The complexity of collecting taxes from digital firms

Increasing smartphone penetration in Kenya has sparked a silent but profound digital revolution that many people can see but whose massive disruption they can hardly fathom.

Kenya has curved its space at the apex of technological advancement in Africa and technological innovations are slowly but steadily destroying the conventional way of doing business.

In fact, technology has been at the centre of vicious trade wars right here in Kenya, which are but a tip of the iceberg. From the street battles pitting conventional taxi operators against digital taxi hailing service Uber to the legal battle over online land transactions, technology is making several traditional businesses uneasy.

Technologically, this revolution is being propelled by among other  factors the landing of fibre optic cables that have seen Kenya’s internet speeds soar to a high of 13.7Mbps, the highest is Africa according to Akamai’s state of internet report of last year.

Smartphone penetration has also continued to grow rapidly with Jumia Business Intelligence putting it at 60 per cent of the population.

Besides, mobile payment platforms continue to be developed and are slowly becoming the number one choice for payments in Kenya making a perfect recipe for growth in digital transactions.

We have witnessed a massive interest in e-commerce, especially from start-ups. While most of the e-commerce was previously dominated by big US tech companies, Kenyan start-ups have got onto the train.

Almost every startup in Kenya has an internet-based business model seeking to eliminate the need for a physical business location.

While this is a welcome move, it poses great challenges to revenue authorities in Africa and indeed the rest of the world.

The challenge is how to target these businesses in revenue collection/administration. We have already seen the Kenya Revenue Authority’s action aimed at bringing big US tech companies such as Google, Facebook and Amazon to the fold. Most companies are using Google, Facebook and other social sites as marketing platforms and paying huge sums for such services.

This has turned out to be a huge revenue leak for the government given that this income has been generated in Kenya and are hence subject to taxation in Kenya. 

While tax may be accounted for on major transactions, the majority of such transactions are not brought to tax. 

The major challenge is that such organisations operate in many countries and hence are able to take advantage of scale and report their incomes in jurisdictions that are tax-favourable. This is perfectly legal and hence the authorities have to think harder on how to legitimately bring such incomes to tax.

The complexity arises from the fact that transactions over the internet are intricate and require experts to design tamper-proof regulations that bring such income to taxation despite their borderless nature.

The underlying fact is that digital transactions do not require physical presence for business to be conducted. In a bid to bring such incomes to tax, Kenyan tax laws require a non-resident company that derives income from Kenya through creating a permanent establishment by virtue of its operations to account for tax in Kenya.

These regulations are not adequate because for many firms, most transactions are done online and hence have no physical presence. Further it is difficult to bring these digital transactions to tax because there is a disconnect between where value is created and where it is consumed.
Jurisdictions where the value is created would demand a share of the taxes just as countries where the value is consumed.

One of the traditional ways KRA uses to collect taxes from non-residents is to require residents paying for services to withhold taxes and remit them to KRA.

While this may work for corporate bodies registered as businesses, individual consumers do not have the means nor motivation to withhold such taxes -- and they form the bulk of customers.

One other suggested way has been to require the non-resident firms to appoint representatives in the country, who will account for the taxes on their behalf and will be held liable for any tax liabilities.

Tax authorities should bear in mind that taxpayers and potential tax payers are willing to gladly declare and pay tax as long as the tax due is definite and clear and the process simplest to the core.

This has been well demonstrated by the huge increase in the filing of returns by individuals since the introduction of the easy to use iTax system.

The manual system was burdensome such that the mere thought of lining up in winding queues at Times Tower made a tax payer prefer paying the Sh1,000 fine  (if caught) or whenever it was absolutely unavoidable.