Simplify VAT registration for non-residents to encourage compliance

Corazon Ongoro is a Tax consultant at PwC Kenya

NAIROBI, KENYA: In July 2013, the Organisation for Economic Co-operation and Development ("OECD") with the backing of the G20 countries, released a 15-point Base Erosion and Profit Shifting (“BEPS”) action plan.

Action one of this plan sought to address the tax challenges of the digital economy. Two years later, the OECD, in its 2015 final report "Addressing the Tax Challenges of the Digital Economy", identified a number of challenges, among them that of collecting Value Added Tax (“VAT”) within the digital economy on cross border business-to-consumer (“B2C”) transactions.

Increasingly, consumers buy almost anything through digital platforms, including goods, services and other intangibles e.g. licenses from suppliers that do not necessarily need to be physically present in the country of the recipient. While VAT on goods purchased online is easily collected through customs, this is not the case for remotely delivered services and intangibles because such transactions are concluded without any tangible items moving across borders or coming under the control of customs. This results in little or no VAT being collected on such transactions and therefore low revenue collection by governments and unfair competition vis-à-vis local businesses which are obliged to account for VAT on similar services or intangibles.

One of the recommendations made by the OECD in the 2015 report with a view to addressing the challenges of tax collection in relation to cross-border services, is that the place of supply for B2C services and intangibles should follow the ‘destination principle’ which essentially means that VAT on such transactions should be collected in the location of the customer. However, whilst some countries have adopted the destination principle, they are yet to institute mechanisms for the collection of the VAT applicable.

In Kenya, for instance, the Value Added Tax Act, 2013 contains a provision that deems the supply of electronic services, such as software, access to databases, games, films, etc. by non-resident suppliers to be made in Kenya where the services are provided to non-registered persons. Additionally, the Tax Procedures Act, 2015 contains a requirement for non-resident persons with no fixed places of business in Kenya to appoint a tax representative in Kenya who would be responsible for the non-resident's VAT (and other taxes) obligations. Unfortunately, there are no clear guidelines on the operationalization of this requirement; for example, the documentary requirements for such appointments, how to fulfil the tax filing obligations through the revenue authority’s online platform, iTax, and invoicing procedures, remain unclear.

The above said, it is noteworthy that the revenue authority is working on formulating guidelines to ensure that Kenya implements adequate rules to govern the taxation of e-commerce and in turn enhance revenue collection from the digital economy.

Key to this agenda, in my view, is ensuring that registration for VAT by non-resident businesses is simplified to encourage compliance. As such, the registration requirements and procedures cannot be similar in complexity to those applicable to local entities as this may either promote non-compliance or lead to loss of business where non-residents perceive that there are unnecessary burdens associated with doing business in/with Kenya.

According to the OECD's International VAT/GST Guidelines, a simplified registration and compliance regime should have the following characteristics: simple registration procedures with limited information requirements, filing of simplified returns, use of electronic payment methods, use of electronic record keeping systems and limit on data requirements, and non-recovery of input tax. However, there should be room for non-resident suppliers to recover their input tax under normal VAT refund or registration and compliance procedures.

Additionally, there should be no invoice requirements as customers involved in B2C transactions are generally not entitled to input tax deductions; however, where invoices are required for whatever reason, e.g. in accordance with existing trade practices or under consumer protection rules, they may be issued in accordance with the rules of the supplier's jurisdiction or alternative commercial documents used instead. The revenue authority should make information regarding the process and requirements available online for ease of reference by non-residents. Finally, non-resident entities should be allowed to appoint third party service providers to act on their behalf in meeting their obligations.

In keeping with this agenda, the OECD on 24 October, 2017 released a guidance, “Mechanisms for the Effective Collection of VAT/GST When the Supplier Is Not located In the Jurisdiction of Taxation” which is aimed at providing support to jurisdictions worldwide with respect to effectively and consistently implementing the taxation of the digital economy. In fact, the report seeks to address the challenges of design and practical operation of a simplified registration and compliance regime for non-resident suppliers as mentioned under the OECD's International VAT/GST Guidelines.

It will certainly be interesting to see how many of the characteristics of a simplified registration and compliance regime will have been adopted when the Kenya Revenue Authority finally releases the long awaited guidelines. While I am confident that Kenya has made steps in the right direction, including the modernization of our VAT legislation, I think we should now make further and hasty strides to ensure we do not miss out on the revenue potential presented by the digital economy.

Corazon Ongoro is a Tax consultant at PwC Kenya