What you need to know:
Treasury Cabinet Secretary Ukur Yatani who has proposed to levy 1.5 per cent tax on the value of digital transactions.
The Kenya Revenue Authority (KRA) is targeting companies operating in the country with no physical presence but who are creating value and income.
Multinational companies on the digital platform have been more successful than local enterprises the government should seek to tax these. But in trying to do this, they may choke other smaller businesses.
The digital services tax model of setting the tax first and then fixing its unintended consequences later.
Just how large is the digital economy dividend? It seems we may get an answer after January 2021 when it is expected that Kenya will commence levying a value-added tax on digital marketplace suppliers.
This was confirmed in the budget speech read last Thursday by Treasury Cabinet Secretary Ukur Yatani who has proposed to levy 1.5 per cent tax on the value of digital transactions. This will not be straightforward and he acknowledged that some of the transactions increasingly being carried out on digital platforms are difficult to effectively tax, but the new levy would provide the framework for this.
The Kenya Revenue Authority (KRA) is targeting companies operating in the country with no physical presence but who are creating value and income. Some of the targeted services under the draft law include e-books, streamed television, software, streamed music, event tickets, online learning courses, transport hailing platforms, online website hosting, and cloud storage.
The taxman determines that some of the criteria that would make the services taxable here include if they are paid for through a Kenyan bank or a using Kenyan credit card, or via a local SIM card and are delivered to an IP address in the country. But will Netflix share a list of its Kenyan subscribers with KRA? It may not even have an accurate account as some Kenyans use overseas proxies to register.
In their Digital Economy report published in 2019, UNCTAD identified seven global “super-platform” companies - Alibaba, Apple, Amazon, Facebook, Google, Microsoft, and Tencent that account for two-thirds of the market value of the seventy largest digital platforms in the world. Naspers, the parent of Multichoice and DStv, is the only African company on that list, largely because it owns 31 per cent of Tencent that runs WeChat in China.
Companies like Google and Facebook have displaced newspapers and television in the advertising race and it is natural that the government should seek to tax these. But in trying to do this, they may choke other smaller businesses.
On a webinar earlier this month, tax experts who are waiting for KRA to publish new guidelines had some concerns that the wording of the tax is vague and open to wide interpretation. Is the digital service tax (DST) based on turnover or income? If a vendor sells a phone on Facebook, is the tax on the value of the phone, or the commission they charge? Does the buyer also pay the tax? Likewise if one takes an Uber, is the 1.5 per cent tax on the value of the ride or Uber’s commission? Does the driver also pay tax on his commission?
Most Uber drivers and small e-commerce businesses, who have just been enrolled under a one per cent turnover tax, fall far below the Sh5 million threshold for them to register for VAT. And the new DST tax is an advance tax that is deductible from the final tax payable at the end of the year.
Kenya is following in the steps of countries like France and that have taken unilateral moves to levy digital taxes as they wait for a consensus tax model proposed by the Organization for Economic Cooperation and Development (OECD) to standardise tax rules. On the webinar, a question was raised that, by Kenya rolling out its DST, would there be consequences, such as from the US that had retaliated against France for imposing digital taxes on American firms?
But KRA hopes that, by setting a low tax rate, no one will raise a fuss. They have also created a simple window for these global giants to register and appoint local agents to administer their tax affairs in the country. This model has worked in Singapore and South Africa. These are both to answer questions on if DST makes Kenya uncompetitive compared to other countries.
The DST model of setting the tax first and then fixing its unintended consequences later is similar to the Railway Development Levy that was introduced at 1.5 per cent tax and is now at two per cent. The RDL covers everything, even taxing items unrelated to the new railway, like an airmail envelope and aircraft engines that firms like Kenya Airways complain drive up the cost of doing business.