CS Rotich puts online firms in tax crosshairs

Treasury Secretary Henry Rotich has paved the way for KRA to start taxing revenue generated by electronic commerce companies in the local market.

The proposed amendments to the Income Tax Act in the Finance Bill 2019 have included income earned through a digital marketplace among the lines of revenue on which tax is chargeable, a move that will affect among others large global firms such as Facebook, Uber, Google and Amazon on whose platforms people trade goods and services.

The Income Tax Act stipulates that earnings by individuals or companies that are accrued or derived from Kenya should be taxed, whether the firms are resident or non-resident.

Mr Rotich’s move to include the digital firms in the tax law is an effort to grab a slice of the billions changing hands each year in the increasingly popular online trading, which now also includes thousands of small businesses.

“Digital marketplace means a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means,” states the Finance Bill 2019. The Treasury CS said he was targeting an additional Sh37 billion from new tax measures to finance his Sh3.1 trillion 2019 budget.

In addition to taxing revenue earned by digital firms facilitating trades (commissions), Mr Rotich is also eyeing VAT on services that are facilitated by these firms.

In his budget speech last week, Mr Rotich promised to bring in tax measures to address the challenges that have made it difficult to tax digital markets, chief among them is difficulty in determination of the jurisdiction in which value creation occurs in a trade.

The proposed amendments to the Finance Bill do not outline how tax collection will be done for the digital companies, but defines the services that are subject to the tax.

The Tax Procedures Act, however, provides mechanisms for administration of tax laws, compliance by taxpayers and collection of the same.

Experts say taxing digital firms has proven problematic across the globe, mainly due to the issue of jurisdiction, and definition of the point of value creation in case of services.

KPMG associate director of tax Robert Waruiru said many countries are opting to tax a proportion of revenue, but even this presents a problem where these companies don’t have a physical presence in the country.

“Ideally, the KRA would appoint users the withholding tax agents, but in digital market places there are hundreds of thousands of customers operating on a daily basis, so it is difficult to appoint everybody as such,” said Mr Waruiru.

“This may be why they have only indicated that the revenue is subject to tax without explaining how it is going to be implemented,” he said.

According to him, there is need for greater clarity, and the provision will be hard to implement as it is currently worded.

Digital service companies that have a physical presence in Kenya are, however, easier to tax, as their income attributable to these local units can be determined easily.