High taxes on digital economy will hinder growth, UN warns

Increasing taxes on internet and mobile money services could be counter-productive, the United Nations has warned.

UN’s Conference on Trade and Development (UNCTAD) says in a new report that further raises in tax slapped on internet and mobile money could slow down transactions by online businesses which rely on the services to cut deals.

Kenya is among countries in Africa which have slapped users of internet and mobile money platforms such as M-Pesa with taxes in a bid to spread the tax burden beyond workers and companies.

Other African countries that are levying taxes on internet are Uganda, Tanzania and Zambia.

“In most parts of the world, policy efforts related to taxation in the digital economy have mostly focused on corporate taxation and on major digital platforms. In Africa, however, the main focus has been on taxation of Internet and mobile money users,” UNCTAD writes in Digital Economy report published last week.

“While this kind of taxation may be attractive to governments, it can be counterproductive if it results in a decline in economic activity by reducing the number of active Internet users.”

Kenya in the financial year ended June 2019 raised excise duty on data services from 10 to 15 percent, while tax on fees charged for mobile money transfer services such as M-Pesa increased from 10 to 12 percent.

Tax on fees airtime also increased to 15 percent from 10 percent, while fees charged for money transfer services by banks, money transfer agencies and other financial service providers doubled to 20 percent.

Higher duty on fees for internet, money transfer and airtime generated nearly Sh13.44 billion in fresh revenue in the year ended June 2019, statistics from the Kenya Revenue Authority (KRA) shows, against the Sh20.2 billion the Treasury had targeted.

“Lack of clarity on what amounts to premium-based or related commissions that are exempt from excise duty has led to abuse of the exemption by taxpayers,” the KRA told National Assembly’s committee on Finance and National Planning.

“The Finance Bill 2019 proposes to clarify that premium-based or related commissions that are exempt from excise duty are those specified in the Insurance Act and the regulations thereunder.”

Former Central Bank of Kenya (CBK) governor Njuguna Ndung’u also warned in a policy paper published by Washington-based Brookings Institution that further raises on tax on mobile money services may reverse financial inclusion gains the country has recorded this decade.

“The tax policy and design of taxes on retail electronic transactions as well as bank transactions have the potential to reverse the gains that technology has pushed Kenya to the frontier of electronic payments and financial inclusion and back to cash preference and financial exclusion for low-income earners,” wrote Prof. Ndung’u, now executive director of African Economic Research Consortium.

“Kenya was moving into a cashless economy. This trend is now in danger of reversal.”

In the Finance Bill 2019, set to be debated and passed by lawmakers later this month, the Treasury has clarified that firms making cash from digital marketplaces in Kenya are subject to income and value added taxes just like those in brick-and-motor operations.

The taxman will be targeting revenue generated in Kenya by global internet-based giants such as Facebook, Uber, Google’s YouTube, Amazon and Netflix.

“If you are not a resident but you have an app that’s being used here, your tax representative (a requirement under section 16 of Tax Procedures Act) must pay your VAT and income tax,” KRA’s Deputy Commissioner for corporate policy Maurice Oray said in an interview on August 14.

“Working with the Communications Authority (of Kenya), we should be able to get the data. But we leave in a self-assessment period and expect that if you are generating revenue, you self-declare so that you don’t pay extra penalties.”

UNCTAD, however, warns that existing international corporate tax system, based on physical presence of companies, is lagging behind the digital economy, making it difficult to ring-fence digital revenue.

“Most proposals and efforts put forth so far for the reform of the international tax system in the digitalization context are premised on outdated ideas of businesses,” UNCTAD says.