SportPesa managed to reduce its tax payments by moving its Kenyan profits over to the United Kingdom. Only 19% of profits are paid in the latter, not 30%.
SportPesa, the international bookmaker, has been siphoning profits off of its lucrative Kenyan branches by paying millions to its own UK-based software company. All to reduce how much tax it pays.
Finance Uncovered and the Kenyan media company Daily Nation uncovered the swindle. It sees the British arm, SPS Sportsoft, being remunerated for services to the Kenyan operation, Pevans East Africa. The former’s services were paid at rates that have been marked up by over 400% since 2017. Annual statements reveal that SPS charged Pevans £42 million over just two years, but the company still reported costs so low that the total profit before tax was just £33 million. This is a 77% profit margin.
This illicit arrangement significantly reduced SportPesa’s income in Kenya, where the company would be subject to a 30% taxation and moved money over to the United Kingdom. Here they are levied at just 19%.
SPS has also been exploiting a Double Taxation treaty over 40 years old between the two nations to reduce its British list of charges. SportPesa has thus been able to create a reserve of profits in the United Kingdom of £22 million according to its most recent filing of accounts in 2018. This store could then be used to reinvest in its own business or to pay shareholders dividends. Earlier on in 2020, Finance Uncovered was able to reveal that one of these investors happens to be Kenyan President Uhuru Kenyatta’s cousin.
SportPesa Calls the Arrangement Standard
SportPesa has answered these claims by stating that the Revenue Share Arrangement it created between its Kenyan and UK organisations are normal in the online betting industry. The firm additionally said that it has abided by all accounting and legal principles, but experts in taxation have queried the pricing arrangement.
An official for the Kenyan Revenue Authority revealed that there appears to be clear evidence of overcharging. A SportPesa spokesperson called this statement incorrect, saying that SPS’ operational costs and charges for software development are in line with industry standards. They went on to say that all SportPesa’s business dealings are fully compliant in the legal and tax frameworks for the countries they are situated in.
The bookmaker actually lost its license to offer betting services in Kenya in July of 2019, just before it announced that it was withdrawing from the country completely in September that year. This was due to what the firm described as a hostile environment in terms of operations and taxation.
Spreading Its Reach
After opening up for business in Kenya in 2014, SportPesa expanded its global presence by sponsoring Everton Football Club in 2017. New headquarters were also created, in Liverpool, along with a corporate structure that has SPS Sportsoft as its main entity. The latter is owned by another UK organisation, SportPesa Global Holdings Ltd. The latter collects all profits recorded in the United Kingdom and is largely owned by the same stockholders as Pevans.
The directors at SportPesa decided that SPS would be in charge of providing Pevans with software services. This allowed money to start being transferred from Africa to Europe and resulted in the funding for their European branch coming almost entirely from Kenyan bettors.
Are Profits Being Recorded Properly?
Taxation authorities reviewed the firms’ accounts in the meantime and believe that there are issues around the amount of profit being recorded in the United Kingdom. One of the major tasks at hand is clarifying just what SPS is doing to earn its income.
Yearly accounts state that the organisation provides IT along with services related to the obtaining of relevant IT for its clients, exclusively its sister companies. The main customer is Kenya’s Pevans East Africa. Over 21 months ending in December 2018, a staggering 97% of its £43.5 million income came from the latter. After being posed questions, SportPesa involved FTI Consulting, one of the largest corporate advisory companies in the world.
Finance Uncovered was informed that what the arrangement came down to is a Software as a Service deal. This means that whenever someone places a bet in Kenya, they’re accessing a platform that drives software which has, at least partly, been developed by SPS in the UK or is overseen by them. As recompense for this service, a percentage of that wager would be allocated to the British firm.
SportPesa did not wish to reveal what gaming software platform they were using from their 2014 launch until the creation of the UK firm in 2017.
The Importance of Transfer Pricing
Transfer pricing is what ensures that transnational organisations are paying the proper amount of tax. It’s been legal in the past to exploit what they charge their own firms in different countries so that they can move profits out of areas subject to higher tax. When they do this, they are supposed to set a realistic cost for intra-group trading. However, when Finance Uncovered asked for more details around the internal charging mechanism SportPesa had set, the organisation declined to comment. All the company was willing to say that their pricing policies have been reviewed by pertinent authorities.
Experts Weigh In
A wagering executive with experience in both markets found no fault with this explanation and said that revenue share ranges are typically in the 20% to 30% region. But when asked whether sourced software could see a 400% mark-up added to its retail price, the administrator said this practice would be questionable.
Richard Murphy, visiting Professor of Accounting at the Sheffield University Management School and campaigner for the fair tax issue, also looked at the SPS financial statements. He’s said that. while a return of between 20% and 25% would be reasonable for upfront investment, this isn’t the case here. This is because the British software company was running before the operation in Kenya got started.
Murphy added that it doesn’t seem like an owner or software development issue at all and that the 400% mark-up is simply how much the software was resold for. He described this as outside the norm and said it begs the question of why this software could not have been far more cheaply resourced in Kenya.
Tommaso Faccio, an experienced Transfer Pricing Adviser, agreed. He wants to know why a firm based in Kenya would pay millions of pounds annually to a UK-based company when it could just purchase the services directly.
The Issue of Double Tax
The analyses of the SPS reports revealed an additional twist. Although the firm recorded £33 million in profits before tax in the United Kingdom, it only paid £658 000 tax. Even though the organisation owed £6.4 million since 2017, almost this entire amount was offset thanks to the 1977 Double Taxation Treaty that still stands between Kenya and the UK. These kinds of agreements are standard and were created so that businesses don’t have to pay tax on the same income stream twice.
In the case of SportPesa, every time Pevans paid its UK sister company, the KRA deducted a 15% withholding tax. The Kenyan company pays this amount and SPS then presents a certificate stating that tax has already been paid to Her Majesty’s Revenue and Customs and the amount is knocked off.
The HMRC bill was £2.9 million in 2018, but SPS was able to avoid paying this by showing certificates confirming that £3.1 million had already been defrayed in withholding tax. So SPS was able to collect a tax credit from the HMRC along with being able to transfer almost all post-tax profits to the holding company belonging to SportPesa, £11.9 million. A spokesperson for the organisation said that it has all been reinvested into various sections of the business.
Regarding tax, the company stated that it paid US$63 million to the KRA in 2018, equal to 32% of its revenue for that year. It also pointed out that the KRA awarded it the Top Taxpayer and Compliance Award but would not provide details on what taxes made up the headline amount.
Time to Update the Treaty
Jason Braganza is a Development Economist and Tax Programme Director from Kenya who works with International Lawyers Project, a pro-bono legal charity. He’s stated that SportPesa is benefiting from the Double Taxation Treaty written in 1977, long before the rise of our current digital economy and the much more complicated transactions it now encompasses.
He said that it is urgent that this treaty be reviewed and updated to remove the loopholes that companies have been taking advantage of for a while now. A representative of the KRA stated that commenting on the matter is not possible due to the ongoing legal dispute with SportPesa over other matters and HRMC spokespeople said that they would not comment on individual firms.
The financial statements for SportPesa Global and SPS for 2019 will be going public in the United Kingdom at the end of 2020. Pevans’ financials have never been released because they don’t have to be according to Kenyan lay and the firm declined to show them to The Daily Nation and Finance Uncovered.