When technology first allowed people to interact with their family members, colleagues and friends in different parts of the world through internet-based applications and platforms (“Apps”), none of us ever imagined the ease with which we could conduct business using them.
In fact, the growth of technology has been tremendous and has influenced online business operations which have also been propelled by mobile money transactions. Mobile money and online money transfer platforms serve as perfect examples of where technology eased financial transactions traditionally conducted through physical exchange of money or telegraphic.
The world today is characterised by users of Apps who purchase services and commodities from suppliers over the Apps without physical interaction.
This non-physical interaction has created a new marketplace for businesses called, “the digital marketplace” which is an interface that enables electronic media interaction between buyers and sellers of goods and services operating in two different locations.
Taxation of the digital marketplace has proven to be a tough juggernaut to crack. This a global phenomenon and not just a challenge for Kenya. The challenges presented by the digital marketplace from a taxation point of view are that transactions can entirely take place on the Apps without necessarily requiring physical interaction. Consequently, businesses in the retail space may not require physical presence through shops to conduct business. The App is the new shop!
With Kenyans trading more on the digital market place, the Kenyan Government through the Finance Act 2019 amended provisions of the Income Tax Act (“ITA”) and Value Added Tax (“VAT”) Act to bring into taxation transactions and businesses conducted on the digital marketplace even as the globe deliberates on a unified approach through international bodies such as the Organisation for Economic Co-operation and Development (“OECD”).
Indeed, the initiative to capture transactions and business operation on the digital marketplace is commendable, however, Kenya requires impermeable legislative and administrative framework. The current legal amendments are not appropriately drafted, are selective and cluttered.
To bring the complexity of taxation of the digital marketplace into perspective, a Kenyan tax resident can purchase commodities outside Kenya over an App without physical contact with the seller.
The transaction is entirely conducted online as the sale is enabled through the App whereas payment is also executed online on local and international money transfer platforms.
The situation is further compounded where the seller of commodities or service provider is not registered or has a permanent establishment in Kenya making it difficult for enforcement of taxation of the transaction and the business.
This conundrum must be dealt with to ensure that all transactions and businesses are taxed in Kenya since Kenya has the taxing rights over such transactions.
To begin with, whereas the Finance Act 2019 introduced enabling provisions under the ITA and VAT Act to bring to tax income earned from the digital market place, the Cabinet Secretary for National Treasury is yet to gazette guidelines on implementation of digital service tax for Income Tax purposes, although draft regulations for the applicability of VAT on incomes earned from the digital market place have been published for public participation.
The Finance Act, 2020 which was this week assented into law by the President has now charges this digital service tax at the rate of 1.5% on gross transaction value of digital transactions. These guidelines will bring clarity to taxpayers and address the complex measures in place to effectively tax B2C online transactions which are numerous and of low value compared to B2B transactions.
Secondly, foreign-based companies are the main targets of revenue authorities’ campaign to collect taxes on income earned on their business activities both within and outside their jurisdictions.
The Kenyan legislative provisions on digital service tax in their present form have been drafted towards administering tax on digital-enabled businesses conducted by both resident and non-residents persons. The finance Act 2020 further gives the Commissioner of Kenya Revenue Authority (“KRA”) powers to appoint a digital service tax agent to aide in the collection of this digital service tax.
From a VAT perspective, tax is chargeable on goods and services sold to Kenyan resident customers on the digital marketplace by virtue that the actual supply has taken place in Kenya and the supplies are consumed locally.
In addition, income earned on goods sold or services provided by non-resident suppliers to Kenyan resident persons is derived from Kenya and needs to be declared and taxed in Kenya.
However, with the lack of presence of these non-resident suppliers in Kenya, an administrative challenge arises for the KRA with respect to enforcement and collection of the digital service tax.
The amendments introduced by the Finance Act, 2020 on taxation of the digital market place envisage a more than ideal scenario where both resident and non-residents will be taxed on income earned from the digital market place.
What the amendments do not consider is the intangible nature of transactions that are conducted through the digital market place. It would be a herculean task for KRA to monitor all transactions that are taking place on the digital marketplace and even a huge task for KRA to identify all possible Kenyan persons who would be ideal for appointment as digital service tax agents.
Taxation of the digital marketplace remains a quagmire globally. Our efforts will bear no fruit should our attack strategy be built on a weak legal framework.
In ordinary transactions, the best way to bring non-resident suppliers is to withhold tax on payments to non-resident suppliers for goods and services. But even this ideal taxation approach cannot circumvent intertwined B2C digital transactions where the customer and supplier interact on an online platform.
How would a Kenyan end consumer withhold tax on payments for goods or services he or she procures online when the price displayed online has not factored Kenyan local taxes? Besides, the purchased goods can only be shipped on confirmation of full payment.
What would be the contractual implications if KRA were to consider partnering with the international money transfer platforms, which are a major player in the online transaction? Simply put, enforcement of the digital service tax is not as straight forward as envisioned by KRA. It is a path that has already sparked diplomatic wrangles among developed countries. Besides, KRA has no power to compel non-resident suppliers to charge VAT on goods and services supplied to Kenya.
The goods sold by non-resident suppliers to Kenya are exports from their countries of origin. It follows therefore that non-resident suppliers cannot charge VAT on exports as this will contravene the ‘destination principle’ adopted as international best practise by the OECD VAT Guidelines.
At best, KRA can only compel Kenyan resident customers, who are taxpayers in Kenya to remit VAT on imported goods.
But in so doing, this shifts the tax burden from its targeted non-resident suppliers to Kenyan resident customers who have no ability to negotiate prices on commodities they purchase online.
Will that not substantially increase the cost of the goods to the end consumer in Kenya? What happens to VAT incurred on imports by Kenyan resident customers?
Will it be considered a tax credit on them? On the flip side, are the tax amendments not over-taxing non-resident suppliers who have customers in almost every jurisdiction in the globe?
Suppose all these countries were to charge a digital service tax on gross transactions, where is the balance in observing tax neutrality for cross border transactions and overtaxing non-resident suppliers who must also account for taxes in their jurisdictions?
It is important, therefore, that we analyse all angles of digital transactions before we send KRA to administer digital service tax without a practical, enforceable and workable tax framework.
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