How the new digital tax will affect business

With the introduction of the Digital Services Tax under the Finance Act 2020, key stakeholders have been eagerly waiting to see how the Kenya Revenue Authority (KRA) would implement it.

There have been various concerns about the exact scope of the transactions that fall under the ambit of new tax and the mechanism through which the KRA would collect and administer it. After extensive stakeholder consultations, forums and public engagements, the Value-Added Tax (Digital Marketplace Supply) Regulations, 2020 governing the Digital Services Tax have been published in the Kenya Gazette.

Some key highlights of the regulations are delved into below.

The regulations have elaborated the array of transactions taking place on digital platforms that attract the tax.

These include downloadable digital content such as e-books, films, mobile applications, subscription-based media such as newspapers, over-the-top content such as streaming services, music, games, e-tickets for concerts and restaurants, transport-hailing services and any other digital market place service providers.

This definition is quite broad and seems to capture service providers that were previously unsure whether Digital Services Tax would apply to their services such as taxi-hailing apps.

In light of Covid-19 pandemic where most business transactions have moved online due to the social distancing rules and movement restrictions, business owners ought to take note if the services they provide through online platforms attract Digital Services Tax.

For purposes of Digital Services Tax, the regulations make a distinction between non-resident business-to-business (B2B) suppliers and business-to-customer(B2C) suppliers.

For the former, there is no requirement to register for VAT in Kenya for purposes of accounting for Digital Services Tax, as there is no interaction with the digital marketplace buyers in Kenya directly.

For such non-resident B2B suppliers, they are not brought under the Kenyan tax framework where they can claim input tax for goods ultimately sold by local sellers on the digital marketplace.

Consequently, a Kenyan importer of goods to be traded on the digital marketplace is required to notify such overseas suppliers that they are not required to account for tax relating to Digital Services Tax.

This distinction between B2B and B2C suppliers is a helpful guide for overseas suppliers who may have been unclear on this aspect.

A supplier shall be required to apply for registration for digital services tax in Kenya if:

The supplier is non-resident and makes a B2C transaction and the consumer is in Kenya and The person is conducting business in Kenya and the place of supply is Kenya and the following further conditions apply — the recipient of the supply is in Kenya, the payment for the services is made to the supplier in the export country from a bank registered under the Banking Act of Kenya or the payment for the service is made to the supplier in the export country is authorised in Kenya.

This proviso attempts to clarify the exact scenario that will necessitate both a non-resident or resident supplier to register for Digital Services Tax in Kenya. Given the potential difficulty of following up with such non-resident suppliers, the commissioner is empowered to appoint a tax representative for such suppliers.

Registration by non-resident suppliers is through a simplified tax regulation framework. Such registered persons shall pay tax at the rate specified in the regulations.

The application to be registered under the simplified registration framework applies to eligible suppliers from export countries and shall take the format prescribed by the commissioner through online registration means.

Information required of the supplier registering include:

Business details including, its trading name, contact person, postal address email address, the websites through which the supplier’s business is conducted.

The supplier’s national tax identification number issued in their jurisdiction. The certificate of registration in the country where it is incorporated and any other information that the commissioner may require.

Upon registration, the supplier shall be issued with a PIN for purposes of filing and paying Digital Services Tax and where the supplier wishes to deregister, they shall make a formal application for deregistration to the commissioner.

The regulations further mandate non-resident persons seeking to register for the simplified framework to appoint a tax representative as guided by the Tax Procedures Act 2015, where they opt not to do so themselves. This provision gives room for non-resident persons to make suitable local arrangements to comply with this tax in Kenya.

A supply shall be considered to have been made in Kenya for purposes of Digital Services Tax where the recipient of the supply is in Kenya by considering whether: The payment proxy, including credit card or debit card information and bank account details of the recipient of the digital supplies, is in Kenya or the residence proxy, including the billing or home address or access proxy including internet address, mobile country code of the SIM card of the recipient is in Kenya.

B2C suppliers from an export country registered under the regulations are not required to issue an electronic tax invoice provided they issue an invoice showing the value of the supply and the tax deducted. This exemption clarifies the position with the recent introduction of electronic tax invoices for suppliers making taxable supplies in Kenya and as it is, will not impose additional compliance costs for such suppliers in respect to electronic tax invoices.

A supplier or the tax representative of the supplier shall pay the tax by submitting a return and remit it to the commissioner in each tax period. A person who fails to comply with the provisions of these regulations shall be liable to the penalties prescribed under the VAT Act or the Tax Procedures Act 2015.

Application for registration

A digital marketplace supplier from an export country who is required to register under these regulations shall apply to the commissioner for registration within six months from the date of publication of the regulations. This gives such suppliers up to March 10, 2021, to put their affairs in order.

The gazettement of the regulations breathes life into digital tax in Kenya, placing it among the countries that are ramping up efforts to collect tax in the e-commerce space even as nations globally watch the developments in this area.