Why effecting digital service tax will not be a walk in the park

The Covid-19 pandemic has brought the global economy to its knees, effectively dealing a blow to revenue collection. Governments have introduced Covid-19 mitigation measures, which in many cases have resulted in the reduction of tax rates. For example, in Kenya, the resident corporate income tax rate was reduced to 25 percent from 30 percent, while the value added tax rate is down to 14 percent from 16 percent.

Enter stage left, the Finance Act 2020, and with it the advent of the “Digital Service Tax” through an amendment of the Income Tax Act. The law imposes a 1.5 percent tax on the gross transaction value of services provided and due at the time of payment. For instance, if one takes an Uber and the cost of trip is Sh200, the digital service tax is Sh3.

But where it gets interesting is when the law says the tax is due at the time of payment. This provision gives room for the digital service provider to pass that tax burden to the consumer. From the previous example, the service provider will most likely increase the cost trip from Sh200 to say Sh210 and avoid paying the digital tax from their own revenues, when the digital tax is designed to target the income of service providers.

The legislation further mandated the Cabinet Secretary in charge of finance to make regulations on the implementation of the tax which is scheduled to take effect in January 2021. Digital service consumers should be on the lookout so that the tax burden is not placed on them.

The Kenya Revenue Authority, through its Deputy Commissioner in charge of policy and domestic taxes, Caxton Masudi recently disclosed in a Business Daily story that it had created a special unit to track transactions and tax multi-nationals using data-driven detection.

But the cunning of the monkey is misplaced in a desert. The pragmatism of such measures will be tested in the furnace of bilateral trade agreements, given the generally borderless nature of the digital economy. For instance, as Kenya is currently negotiating a trade deal with the US, it’s likely that this digital tax will be among the contentious issues raised by US-based technology companies such as Uber, Amazon and Microsoft.

Last year, Google where locals pay for online ads on their platform which will attract digital tax, through their East Africa Policy and Government Relations Manager, Michael Murungi, protested the idea of Kenya implementing digital taxation.

He was of the view that such a tax would brew a trade war with other countries similar to that of France and the US. Still last year, the French government introduced a digital services tax that targeted US companies such as Amazon and Google.

The US government retaliated by threatening to impose 100 percent tariffs on products such as cheese and handbags coming from France. Essentially, if the adoption of digital taxation results in protectionist measures being adopted by our trading partners, then we will be ultimately, penny wise but pound foolish.

Yet, this coin too has two sides. Part of the philosophy informing the digital service tax, is a need for equity and fairness in shouldering the tax burden. We may recall an example from across the pond, in the US, where Amazon posted incomes north of $11 billion, but paid nil federal taxes in 2018, and furthermore, received a federal income tax rebate of $129 million.

This is one of the cases that has informed the rising clamour for tech firms to have their fair share of obligations in shouldering the tax burden just as much as the local firms — disproportionately over-burdened in their tax contribution to organised society.

Tech giants utilise personal data from consumers as the raw material to develop their chalice of products and services, from which the same consumers then partake. It is manifestly evident that the supernormal profits these entities rake in are not subject to tax obligations in any jurisdiction. This is shouldered by Adam Smith’s proverbial butcher, who it must be remembered does not engage in his trade out of a sense of benevolence, but rather a pursuit of profit.

Simply stated, the rules are not the same for everyone, and this fact is unconscionable and needs to be addressed.

Therefore, it is only fair that the economic environment should be conducive to a fair fight. Our Constitution anticipates equity as being a pillar of our organised society.

India provides a case study. In 2016 she introduced an equalisation levy pegged at six per cent targeting online advertisements and payments touching on provision of digital advertising to non-residents who had no permanent establishment within India. Then on April 1 this year, India introducing a two percent equalisation levy targeting e-commerce sale of goods or services.

Be that as it may, it needs to be borne in mind that in the steady march towards the prime of the digital age, tech-based companies have played a central and essential role in advancing organised society.

From our socio-economics to the nature of our commerce, the evolution has been both rapid and in many ways beneficial. As such, it needs to be ensured that tax policies and regulatory measures do not end up stifling innovation, as we seek to broaden the tax base.

Kenya as an emerging economy is both a consumer and provider of digital services. So, there is need to have a balance in protecting home grown companies from overregulation and taxing large multinationals who make billions while avoiding tax nets, while also being careful not to avoid the slippery slope of protectionism.

Karanja is a Data Protection Compliance & Commercial Law Practitioner