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It’s about time we collect digital taxes

COMMENTARY
By Bwire Mugolla | August 18th 2020

With the internet penetration rates continuing to grow in Kenya and across the African continent, more Silicon Valley tech giants are setting base to offer their services.

In 2005, only 2.1 per cent of Africans used the internet. Fifteen years later, in 2020, almost 40 per cent of Africans have access to the internet, according to the Internet World Stats website. In Kenya, the number is far higher.

This has been a blessing for our economic growth and for increasing access to upwardly mobile lifestyles because of better education and knowledge resources. It has also meant that global tech giants, ranging from Facebook and Google to Netflix, Uber and others, have seen the great potential that exists in African markets. 

These digital services offer us a lot, in terms of education, socialising and access to knowledge, entertainment and transportation. Now, it is time that these digital services, which generate profits from users, begin to be completely regulated by governments, and not just in terms of digital privacy.

They are major profit machines and some of that profit should stay in Africa, rather than making its way back to California. Collecting digital taxes is also helpful to many developing countries who usually have lower tax revenue due to large informal sectors.

In addition to increasing a tax base, collecting digital taxes helps to diversify economies dependent mostly on the export of raw commodities. This includes Kenya, which predominantly exports produce and flowers. 

Recession

Due to the global health pandemic, Sub-Saharan Africa is this year due to suffer from its first recession in 25 years. Now more than ever, we have to be exploring alternative revenue sources to keep our economy afloat. 

At present, there still does not exist a global standard to legislate taxes on digital services offered in one country from a company based elsewhere. Since this is still quite new territory, international tax treaties have not yet been agreed upon to tax multinational tech companies.

While the OECD is working on creating a global tax framework, it will still take years for anything concrete to be adopted. In July, Donald Trump pulled out of these talks, and many things will likely change before the tech giants begin to be taxed uniformly across the globe.

That is why President Uhuru Kenyatta took an important step at the beginning of August to be proactive about digital tax collection. In 2019, he extended the scope of Kenya’s finance laws to allow for tax collection on “income earned through digital marketplaces.”

To add to that, he recently signed a new law that will tax 1.5 per cent of gross transaction value on digital services and marketplaces that gain income from Kenyans. This law will take effect in January 2021. Many of us are used to paying for Netflix subscriptions and using ride sharing apps such as Uber and Bolt to get us to work every day.

 

Many tech giants still remain unprofitable, including Uber and Netflix. Therefore, it is key that the president’s new law focuses on gross transactions rather than profit. 

Even without having a physical presence in our country or elsewhere in Africa, many of these multinational tech giants are driving revenue from Kenyans each and every day. As the world increasingly goes online and it becomes more and more common to work remotely, the location of a company’s physical headquarters becomes less and less relevant. 

That is why these proactive tax laws are essential to protect Kenya from spending too much money abroad, without returning our expenses to our own pockets. 

With one of the continent’s most advanced technology ecosystems, it is important that Kenya serves as a pioneer for how to wade into the new territory of internet legislation. If we allow larger and wealthier nations to take advantage of the services they can offer in Kenya, then it would set a precedent for how this is dealt with in the future.

Uhuru’s wise move to begin regulation shows foreign companies that while they are welcome to operate here, they have to play by our rules. We are also assets to these companies, who are seeking to increase their ever expanding user base. If they want to operate in Kenya, it’s time to make sure that the Kenyan people benefit as well.

Mr Mugolla is a public policy analyst.

[email protected]

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