Taking no chances: Kenya’s introduction of withholding tax on the Betting and Gaming industry

 
Taking no chances: Kenya’s introduction of Withholding Tax on the Betting and Gaming industry
By Judy Chebet[1]
 
Kenya’s gambling legislation is among the oldest in the content, having been passed in 1966. This has effectively made the activities in the mostly foreigner-frequented casinos in Kenya not as frowned upon by the Kenyan society as it is in other parts of the world.
The primary gaming legislation in Kenya is the Betting Lotteries and Gaming Act, Cap 131 (“BLGA”). The BLGA establishes the Betting Control and Licensing Board (“BLGB) which implements the Act by licensing and issuing permits to gaming and lottery premises, betting premises and the conduct of prize competitions.
A recent report by PriceWaterHouse Coopers[2] provides some statistical insight into the gambling revenues in Kenya. According to the report, revenues from the gambling were up to Kshs 1.8 billion in 2012 and this is projected to almost double by 2017. While this study and statistics were limited to the fifteen or so licensed casinos in Kenya, it is easy to extrapolate that the total revenue generated by gambling, lotteries and gaming activities in Kenya, including land-based, internet and SMS-based lotteries and games, is quite significant and is expected continue to be so well into the future. Perhaps it is against this background that parliament amended the Income Tax Act, Cap 470, to tax “winnings from betting and gaming” (though it is curious that parliament also introduced, via the Value Added Tax Act number 35 of 2013, an exemption from payment of Value Added Tax for “betting, gaming and lotteries services.”)
Withholding tax on winnings
The Finance Act number 04 of 2012 amended the ITA by introducing a withholding tax of 20% on winnings from betting and gaming from 2^nd January 2012. Interestingly and notably, this tax was scrapped following an amendment to the ITA via the Finance Act number 57 of 2012 effective from 09^th January 2013, and subsequently re-introduced via the Finance Act number 38 of 2013 effective from 01^st January 2014.
As such, currently, withholding tax of 20% is due and payable to the Kenya Revenue Authority on all winnings from betting and gaming.
“Betting” and “Gaming” are very specific activities under the BLGA and it is “winnings” from these activities that are subject to tax in Kenya. It is therefore important to examine what these activities are in order to ascertain what is subject to tax because taxation statutes must be interpreted strictly, giving effect to the law as such and not trying to interpret them to give effect to what parliament may have intended[3].
Meaning of “winnings from betting and gaming” in the BLGA
The following definitions in the BLGA are relevant and I have reproduced them here for clarity:

• “winnings” includes winnings of any kind and a reference to the amount or to the payment of winnings shall be construed accordingly;
• “betting transaction” includes the collection or payment of winnings on a bet and any transaction in which one or more of the parties is acting as a bookmaker”
• “betting premises” means premises to which the public has or may have access and which are kept or used (whether on one occasion or more than one) for the purpose of—

(a)     bets being made therein between persons resorting to the premises and the owner, occupier or keeper thereof, or any person using the premises, or any person procured or employed by or acting for or on behalf of the owner, occupier, keeper or person using the premises, or of any person having the care or management or in any manner conducting the business thereof; or
(b)     any money or valuable thing being received by or on behalf of the owner, occupier, keeper or person aforesaid as or for the consideration for any assurance, undertaking, promise or agreement, express or implied, to pay or give, or for securing the paying or giving by some other person of, any money or valuable thing on any horse race, or other race, fight, game, sport, lottery or exercise, or any other event or contingency;

• “pool betting” means the making of bets (other than bets made by means of totalisator), whether the bets are made on the system known as a fixed odds betting or otherwise, by a number of persons on terms that the winnings of such of those persons as are winners shall be, or be a share of, or be determined by reference to, the stake money paid or agreed to be paid by those persons;
• “pool betting scheme” means a scheme involving the receiving or negotiating of bets made by way of pool betting;
• “totalisator” means the instrument, machine or contrivance commonly known as a totalisator, or any other instrument, machine or contrivance of a similar nature, or a scheme for enabling any number of persons to make bets on any event or contingency whatsoever with one another or principles of a similar nature;
• “to bet” means to wager or stake any money or valuable thing by or on behalf of any person or, expressly or impliedly to undertake, promise or agree to wager or stake by or on behalf of any person, any money or valuable thing on a horse race, or other race, fight, game, sport, lottery or exercise or any other event or contingency;
• “game of chance” includes a game of chance and skill combined and a pretended game of chance or of chance and skill combined, but does not include an athletic game or sport;
• “gaming” means the playing of a game of chance for winnings in money or money’s worth;
• “gaming machine” means a machine for playing a game of chance, being a game which requires no action by a player other than the actuation or manipulation of the machine;
• “gaming premises” means premises which are kept or used (whether on one occasion or more than one) for gaming, and to which the public has or may have access for the playing therein of a game of chance, whether the game of chance be an unlawful game or not.

