Government laying digital traps to tax virtual music

The word music appears just once in Kenya’s 510-page Economic Survey 2023, perhaps an indication of the loud but minuscule role the segment plays in the country’s economy.

Despite its enormous potential, the music industry remains a footnote in Kenya’s economy only featuring lumped under the broad arts, entertainment, and recreation segment.

The survey statistics show that the arts, entertainment, and recreation GDP contributed Kes28 million to Kenya’s wealth last year.

Although the music industry is struggling in Kenya, signs of success have began streaming in as Kenyan artists push through digital platforms in search of the Afrobeat and Amapiano success, and the taxman cannot wait.

Tax advisory firm KPMG notes that Kenya’s Finance Bill 2023 seeks to “bring into the tax net, digital content business which has experienced growth in the recent past” largely on the creative prowess of players, who have not enjoyed significant government support.

The Finance Bill proposes to introduce a definition of the term “digital content monetisation” to mean offering for payment entertainment, social, literal, artistic, educational or any other material electronically.

This implies that any income generated from artistic works through website advertisement, social media, brand sponsorship, affiliate marketing, subscription services, merchandise sales, exclusive content membership plans, licensing content including photographs, music, or user own projects, and crowdfunding for specific goals for content creators will attract 15 percent duty.

Tax advisory firm PwC said 15 percent withholding tax rate is higher than the usual withholding tax rate applicable to other professional services at 5 percent.

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“This may result in an effective tax rate higher than 30 percent for digital content creators resulting in the generation of continuous income tax credits for the creators as the withholding tax of 15 percent assumes a profit margin of 50 percent,” PwC explained.

The legal provisions may capture minors as some of the content creators are still below the age of majority, PwC added, “It is unclear whether the minors or their guardians will be required to register for taxes.”

If lawmakers pass the tax measure, it will turn into a body blow for Kenya’s arts, entertainment and creative sector, which is still smarting from the pandemic-induced economic fallout.

The music and entertainment sector has been on an upward trajectory since 2018 when it contributed 24.5 million, Kes27 million in 2019 before dipping to Kes19.9 million in 2020 at the height of Covid-19 on account of muted music entertainment scene.

Following the easing of travel curbs, and a rise in footfall to clubs and concerts in 2021, the sector saw its fortunes bounce back posting Kes23.3 million to Kenya’s GDP.

Even with its potential to employ thousands of youth in the value chain, music remains a hugely untapped enterprise in Kenya’s economic matrix. According to the UN, the entertainment industry employs about 2.4 million people across Africa and the Middle East.

Nigeria’s Nollywood, the popular reference to the country’s film production industry, is the second-largest employer in the West African nation providing roughly 300,000 jobs, beating the agricultural sector.

Successive governments in Kenya have left the sector unattended, but thanks largely to private sector players, workers in the segment still manage to get fairly good incomes.

In 2022, the estimated real average annual wage per worker in the arts, entertainment, and recreation was Kes663,301, which was Kes54,359 less than the Kes716,660 reported just before the pandemic two years prior.

This implies that an average worker in the sector made just above Kes50,000 per month last year according to the Kenya National Bureau of Statistics (KNBS).

In comparison, the real wage earnings in the arts, entertainment and recreation sector were better than agriculture, forestry, and fishing at Kes321,034 per worker. The arts also beat workers in mining and quarrying where employees earned Kes567,204 last year as well as manufacturing (Kes497,225), and real estate activities (Kes272,987), statistics from KNBS showed.

Further, data says the sector remains one with the lowest number of unionisable employees, perhaps underscoring why Kenyan musicians’ issues remain in the backwaters of the country’s economic discourse.

Last year, the number of unionisable employees in the arts, entertainment, and recreation was reported at 350. This was a 306 percent jump from 86 workers in 2021. In the 12-month period that ended December 2022, the average basic wage was Kes40,525 and a worker could also draw allowances amounting to Kes20,117, KNBS said.

Efforts from the government to revamp the sector’s contribution to national wealth often sound reactionary. In November last year, Cabinet Secretary for Youth Affairs, Sports and Arts Ababu Namwamba, met with industry officials including CMOs – the not-for-profit lobby of entities licensed to collect and distribute royalties for and among its members, Kenya Association of Music Producers among others to come up with a way forward in addressing the plight of musicians, copyright compliance from music users, royalties and overall transformation of the sector.

Mr Namwamba’s move followed another effort in 2017 when the Kenya Copyright Board (KECOBO) licensed the Music Producers Association of Kenya (MPAKE) to collect and distribute royalties on behalf of authors, composers, and publishers.

This came after the public was been treated to reports of alleged misappropriation and mishandling of revenues meant for musicians. For instance, in 2016 music trio Elani criticised the Music Copyright Society of Kenya (MCSK) saying some Kes31,000 paid to the afro-pop music group “did not add up”.

The meagre payment came after Elani saw their hit songs played all-round in the year under focus. Upon their complaint, MCSK appeared to admit it erred, authorising the payment of some Kes300,000 in ‘compensation’.

In the same year when the controversy was in the airwaves, MCSK failed to provide their audited accounts and equally did not publish the amounts of royalties paid to musicians, attracting the wrath of industry watchdog KECOBO, which canceled their license. The permit was, however, later reinstated in 2019.

Fast forward, during the Kenya National Drama and Film Festival hosted at State House, Nairobi, on June 2, President William Ruto said: “We would want to see the arts grow so that they can also contribute productively to our growth.”

Citing a programme under the Ministry of Sports, Arts and Culture to growing the arts industry, Dr Ruto said the initiative, is a flagship project through which his Kenya Kwanza administration “will revolutionise the way we organise sports and the arts in Kenya.”

“We are lucky that we are implementing a curriculum that recognises performing arts such as music, dance, drama, and film as learning components.” The President noted that the move will see students leave secondary school armed with knowledge—both theory and skill—in the arts.

The country may not have to look far for examples on how to revamp the sector. The Ethiopian Jobs Creation Commission has singled out creative industries as a high-potential sector for job creation in its Plan of Action for Job Creation 2020–2025’.

Authorities in Addis Ababa have proposed several strategies to support music, film, fashion, photography, and fine arts sectors. Some of the proposals include reducing the tax burden on artists, establishing a multipurpose physical space, providing protection for artists, and developing an arts education curriculum.

Instead, Kenya wants to impose a tax on this nascent sector that has seen content services providers (CSPs) in Kenya rise by 14 percent last year to 682 from 598 in 2021 owing to the expansion of the digital content market. KNBS survey says CSPs entail local firms that offer digital content services such as streaming video, music, games, or e-books.

An increasing number of Kenyans, including businesses, have turned online to shop for options and increase their footprint respectively.

Last year, Kenya’s total wireless internet subscriptions—the primary driver of arts industry offerings—increased to 48 million from 45.7 million subscribers in 2021 with terrestrial wireless data going up by 67.4 percent.

The growth was attributable to the expanding mobile market and increased adoption of smartphones and other internet-enabled devices in the country. Total fixed internet subscriptions expanded significantly by 24.5 percent, with the most notable increase of 34.5 percent observed in fixed fibre optic data subscriptions.

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