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The complexities of taxing Sports Betting

What Kenyans have not realised is that Information technology could actually bring the conventional Casino’s right into your pocket through a mobile device.

What Kenyans have not realised is that Information technology could actually bring the conventional Casino’s right into your pocket through a mobile device.

In 2010, it was possible that if you mentioned the word bookmaker to ten Kenyans, only one out of the ten would understand what you are talking about.

A bookmaker is a person/entity that takes bets on sporting and other events at agreed upon odds, what in Kenya is commonly referred to a SportPesa, BetIn and Betway among others.

These organizations have revolutionised the sports and betting market in Kenya as news of Jackpot winners spread across the country.

The advent of sports betting is a recent and upcoming innovation in Kenya which was greatly encouraged by the existing laws and regulations in Kenya.

What Kenyans have not realised is that Information technology could actually bring the conventional Casino’s right into your pocket through a mobile device. With over twenty million mobile phone subscribers in Kenya, sports betting business in Kenya is big and is expected to grow further in the short term.

The Finance Act, 2013 amended the Income Tax Act to the effect that winnings from betting and gaming are subject to tax at the rate of twenty percent. This was a move by the government to bring income earned from betting activities within the tax bracket.

The casinos immediately lodged a petition at the High court,sighting that the taxes would kill their businesses as they will lose out to casinos operating in neighbouring countries that have more favourable tax laws on gains from betting. The high court dismissed this petition.

Further, Finance Act, 2015 sought to minimise tax leakage from betting by introducing a withholding tax system that requires the book maker to withhold seven and a half percent of the punters (also known as players) winnings whether they are resident or non-resident.

The Betting and Gaming Act defines winning as, “includes winnings of any kind and a reference to the amount or to the payment of winnings shall be construed accordingly”.

This definition sets out what is taxable in a game of betting as what the player wins. However, it’s a known fact that when a bookmaker places an odd on a sporting event, there can only be two outcomes, a win or lose for him.

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The bookmaker is therefore taxed on his net profit being the trade-off between the wins and losses. This ensures no revenue loss by the Kenya Revenue Authority.

Conversely, the taxation of punter’s winnings is a rather unfair principle since for them a win in a game of betting is normally the exception rather than the norm.

Therefore, this presupposes that when the bookmaker is withholding tax from the punter he should factor in the losses and winnings of the player and it is on the net position that the bookmaker should levy tax when remitting the money to the player.

Opponents of this system would indicate that it is impossible for the bookmaker to calculate the net position; however, the bookmaker is required to maintain a log of all bet slips placed by the player just like a stock broker would.

Therefore the determination of a punters winning in a game of betting should be easy especially with the current and future technological advancements.

The taxation of betting is made more complex, as some of the punters have taken up the placing of bets and analysis of sports to a professional level.

The professional punter does not believe in luck rather he believes in analysis, man hours, cost of capital and shared information. Therefore, these costs the punter incurs are deductible from the income earned from betting.

These are some of the principles applied by the Internal Revenue Service’s when taxing punters in Las Vegas, which is the betting capital of the world. Hence, the Kenya Revenue Authority should borrow some of these practices so as to ensure proper and efficient taxation of the betting sector in Kenya.

The writer is a Senior Tax consultant at EY; michael.ichura@ke.ey.com

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