Safaricom Reveals Tax Concerns in Plan to Spin off M-Pesa

Safaricom is concerned that if it proceeds with the internal reorganisation process to separate Mpesa from its telco business, the Kenya Revenue Authority (KRA) will use current tax laws to levy taxes such as capital gains tax (CGT).

The telco says it will seek government tax exemptions before moving forward with its plan to establish a new group structure that will separate the M-Pesa and telecommunications businesses.

According to a transcript of Safaricom CEO Peter Ndegwa’s investor call on November 11, last year, the listed firm would require government assistance “in terms of tax reliefs and so on to be able to go that direction.”

“There is clearly quite a lot of work to do in terms of tax and legal structures that would need to be overcome, in particular tax, because the current tax law almost treats internal reorganisation as if there were external disposals,” said Mr Ndegwa.

“We do need approvals if we’re going in that direction so that we don’t have to pay VAT (value added tax) or withholding tax or whatever in order for us to be able to reorganise the way we intend to.”

Mr Ndegwa says while the board is yet to approve the transaction to separate the two businesses, it has given support to the management to work towards that.

According to , several insiders who were initially against the split have been progressively warming up to the reorganization idea. They see it as a chance to directly compete with banks by using Mpesa as a digital bank.

Assets are moved from one firm within a group to another within the same group as part of the reorganization. These assets can be liable for capital gains tax (CGT).

Any company transfer inside Safaricom that is done as a going concern may also result in a VAT charge of up to 16%.

CGT tax laws give a number of exemptions, such as when a company restructures its group of companies without the involvement of a third party.

Safaricom would still need to submit an application, and the KRA will need to decide which exemptions to grant them—despite the fact that President William Ruto has vowed to be stringent about approving any tax waivers.

In a news conference on Wednesday, President Ruto promised that his government would “collect all collectible revenue” in Kenya and make sure that everyone paid their fair amount of taxes.

He has given the KRA the mandate to raise an additional Sh500 billion in the fiscal year that ends in June 2023, an additional Sh1 trillion in the following 24 months, and to treble tax revenue by 2027.

“Everyone will pay taxes. President Ruto declared, “This is not Animal Farm where some animals are more equal than others.

No one will be granted a waiver. You observed people exempting their firms from paying taxes. You purchase one bank, sell another, and forego paying taxes. I won’t allow it to happen while in office.