Inside Kenya’s new gambling tax dispute

Saturday January 13 2018

Models at the unveiling of the SportPesa

Models at the unveiling of the SportPesa Premier League Trophy in Nairobi in October 2015. SportPesa withdrew its funding for sports in January 2017 over a disputed tax. PHOTO | NMG  

By VICTOR KIPROP
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Intense rivalry rather than the introduction of a 35 per cent tax has eroded margins of key players in the betting, gaming and lotteries segment in Kenya, threatening their survival.

SportPesa, the leading online betting firm, has vehemently protested the tax which the government introduced last year, and recently withdrew its $6 million sponsorship of sports in Kenya, even as it continues to fund football teams or leagues in the UK and Spain.

Although the company argues that the tax would leave it running at losses, research by The EastAfrican shows that betting firms have shot themselves in the foot by taking on obligations that are not prescribed by the law in a bid to outwit their rivals.

For instance, the law requires lotteries to pay up to 50 per cent in winnings, but they give as much as 55 per cent. For betting firms like SportPesa, there is no obligation for them on winnings because the business is founded on calculated guesses unlike lotteries which are hinged on chance.

According to Muchoki, Kangata & Njenga Advocates, the 55 per cent the firm paid out was not a prescription of the law.

“This is just an industry practice where lottery firms choose to ensure that half of the proceeds from their ticket sales are won as prizes by participants,” Charles Njenga, a partner in the law firm told The EastAfrican.

Kangata & Njenga Advocates represented lottery firm Pambazuka in the tax dispute case in court.

Charities

According to the Betting, Lotteries and Gaming Act, lotteries are only required to pay the 35 per cent lottery tax on their turnover and channel 25 per cent of their gross proceeds to charitable activities.

Mr Njenga said the 25 per cent contribution to charity is a condition for a lottery licence. Although this condition does not exist for betting firms, they dabble into funding activities, mostly sports, that afford them maximum publicity and captive business from followers of a sport or team.

Technically, it means statutory obligations take up 60 per cent of a lottery’s proceeds and 35 per cent of a betting firm’s.  Lotteries are left with 40 per cent to share between expenses and winnings, after the taxes.

The government views betting, especially among the youth, to be as harmful as substances like cigarettes and alcohol. The 35 per cent tax was meant to discourage its spread by making it expensive to participate in and by restricting the winnings that could be shared out.

Industry insiders said this has not been achieved because of operators’ fears of losing customers. To protect market shares, lotteries and betting firms have not passed on the tax to participants. Lotteries have also not reduced winnings to prudent levels, leading to higher operating costs.

“Operating any lottery under this framework is not possible and therefore business operations are forced to close,” said Bradley Ltd when it announced the suspension of its operations in Kenya last week.

Bradley Ltd ran the Pambazuka National Lottery and blamed the taxes for making the business unsustainable. Industry sources, however, said the firm was considering its options even before the tax was introduced, because of poor margins.

The High Court, in a December 28, 2017 ruling dismissed a case filed by SportPesa Ltd and Bradley Ltd — both owned by Pevans East Africa — that challenged the constitutionality of the 35 per cent tax.

After the ruling, SportPesa withdrew its funding for sports while Bradley Kenya suspended operations in what analysts said was a bid to arm-twist the government into removing or reducing the tax.

Bradley Ltd said the 35 per cent tax on its gross profits in addition to the 25 per cent tax it is required to devote to charity and the 55 per cent of all income it pays out as winnings raised the total cost of its operations to 115 per cent.

Withdrawal of sponsorship

According to SportPesa CEO Ronald Karauri, the withdrawal of sponsorship was a response to the “punitive” taxes and was meant to help the company stay afloat.  

SportPesa’s cancellation of sponsorships was expected to hit hard on sports federations and clubs including the Kenya Premier League, Football Kenya Federation, Kenya Rugby Union, Gor Mahia and AFC Leopards.

SportPesa, however, still has active multi-million dollar deals with English Premier League clubs Everton, Hull City, Southampton and Arsenal and the Spanish football league La Liga. The deal with Everton alone is said to be worth about $63 million.

Betting youth

In his 2017/2018 budget speech where he introduced the increased taxes, Treasury Cabinet Secretary Henry Rotich said the tax was meant to discourage widespread gaming and betting especially among the youth.

According to GeoPoll, Kenya has the highest number of betting youth in sub-Saharan Africa with at least 76 per cent of them having participated in gambling, followed by Uganda at 57 per cent. The uptake is increasing with increased smartphone and Internet use.

According to Michael Mburugu, a partner at PKF East Africa the 35 per cent tax is not high considering the harm that the vice brings to the country’s workforce.

“For a sector that employs few people but generates huge turnovers, this tax is not harsh. In other jurisdictions including Las Vegas, betting and gambling are highly regulated, both in terms of taxes and the hours spent and the people participating in it,” said Mr Mburugu.

According to Mburugu, widespread betting and gambling activities in Kenya will tear the social fabric of the youth who spend longer hours engaging in the activities.

The Kenya Revenue Authority collected about $47 million from just eight betting companies between 2014 and 2016. Last week, a section of legislators criticised the cancelation of sponsorship by SportPesa, terming it as a way of blackmailing the government in order to avoid paying taxes.

“Kenya is among the countries with the lowest gambling tax rates in the world,” National Assembly Majority Leader Aden Duale said, noting that Germany charges 90 per cent, France and Austria up to 80 per cent and Denmark 75 per cent among others.

Consultancy firm PricewaterhouseCoopers (PwC) however said betting taxes in Germany stood at five per cent, Las Vegas (6.5 per cent and Canada (20 per cent).

South Africa, Africa’s biggest gambling market — according to a 2015 PwC report — charges 9.6 per cent while neighbours Rwanda and Uganda charge 13 per cent and 20 per cent taxes respectively. PwC are the auditors of SportPesa.