Under the VAT Act, service providers who focus on clients outside Kenya have been dealt a big blow by the reclassification of exported services from zero-rated to exempt.
Kenya has realised it can’t be left behind in efforts made by tax jurisdictions in the developed world to tackle frictions and potential double taxation of multinationals operating in sovereign States.
According to the OECD’s International VAT Guidelines, the burden of VAT should not lie on taxable businesses and foreign enterprises should not be disadvantaged or advantaged against domestic ones.
The Finance Act 2021 has brought forth a number of changes focused on the tax policies.
The significant steps made by the Finance Act 2021 in painting the Government’s taxation policy towards multinational enterprises (MNEs) require a mention.
Under the VAT Act, service providers who focus on clients outside Kenya have been dealt a big blow by the reclassification of exported services from zero-rated to exempt. This amendment prevents the service providers from recovering any input taxes incurred when offering exported services, unlike the case of export of commodities.
The amendment also cuts short the celebration and reprieve that taxpayers obtained in two notable rulings recently made by the High Court of Kenya and Tax Appeals Tribunal.
According to the High Court, it does not matter whether a service is performed in Kenya or outside to determine export of a service but rather that the location of service consumption should be outside Kenya.
The same position was adopted by the Tax Appeals Tribunal in its March 2020 ruling on an appeal made by the Coca-Cola Central East and West Africa Limited. Here it was added that the relevant factor in determining an exported service is the location of the consumer and not the place where the service is performed.
Prior to Finance Act 2021, all exported services were zero-rated and Kenyan providers qualified for refund of all input tax attributable to delivery of the service.
According to the OECD’s International VAT Guidelines, the burden of VAT should not lie on taxable businesses and foreign enterprises should not be disadvantaged or advantaged against domestic ones.
Whereas Kenya is not a member of the OECD, it has realised it can’t be left behind in efforts made by tax jurisdictions in the developed world to tackle frictions and potential double taxation of multinationals operating in sovereign States, caused by their incoherent domestic tax rules.
This move exudes a lot of confidence from foreign investors.
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