What Treasury requires for effective digital taxes

The Kenya Revenue Authority (KRA) has recently released draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020. In our opinion, the drafters have done a good job in putting together the first draft.

In the recent past, taxation of the digital economy has become topical worldwide, several changes have been made to our fiscal laws to emphasise the government’s desire to tax this sector.

Specifically, the Kenyan VAT legislation has provisions for the taxation of electronic services provided by non-resident suppliers to Kenyan non-registered consumers. Such services include web hosting, self-education packages, software, access to databases, music, and films.

The non-resident suppliers are obliged to appoint a tax representative in Kenya to fulfil their VAT obligations, such as collecting and remitting the VAT charged to the revenue authority.

However, the operationalisation of this requirement has not been possible owing to administrative challenges. The KRA’s iTax system has not been configured to support such compliance; in essence, any non-resident service providers seeking to comply with the VAT legislation have been turned away.

But Kenya is not alone in this. Globally, there have been rapid developments over the last couple of years with regard to these service offerings. Many services are now offered electronically through the internet.

With the evolution of electronic services, key challenges in taxing such services have, inter alia, included the understanding, defining and tracking of the services.

From a VAT perspective, countries have adopted the Organisation for Economic Co-operation and Development (OECD) guidelines on aspects such as the definition of the place of use as well as time of supply, which are not always easy to discern in relation to electronically supplied services.

In Kenya, digital taxation once again became a subject of keen interest when the Finance Act, 2019 was enacted in November 2019. The Act amended the VAT legislation to reiterate the fact that supplies made through a digital marketplace are subject to VAT.

The term “digital marketplace” was defined to be a platform that enables the direct interaction between buyers and sellers through electronic means.

The Act also provided that the Cabinet Secretary responsible for the National Treasury would make regulations to provide the mechanisms for the implementation of these provisions. It is on the back of this provision that the CS issued the draft Regulations for public comments.

The Regulations have defined to electronic services to cover downloadable digital content (for example, mobile apps and e-books), subscription-based media, search engine services, online courses and training and the provision of transport hailing platforms. While the Regulations have set out a list of 10 categories of electronic services, the Commissioner for KRA has been allowed leeway to determine additional digital supplies that will attract VAT.

According to the Regulations, a supplier of digital services will have to register and account for VAT on its supplies provided that the recipient of the supply is in Kenya, the payment for the supply originates from a Kenyan bank, or the recipient has a physical or postal address in Kenya. Internet Proxy (“IP”) addresses and mobile country codes will also be considered in determining the place of supply.

The Regulations make it clear that any such services supplied from a non-resident to a registered person — also referred to as Business-to-Business (B2B) transactions — will be accounted for through the VAT on imported services mechanism. The scope of the Regulations is therefore restricted to ‘Business-to-Consumer’ (B2C) supplies.

Unfortunately, they have not addressed certain aspects, which should be considered by the Treasury CS in the final version.

For instance, the Regulations are silent on registration threshold — we assume this will be aligned to the ordinary threshold of taxable supplies of Sh5 million per annum.

Further, the Regulations do not specify the documents needed for the simplified VAT registration application or the type of records to be kept by the registered suppliers.

In the absence of clarity on some of the issues highlighted above, it may not be possible for the digital services suppliers to register for VAT within 30 days from the publication of the Regulations as stipulated.

The Regulations also provide that any electronic service supplier registered under the simplified VAT registration regime will not be allowed input tax credits.

While it is unlikely the non-resident suppliers will incur significant VAT amounts in Kenya, it is our view the Regulations should allow for the recovery of VAT associated with maintaining the VAT registration in Kenya such as professional fees charged by the tax representative and other consultants including accountants and lawyers.

Additionally, the Regulations should guide on currency conversion as we expect most transactions to be designated in a currency other than Kenya Shillings.

If the Regulations are to achieve the desired revenue collection targets, then simplicity should be at the heart of the compliance system.