A decade ago, Peru, on the Western Coast of South America, embarked on a journey towards rolling out and adopting electronic tax invoices. The approach was staggered and began by targeting 239 of the largest issuers of invoices in the economy, largely players in manufacturing and mining.
Despite the small number of targeted firms and a 10-month compliance window, the Peruvian tax authority was compelled to extend the deadline twice – first from October 2014 to April 2015 then to August 2015.
Issuance of manually generated invoices only ended in 2018, four years after the country started the process of rolling out the new platform having tested the waters with large businesses.
In Kenya, Finance Act 2023 amended Section 23 of the Tax Procedures Act, providing that all businesses issue electronic invoices starting September 1, 2023. It further amended Section 16 of the Income Tax Act, providing that effective January 1, 2024, only invoices generated through the electronic Tax Invoice Management System (eTims) would be viable in determining deductible expenses in computing corporate income tax.
These two amendments imply that, unlike the Peruvian route of slow-pedalling the rollout of electronic tax invoices, Kenya opted for netting all businesses at once. It comes as no surprise that the rollout of eTims has been met with hue and cry, notably from the small and micro businesses, especially now that the March 31 deadline for mandatory onboarding lapsed.
As at March 31, some 202,291 taxpayers had been onboarded on eTims against a targeted 915,000. Whereas this performance rate is at a mere 22.1 percent, the Peruvian experience and the time taken to roll out electronic invoicing to all businesses suggests that the Kenya Revenue Authority (KRA) delivered a strong punch within the constraints of limited time and a strategy that spread it thin targeting all business ventures.
Now that the deadline for mandatory eTims onboarding has passed and the regulations gazetted, where do we go from here?
Here are three lessons Kenya could possibly draw from experiences in Latin America.
First, the transition from manual to electronic invoicing is a marathon, not a sprint. Peru embarked on this journey in 2014 and it was only four years later that issuance became mandatory for all businesses. Chile, not so far from Peru geographically but a lot higher than Kenya from a per capita income standpoint, rolled out electronic invoicing in 2003 and it was not until 2019 that it became mandatory for all.
Whereas Kenya has made electronic invoicing mandatory via Section 23 of the Tax Procedures Act, the implementation can and should still be staggered. This would call for a rethink of the provision of Section 16 of the Income Tax Act with regard to deductible expenses.
Perhaps large corporates who source from businesses which fall within the turnover tax band (annual turnover between Sh1 million and Sh25 million) should have a longer runway before this applies to them than those large corporates who source from peer large corporates.
Second, there is a case for a dedicated focus on sectors that directly interface with final consumers and designing a mechanism that makes compliance with electronic invoicing easier. Think about your estate kiosk or mini-market, for instance. One of the main headaches around widening the tax base in frontier economies such as Kenya is that the vast majority of micro and small businesses go unaudited because the cost of doing so is not justified by the relatively small tax yield.
A targeted approach via electronic invoices could help address this and this is where incentives/rewards for compliance have stood out as a viable enforcement route.
Rwanda has introduced a reward of up to 10 percent of the VAT amount captured in the receipt in instances where the final consumer insists on being issued with an electronically generated invoice. It has also provided that if a consumer is denied an electronic invoice and they inform the tax authority, they are eligible for a reward to the tune of 50 percent of the penalties paid on that invoice.
Third, the experience in Mexico and Argentina tells us that rolling out of electronic invoices does not entirely stave off the risk of fraudulent or counterfeit invoices.
Necessary safeguards
The desire to lessen one’s tax liability will almost always create a perverse incentive for some taxpayers to scheme ways of beating the system through fraudulent electronic invoices. So, rolling out electronic invoices without necessary safeguards against fraud could be an exercise in futility. In Argentina, the tax authority has an elaborate risk profiling and susceptibility to fraudulent invoices assessment against which businesses are subjected.
Finally, electronic invoicing is the way of the future for economies such as Kenya grappling with vast informal segments.
For the taxpayer, it is designed to ease compliance. For the tax authority, it is designed to address compliance gaps, slash the taxpayer-borne burden of costly audits and provide more data to help shape tax policy optimally.
