile tech. Share your thoughts, tips and hate mail at [email protected]