By Mercy King’ori and Jaaziyah Satar
The idea of taxing the digital space is now not novel. Many countries in the world have toyed with the idea as a means of increasing their tax base revenue. In fact, others have already implemented these taxes despite initial resistance. Two such countries are Uganda in Africa through imposing social media tax and France in Europe through taxing Over-the-Top platforms. Kenya has also not been left behind in exploring this sphere as a tax generating avenue; from issuing public notices to online businesses to file tax returns to developing corporate plans to discuss how to utilise the digital economy as a means of increasing its tax base.
The tax man is out to have a share of the revenue from this sector. In Kenya Revenue Authority’s seventh corporate plan, 2018/2019- 2020/2021, plans of taxing the digital economy featured heavily as a new channel of revenue to hit its 6.1 trillion Kenya shillings tax base by 2021. The icing on the cake was on 7th November 2019 when the Finance Bill that was tabled after delivery of the 2019/2020 budget was assented into law. The Act has introduced elements of taxing the online marketplace (OM). Prior to the amendment, there was disquiet among the interested parties on the implementation of the taxes. This is because the taxes have the potential of affecting the very core of the operation of an affected e-commerce business. Indeed that has been of concern world over due to the complexities in the OM. For example, most OMs can be accessed anywhere in the world without having a permanent establishment in all those places while most tax regimes place importance on having one for purposes of taxation.
This post seeks to explore these legal amendments and discusses what this means for the Kenyan OM that is characterised by both international and local players and how to navigate these new waters while learning from the forerunners.
Finance Act 2019
According to the “OECD/G20 Base Erosion and Profit Shifting Project- Addressing the Tax Challenges of the Digital Economy, Action 1- 2015 Final Report”, technological developments are viewed as contributing to the erosion of the tax base of many jurisdictions by reducing the number of otherwise taxable persons. One key factor that is leading to fewer taxable persons, is reduced visibility of the economic activities of people in this space. To capture a share of the revenue being generated, the Finance Act, 2018 was amended to incorporate this new desire to tax. The amendments have created new tax obligations to the players in the OM by introducing income tax and VAT obligation to the participants of e-commerce.
I. Income Tax Act (ITA)
Income tax has been introduced through section 3(a) of the Finance Act which amends sub-section 2 of the ITA by introducing a new charging section. According to the Finance Act, income chargeable to tax will now include income accruing through a digital marketplace. The Finance Act defines a “digital marketplace” as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. Generally, in Kenya income tax is charged on all income of a person whether they are resident or non-resident as long as the income was derived or has accrued from Kenya. This general provision does not distinguish whether the income is accrued through online or other means. This amendment can be said to be intending to bring to the attention of OM players that in fact, they are also included in this tax bracket. The amendment does not elaborate how the ITA will go about implementing this tax. The Cabinet Secretary is charged with developing the regulations on this.
II. Value Added Tax (VAT)
Additionally, section 16 of the Finance Act provides that a tax known as VAT is to be charged on income accruing through a digital marketplace. According to the VAT Act, 2013, VAT is charged on the supply of goods and services in Kenya and on the importation of goods and services into Kenya and on the importation of goods and services into Kenya. VAT Act requires that persons to be taxed under the Act are supposed to be registered for the purposes of taxation. This tax is payable by the person making the supply at the time of making the supply. Where the taxable goods and services are being imported into Kenya, the tax is payable by the person receiving the goods and services. Further on, the Act states that for the provision of services where the supplier is not a usual resident of Kenya, there will need to be an agent appointed for the purposes of remitting taxes.
Similarly, the Act does not specify how the implementation of this tax will be carried out. The Cabinet Secretary is tasked with formulating guidelines for imposing this tax.
Questions Kenya will need to grapple with in implementing these taxes.
As earlier mentioned, the Kenyan OM is characterised by international and local players; it is not homogenous. International players in the Kenyan OM scene include platforms such as Facebook, Netflix and Google all of which are multinational enterprises (MNEs). The challenge with these MNEs has been the failure to pay income taxes or corporate taxes, especially in developing countries despite receiving significant revenues from these markets. In principle, every country has the right to tax foreign corporations for benefits they accrue within its jurisdiction. However, Kenya should be aware that this has the potential of being murky waters if not treated carefully. In creating the Guidelines, the CS needs to be creative to avoid certain loopholes. Digital businesses have developed new business models such as online advertising in countries where they do not necessarily have a physical presence, reliance on intangibles and data. Consequently, taxation is made difficult with issues such as determining nexus between the company and the country and methodology of taxation after establishing a nexus.
Tax administration follows certain international principles that have long guided the creation of international tax systems. Some of these principles include: neutrality, efficiency, certainty and simplicity, effectiveness and fairness and flexibility. For instance, a taxation system should be easy to administer by tax administrators and easy to comply with by taxpayers. Complexity simply leads to potential disputes and double taxation. However, Kenya like many other developing countries struggle with tax administration. As Kenya stretches for these international fruits proper administration will be crucial to avoid more revenue loss. The corporate plan states that Kenya already experiences a huge tax gap from key taxes (income tax, VAT, import duty and excise duty) that is equivalent to 6.6% of the GDP.
Other players who will be affected by these taxes are local OM participants. According to the Corporate plan, KRA is targeting to rope in approximately 40,000 individuals who are trading online. In Kenya, the decision to establish an online shop is influenced by the low cost of establishment as opposed to having a physical store that has other expenses such as business permits and rent. Additionally, the OM is populated mainly by small scale traders selling their wares. Therefore, in implementing guidelines to tax this category of persons, KRA must give cognizance to the challenges faced by this category of traders. There was an uproar from the developer market when plans to impose VAT on app downloads was floated. The uproar came from the fact the Kenyan application market is still at its nascent stage and much smaller for paid applications. Therefore, introducing this tax for paid downloads was seen as an attempt to stifle any developments. Kenya is making progress in paid application with Google, recently allowing merchant accounts on playstore. Users can now pay for applications through M-pesa.
This is also another chance for the government to tread carefully while giving cognizance to principles of taxation such as equity which states that taxes should be fair and reflect the ability to pay. This will ensure that Kenya avoids negative effects such as when Uganda introduced the social media tax that saw a drop-in internet users by 3 million over a period of 3 months.
The effects of taxation at the international scene and local scene can be viewed from the lenses of two countries that have implemented taxes on their OM. In 2018, Uganda introduced the social media tax for Over-the-Top (OTT) platforms. The immediate effect of the taxes saw internet users decline by 3 million over a period of 3 months proving its detrimental nature. At the international level, France’s lower house of parliament imposed a 3% tax for giant OTT services. The affected parties were quick to transfer the costs to consumers in terms of fees
The shift from physical markets to online ones will continue to progress. With this in mind, governments will continue to seek to collect more revenue from this shift. However, in doing so countries like Kenya have a chance to ensure that implementation of these taxes does not stifle innovation and competition in the market. A balanced approach towards taxation can be found from the internationally recognised principles of taxation and lessons from predecessors.