Safaricom is facing a Sh75 billion tax liability in the Central Bank of Kenya (CBK) push for the separation of M-Pesa from the telecoms business, forcing the telco to delay the move that is supposed to allow for increased scrutiny of the multi-billion shilling mobile money deals.

Discussions about the split have taken years, with Safaricom pushing for an international reorganisation so as to avoid paying taxes on the transaction. However, the CBK is keen on a total separation to give it oversight over M-Pesa, which in the year ended March 2023 transacted Sh35.86 trillion.

CBK governor Kamau Thugge says the Treasury and CBK officials have now planned a meeting with Safaricom where the telco will be pushing for the government— that owns a 40 percent stake in the telco— to waive the tax liability.

“We have arranged to meet with the board of Safaricom in the near future. The Treasury also needs to be involved in this particular case. One of the factors that has been delaying the delinkage of M-Pesa mobile money from the rest of Safaricom is the tax liability, which is fairly significant in the order of roughly Sh75 billion and what to do with it,” said Dr Thugge on Thursday in a media briefing.

“We believe there needs to be a separation and that CBK should oversight M-Pesa and so we will therefore continue engaging Safaricom and the National Treasury to see how quickly this separation can be done.”

At Sh75 billion, the potential tax liability is more than the Sh52.48 billion net profit that Safaricom made in the financial year ended March 2023, making it a significant amount to part with at a time the telco’s earnings have dipped for the third straight year, partly on Ethiopia’s entry costs.

Airtel Kenya, meanwhile, in October 2022 successfully separated its mobile money business from the telecommunications arm, with the new entity now operating as Airtel Money Kenya Ltd. It is not clear if any tax liability arose out of the transaction.

Safaricom is the single largest corporate taxpayer in the country. It remitted Sh132.6 billion in duties, taxes and licence fees in the year ended March 2023, taking its cumulative duties, taxes and fees paid since inception to Sh1.17 trillion.

Safaricom has been dragging its feet over the fears that a separation will see the Kenya Revenue Authority (KRA) hit it with tax. It is therefore keen on securing waivers before proceeding with the transaction. The telco is favouring business reorganisation which involves transferring assets from one company in a group to another within the same group. Such assets could be subjected to capital gains tax (CGT).

Safaricom has been under pressure, especially from Parliament, to split M-Pesa from the telecoms business and create two separate entities.

An internal reorganisation, as opposed to a permanent hive-out of businesses, would mean having M-Pesa, telecommunications or any other entity as separate subsidiaries within the same firm. The actual relationship between the businesses will be housed within Safaricom and the synergy benefits of the group will continue to accrue to those businesses.

Currently, the CBK regulates Safaricom’s mobile money business while the Communications Authority of Kenya regulates the telecommunication business.

The CBK, however, wants total separation to get better oversight.

Safaricom chief executive Peter Ndegwa said previously the telco was wary that the “current tax law almost treats internal reorganisation as if there were external disposals” and a separation makes it almost a guarantee that the KRA will come for the tax.

Telecoms and M-Pesa businesses currently operate separately and with different teams but without formal structures separating them. Mr Ndegwa had said formal structures would allow the separate businesses to raise money or co-invest if such a need arises.

Potentially, there could also be a 16 percent VAT consequence on the transfer of any business within Safaricom as a going concern. Tax laws on CGT offer several exemptions, for instance when a firm is doing group restructuring and no third party is involved.

However, the KRA will still have to receive an application from Safaricom and determine which exemptions to grant at a time President William Ruto has vowed to be strict on granting any tax waivers.

A spirited attempt by Parliament to make the split a reality flopped in early 2021 after MPs snubbed debate on the Kenya Information and Communications (Amendment) Bill. The proposed legislation was targeted to address concerns that Safaricom has become too big through its dominant market share in voice, mobile data, and mobile money.

M-Pesa’s stature in Safaricom has been growing even as voice and text messaging revenues stutter.

Safaricom voice service revenue in the half year ended September 2023 dropped to Sh39.1 billion from Sh39.9 billion while revenue from M-Pesa hit Sh66.2 billion from Sh56.9 billion.