In Kenya, betting and gaming most commonly takes place in casinos, horse-racing venues, gaming premises, in the streets through lottery and sweepstake tickets, via the internet and mobile phone. Winning in betting transactions and games is generally dependent on chance, with the chances of winnings being purely or substantially a matter of luck.
There was particular increased uptake of SMS-based and television lotteries in Kenya between 2000 and 2012, drawing the Kenyan public’s attention to the generally unregulated nature of the activities of the promoters. For example, Interactive Gaming and Lotteries Limited, the operators of ‘Shinda Smart  6969″’ SMS-based lottery had their lottery licence withdrawn in 2011 when, as reported in the media, attention was drawn to the fact that it was unclear if and how proceeds from this lottery were going to charity as required by the BLGA.
Other common lotteries include ‘stick and win’ and ‘jaza ushinde’ type competitions organized by entities with a view to encourage and reward loyalty. Online and television lotteries include ‘spot the ball’ or other similar types of rewarding competitions.
The withholding tax on winnings from betting and gaming essentially is a tax on the winnings by these two activities and does not extend to winnings from other activities under the BLGA, specifically the activities in Part VI of the BLGA which are amusements with prizes, prize competitions and chain letters.
Amusements with prizes
Therefore, where a person provides amusements with prizes at non-commercial entertainment places, such as a bazaar, dinner, dance, sporting or athletic event or other entertainment of a similar character, provided that all proceeds from such entertainment- after expenses, and an amount not exceeding  Kshs 1,000 incurred in purchasing prizes- are devoted to purposes other than private gain, such amusements are permissible in law. The opportunity to win prizes in these amusements must also not be the only or a substantial inducement to attend the entertainment.  Winnings or prizes from such amusements are not subject to tax.
Prize competitions
Though no definition of a prize competition per se under the BLGA, Section 59A alludes to what is to be considered as a prize competition. This section states that the BLGB may issue a permit authorizing the promotion and conduct of prize competitions “the success of which depends to a substantial degree upon the exercise of skill in connection with any trade or business or the sale of any article to the public.” It can therefore be inferred that:

1. a prize competition is a competition where success (chances of winning) substantially depends on a participant exercising skill;
2. where a competition involves both skill and chance, and success is not substantially dependent on skill, this would amount to a game of chance; and
3. a prize competition where the success does not involve the exercise of any skill or does not substantially involve the exercise of skill is prohibited, presumably because this would amount to a game as opposed to a prize competition.

From the above, it can be said that provided a competition is strictly a prize competition as such, winnings from a prize competition are not subject to taxation. On the other hand, if it can be shown that the success in a prize competition does not substantially depend on exercise of skill or does not depend on exercise of any skill at all, this would not be a prize competition strictly speaking.
Prize competitions or rather what appear to be prize competitions are common in Kenya. Typically, the organiser of such a competition requires a participant to exercise some skill in order to win, such as answering a question, or submitting an item/piece of work or actively doing something that shows the exercise of skill.
Whilst it may be clear in some instances that a competition is a prize competition, say where in a public competition, applicants are required to write an essay and the success or chances of winning is therefore largely dependent on the essay meeting the ‘winning’ criteria and not only because that particular essay was ‘picked’ from a pool of submitted essays.
In other cases, it is not so easy to assess whether the success of a competition depends substantially on exercise of skill. For example, where a radio-based promotion is such that listeners (participants) are required to call in and answer a very simple question with the first person to call with the correct answer winning. Arguably, if the degree of skill to be exercised in a competition is minimal, say for a ‘common sense’ type question like ‘how many legs does a cat have?,’ the chances of success in that competition are not substantially dependent on exercise of skill but on chance, such as being the first caller.
These considerations are important because a would-be prize competition can end up being in fact a ‘game of chance’ and making the promoter or organiser liable to remit 20% of the winnings from such a competition.
While it may be argued that if the BLGB has issued a promoter with a licence to conduct a ‘prize competition’, this means that such competition is, prima facie, a ‘prize competition’, I would be hesitant to draw this conclusion because the taxman’s mandate is to collect revenue from “winnings from betting and gaming” with no requirement for the KRA to be limit itself to an activity that has been ‘named’ a bet or a game. I would expect that this grey area will be the subject of a number of assessment notices by the KRA.
Chain letters
I am not aware of any chain letter types of competitions or promotions as these are not common (if they ever were) in Kenya. A chain letter is document supplied from one person to another suggesting to the person to whom it is supplied  that he should  send a document having the same or similar purport to another person or persons and that he should remit to a person or to an address specified in the firstmentioned document money or money’s worth.
In Summary
In conclusion, the introduction of withholding tax of 20% is significant for the betting and gaming industry in Kenya, though this is not likely to affect casinos and gambling businesses because the tax is on the winnings as opposed to a tax on the proprietors’ income. The move to tax these winnings is also not likely to reduce gamblers and gamers’ appetites because winnings from these activities are chance based in any event and it is doubtful whether the motivation to participate in a lottery to win Kshs 1 million will be reduced significantly by winning “Kshs 1 million subject to applicable tax”.
Promoters of lotteries may move to giving cash as opposed to non-cash prizes as these will make the administration of lotteries and games easier. There are no guidelines on valuing non-cash winnings but the taxman is likely to assess these at fair market value and demand 20% of that value. This will mean that winners are likely to have to pay to win, and this could be an administrative challenge for promoters, for example where a person wins a trip worth Kshs 1 million or a car worth Kshs 2 million and is forced to pay Kshs 200,000 and Kshs 400,000 respectively before they can be gifted.
Perhaps the most significant impending issue arising from this new tax will be the issue of prize competitions which are not prize competitions as such and where the KRA demands withholding tax from the promoters of such competitions.