One of the canons of taxation is certainty. Certainty demands clarity and simplicity in tax legislation, administration and procedures. Through certainty, taxpayers are able to pay their rightful taxes, within set procedures and timelines.
In Kenya, the VAT treatment of services, especially those traded across borders remains unclear. Partly, the lack of clarity is occasioned by the lack of proper guidance in the Kenyan VAT law on how internationally traded services should be taxed. This is also created by the varying interpretations taken by taxpayers and the Kenya Revenue Authority (KRA) on the VAT status of services especially traded across borders.
Under the Kenyan VAT law, exported services are those that are provided for use or consumption outside Kenya. Therefore, the key consideration when determining whether services qualify as exported in nature is the place they are used or consumed. However, the law falls short in defining what constitutes use or consumption and how one would determine the place of use or consumption. This legislative vacuum has created uncertainty in the administration and/or interpretation of the VAT law.
The government has previously made attempts to provide guidance on the VAT treatment of services traded across borders. In 2017, the government released the current VAT Regulations.
The basic purpose of these regulations was to provide guidance on the application of certain provisions of the main VAT law, the VAT Act, 2013. The said regulations sought to provide some clarity on the VAT treatment of exported services. While this was a step in the right direction, we note that the guidance provided through the VAT Regulations has only created further confusion.
For instance, Regulation 13 excludes taxable services provided in Kenya but paid for by a person who is not resident in Kenya from the purview of exported services. The regulation further excludes taxable services consumed on the exportation of goods, other than transport services, from the scope of exported services.
The above exclusions clearly negate the provisions of the main VAT law which only require that services be used or consumed outside Kenya for them to qualify as exported. For instance, in this digital age, it is possible for persons in Kenya to remotely provide services to clients abroad. An information technology (IT) expert in Kenya could develop an application or software locally for a non-resident. Similar other examples exist across professions. Lawyers, for example, could provide a legal opinion to non-residents regarding certain legal matters in Kenya. Applying the guidance provided in the VAT regulations would mean that such services cannot be considered as exported.
Therefore, the guidance in the VAT regulations in respect of exported services is not aligned to the provisions of the main VAT law. Arguably therefore, and in line with the canons of interpretation of statute, these exclusions could be considered to be null and void to the extent of their inconsistency.
Due to Kenya’s attractive position as a foreign investment destination, quite a number of multinational entities have been setting shop in the country. Largely, the companies that set up in Kenya are service entities. In the same vein, there are Kenyan entities that have set up offices in various countries within Africa. The management and operation of such entities is mainly run centrally from Kenya. This necessitates cross border trade in services. Inevitably therefore, the VAT treatment of the services provided by such entities will be called to question.
Consider the case of a multinational company that sets up a shared service centre in Kenya. Such office is expected to provide managerial services to related entities located across various countries in Africa. It is not in doubt that the supply of management services falls within the scope of services supplied in Kenya for VAT purposes.
However, whether to subject such services to VAT at the zero rate or at 16 percent is a contentious matter. It is likely that the multinational company would consider its management services as provided for use or consumption outside Kenya (by the related entities). This is of course backed up by sound legal and practical arguments. However, based on the general position that the KRA has taken in the recent past on cross-border services, it is likely that the revenue authority will take a contrary view and seek to subject such services to VAT at 16 per cent.
VAT is a consumption tax collected through a multi-staged process which should be borne by the final consumer. There is a principle in VAT referred to as the neutrality principle. Under the neutrality principle, business decisions should be influenced by economic and not tax considerations. Simply put, VAT should largely not be a cost borne by businesses as this would end up influencing business decisions. It is on this basis that the burden of VAT is pushed to the final consumer through the multi-stage collection process.
The writer is a manager with Deloitte Consulting.