The Kenya Revenue Authority (KRA) is finally set to go after global technology giants operating in the country in the latest push to grow tax revenues and bridge the ever-growing budget deficit.
The taxman will from January next year start administering the 1.5 per cent digital services tax, which is expected to increase tax revenues from such tech firms as Netflix, Alibaba, Facebook, Google and Uber.
The tax authority noted that the new proposed tax measure, which is contained in the Finance Bill 2020, will enable it to keep up with the times, with a chunk of taxes coming from brick and mortar businesses increasingly under threat as more firms move online.
Other than the introduction of the 1.5 per cent digital service tax, which is an income tax, the National Treasury has also published the Draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020.
Among the online firms targeted by KRA in the new tax proposals are those offering streaming services, search engine services, those that sell electronic event tickets, software programmes, web hosting services and downloadable digital content.
KRA Deputy Commissioner for Tax Policy Maurice Oray clarified that the new tax is not targeted at local digital firms, which he said are already subject to local taxation. Instead, the new tax targets the multinationals that have not been paying taxes in Kenya.
Kenyan firms that will pay the digital service tax can always claim refunds when filing tax returns. This, Mr Oray noted, would ensure that KRA does not inhibit local innovation, which is still fledgeling, an accusation that the taxman has constantly fought off.
“We are targeting the multinational firms doing businesses in Kenya without paying taxes. We are not targeting the local companies that are doing innovative work. The local companies are already under the normal tax regime,” he said.
“Local companies will ordinarily pay taxes and what we are telling them is that if they pay the Digital Service Tax, the amount they pay is credited against their final tax. It is like an advance tax as once they pay it will be deducted from what they normally pay and when filing taxes they can pay the difference or claim refunds. It is not a burden to the local enterprises, it is only a burden to the foreign entities which have not been paying tax and cannot pay tax in any way if we do not have this framework.”
Globally, economies lose an estimated $1.48 trillion (Sh148 trillion) every year due to lack of proper laws.
Locally, KRA gives a “very conservative” estimate of Sh2 billion in lost tax revenues every year. This is expected to further grow as more firms take to the digital marketplace.
Oray noted developing policies targeted at the digital economy is a critical step for the tax authority as this is set to be the global trend.
Failure to keep up with the developments that industries are making might result in the agency’s tax collections stagnating, or worse, dropping.
“When you talk about taxing the digital economy, the first thing that you need to take into account is that significant advancement has been made in technology and business transactions are moving away from the traditional form – brick and mortar – where you have a person selling over the counter. The models have changed and it is important that for us to keep up with the pace in this area, we have to change our tax rules,” he said.
“If we do not do this, we will have our profit base eroded because the digital transformation has enabled multinationals to do businesses without creating physical presence. If they do not have a physical office in Kenya, how are you going to tax them?”
He added that this would also give local firms a level playing field. Currently, Kenyan companies are disadvantaged as they are subject to local tax regimes, while foreign firms are not subject to local taxation. This was among the issues that local traditional taxi drivers protested against in 2016 when they noted that cabs using hailing apps do not pay tax locally.
The taxman had last year made an attempt to tax the digital firms, with Treasury reviewing the Income Tax and VAT Acts through the Finance Act 2019, where it said transactions carried over digital platforms are subject to the two taxes. The move never took off owing to the complexity of the issue of taxing the digital economy, which included difficulties in taxing a firm’s turnover at a rate of 30 per cent, considering not all its revenues come from Kenya, in the case of income tax.
“We realised that we need to do more and have a specific framework that will enable the businesses to remit taxes due from their activities in Kenya. It is on the basis of this that we have significant amendments in the Income Tax Act and have regulations for VAT,” said Oray.
“Income taxes are specific to services because we are aware that goods go through the border and are taxed at the border. It is services that you cannot see when they cross the border and hence the need to amend the tax laws in this regards,” he said.
He also dismisses the argument introducing the digital service tax would amount to double taxation as the services are already subject to VAT.
“VAT is a consumption tax and the burden is on the consumer buying. Digital service tax is income tax and the burden is the person doing business and not the buyer. It is not double taxation as they are borne by different people,” said Oray. A key concern for KRA still remains how to administer the proposed tax measure.
Past experience has shown that it was difficult to tax these big foreign firms that dominate the digital space. Over a dozen countries have recently begun to enact new digital services taxes (DSTs), which would generate two to three per cent of the countries’ domestic revenues from a narrow group of large Internet companies.
Supporters of these firms argue that most of the targeted companies’ value is created by users, and therefore the profits on that value should be taxed in the nations wherein the users reside. This, however, would violate the spirit behind long-standing international agreements, because users do not create value in any significant way.
“Due to the nature of transactions executed via digital platforms, it is difficult to effectively tax the income derived from such platforms,” noted a business advisory firm global consulting firm PwC. Oray, however, said once the Finance Act 2020 is in place, it would do regulations to “enable the commissioner to prescribe how these taxes will be paid”.
He added that the recently ratified Multilateral Agreement Convention (MAC) that allows countries to share some information on companies registered in their jurisdictions would also turn up the heat on tax cheats.
“MAC allows countries to exchange information for mutual assistance in tax collection. With it, we have access to over 130 jurisdictions, which can help us in terms of collection and access to information. With that, we are set to collect these taxes come January 2021,” he said. While KRA is confident that through its own local means and international cooperation it will be able to get the digital giants to pay taxes locally, analysts note that compliance might be a tad difficult.
Law firm Bowman’s noted that the draft VAT (Digital Marketplace Supply) Regulations, 2020 in their current form might be a turn-off for firms looking to invest in Kenya.
“As currently drafted, the draft regulations do not comprehensively deal effectively with what is a complex area of taxation. Subjecting every supplier of digital market places from an export country to the VAT regime regardless of their turnovers hinders the ease of entry and doing business in the Kenyan market,” said Nikhil Hira, a director at Bowman’s Law.
“Considering that Kenya has been positioning itself as the preferred base for technology start-ups in Africa, KRA should consider an appropriate threshold before registration is required,“ he added.
Hira also noted that the requirement by the draft regulations to provide KRA with a monthly record “may pose a significant compliance challenge to many Multinational Enterprises” and instead suggested such filings be undertaken quarterly. The law firm also noted that a digital service tax might not go down well with the US, which has opposed such tax measures in other jurisdictions.