May 18, 2020 - 5 minutes read

DIGITAL SERVICE TAX: A TURN OVER TAX FOR THE ONLINE WORLD

By The Vellum Team

In the wake of the COVID-19 pandemic the Kenyan economy is experience reduced growth. In fact, it is projected that the growth rate initially pegged at 5.6% will be revised downwards to about -1.5% to 3%. The impact of the pandemic is also reflected in the revenues to be raised by Government with ordinary revenues having been revised downwards by KES 33.4 billion. Kenya expects to raise KES. 1.78 trillion.

Government in dire straits

With the above in mind, there are concerns over how the Government will meet its obligations with regard to both re-current and development expenditure.

The Government is looking to new ways to raise funds beyond the traditional tax payers. The need to expand the tax base and bridge the gap as much as possible is felt more acutely in the wake of the economic effects of the COVID pandemic. The abolishment of previous tax exemptions has caused fears of overburdening an already exasperating cadre of tax payers.

It was bound to happen

It is no surprise that one of the new Government tax proposals in the Finance Bill 2020 seeks to amend the Income Tax Act by introducing a 1.5% Digital Service Tax (DST) to be charged on the gross transaction value on the provision of services derived from or accrued in Kenya through a digital market place. The tax will be due at the time of the transfer of payment or the service to the service provider.

In the case of a resident person or a non-resident person with a permanent establishment in Kenya, such tax shall be treated as an advance tax to be offset against the final tax liability.

This new tax has been met with a lot of anxiety and uncertainty by those working in the digital space. Anxiety and uncertainty is caused by the fact that concerns that the Kenyan digital ecosystem is still a growing industry as well as fears of duplicity and multiplicity of tax which would lead to a complete disruption of the budding sector.

Getting everyone to the table

To understand the rationale informing the policy proposal, Oxygene MCL in collaboration with the Kenya Private Sector Alliance (KEPSA) and Article 19 held a virtual meeting with Members of Parliament from the National Assembly Departmental Committee for Communication, Information and Innovation led by the Chairperson Hon. William Kisang and the Kenya Revenue Authority represented by the Deputy Commissioner, Corporate Policy Unit Mr. Michael Oray on Friday 15th May, 2020.

The Ministry of ICT was also represented by Eng. Daniel Obam, National Communications Secretariat ICT Sector Policy advisor.

The scope of the discussions was largely around the Principles of fairness for digital taxation and the issues and impact of the DST legislative proposal.

In the presentation, it was noted that there was ambiguity in the definition with regard to the scope of DST application. As it drafted, the proposal is not clear on:

·       how the tax will be collected and remitted;

·       the due dates for the payment have not been defined;

·       needed amendments to Sections 10, 34, 35 and the Third Schedule of the Income Tax Act in respect to taxation of non-residents, which DST would affect.

DST proposal follows recent expansion of tax base

The DST proposal comes after the recent enactment of  the Tax Laws Amendment Act (2020) which included an amendment to the Income Tax Act expanding the services subject to withholding tax to include marketing, sales promotion and advertising services provided by non-resident companies at 20%.

This could potentially mean that advertisers on non-resident platforms would be required to withhold 20% of income owed to the said advertising platforms and pay that amount directly to the Government. This immediately raises concerns on

·       the ability of users to comply,

·       the implications on the nascent digital economy in Kenya and

·       the efficiency of such a tax.

Is Government killing the digital economy?

There is a sense that the digital economy landscape is still at infancy and requires time and resource allocation to facilitate growth and development as opposed to burdening it with more taxes.

Arguments presented included the fact operators in the digital space are already paying other taxes. It would therefore be unfair to apply any other additional tax requirement uniformly (without due consideration of residence, size and capacity to comply). This would create an unconducive business environment, and potentially an unfair competitive advantage to non-resident companies not paying the same type of taxes for transactions carried out in Kenya.

In making their submissions,  non-resident companies in attendance made reference to the Organisation for Economic Co-operation and Development (OECD) process underscoring the need for a tax system that is widely recognized, legitimate, principled, robust, and appropriate.

The OECD has been working on an Inclusive Framework for Taxation through its Task Force on the Digital Economy since 2017.

On 9th October 2019 the OECD published for public consultation a document with a proposal for a unified approach toward digital services related taxes under pillar One of Base Erosion of Profits Sharing consultation. The Interim Report of the OECD Task Force and the subsequent policy notes proposed approach focuses on consumer-facing businesses, and it largely depends upon sales, not physical presence.

What is fairness in taxation?

Another major concern raised was in relation to the potential for duplicity of taxation. The unilateral DST proposal would see Kenya claim income currently due in another country. For instance, for some US technology companies like Uber and Bolt offering services to people in Kenya. This income is taxed in the US and/or Ireland.

Proposed alternatives: shifting burden from business to consumers

To address these concerns, the non-resident companies proposed an Extra-territorial VAT as an alternative that is in line with the OECD recommendations which include an option for a registration regime for non-resident suppliers of digital services, in particular for B2C supplies. This would in theory allow nonresident enterprises subject to this extraterritorial obligation to comply with the requirements of each jurisdiction with the fewest modifications to their existing compliance systems.

KRA’s Take

In response to the issues raised, the Kenya Revenue Authority noted the fact that the proposed DST was not unique to Kenya. In fact, the rate proposed is the lowest globally at 1.5% in comparison to other countries such as Nigeria and the UK currently at 3% and India at 6% according to KRA.

Notably, KRA emphasized the fact that the they are open to receiving suggestions on how best to provide clarity and avoid the ambiguities highlighted by members of the private sector. KRA is currently in the process of drafting simplified VAT registration regulations which will be open for public participation once completed.

Parliament’s Take

In furthering the discussions, the Members of Parliament present at the webinar agreed with the proposal to have more investments being made by Government to facilitate the growth of the digital economy sector.

In this regard, reference was made to an economic stimulus package of KES. 25 Billion to be availed post COVID-19, part of which could be re-directed to develop enabling infrastructure that spurs the digital economy.

Further, the Honorable Members present highlighted their willingness to receive clear proposals for incentives needed to further the growth and development of the digital economy.

Call for submissions

Moving forward, it was agreed that members of the private sector would present submissions on the issues raised as well as clear alternative proposals with justifications for the proposed changes to the National Assembly via the Finance and Planning Committee and the Information and Innovation Committee for consideration by Parliament.

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