Kenya is moving aggressively towards taxing digital businesses. After that ?
The COVID-19 pandemic has accelerated the transition of businesses to solutions based on digital technology. The growing shift to transactions online and on mobile platforms has kept businesses from shutting down entirely. It has also seen a steady increase in business revenues generated by the Internet and mobile platforms.
Naturally, governments concerned with maintaining tax revenues have sought to integrate digital revenues into their tax bases. Governments like Kenya’s have been grappling with ways to tap into the global digital space for some time. Kenya’s digital services market revenue is expected to reach $ 4.4 billion in 2022, up from $ 1.9 billion in 2017.
Digital businesses can avoid taxes when their operations generate income in multiple countries and when no state can claim to have the power to impose it. Businesses are also attracted to countries that have favorable tax laws, allowing them to maximize their profits.
Some states may impose taxes by exercising authority over companies incorporated in their territory. When this is not the case, governments must prove substantial contact between the company and the state.
Kenya is among the small number of African countries that introduced a digital services tax before the pandemic. In 2019, Kenya’s budget report first introduced a digital services tax. These tax rules, however, appeared to have been hastily designed and it was not clear who should bear the burden of the tax.
The revised digital services tax regulations that came into effect in January 2021 are much more detailed on who and what to tax. In the recent budget report from June 2021, Kenya again sought to broaden the scope of the digital services tax. Kenya is also seeking to overcome a major challenge facing governments that have attempted to implement the digital tax. It is about a fair and equitable collection of the tax.
It remains to be seen what the impact will be on the individual users targeted by the new taxes as well as on businesses large and small. In all likelihood, large companies such as Zoom – which has started paying VAT on its services in Kenya – will weather the storm. But taxes on services, for example, could be a heavy burden for struggling start-ups that have moved to the digital space to survive. This could have the effect of strangling the young local digital industry.
Evolution of the digital tax
The first version of Kenya’s digital services tax law defined it as a tax levied on all income generated by a digital market. The digital marketplace has been described as an electronic platform that enables direct interaction between buyers and sellers of goods and services. The law imposed a 1.5% tax on any income generated by the Internet platform.
Significantly, the digital marketplace was limited in this definition to a platform where the electronic sale of goods and services took place. An example would be like the digital marketplace platforms Amazon and Jumia. Transactions were deemed to take place between legal entities (human and fictitious) qualified as buyers and sellers.
Recent revisions to the 2021/2022 budget statement that aimed to broaden the scope of the digital tax. The tax now applies to income from a business conducted over the Internet or an electronic network, including through a digital marketplace.
The definition of the digital market has also been changed to include online platforms that allow users to sell or provide services, goods or other goods to other users.
The law goes further by defining a platform as any electronic application that allows digital service providers to be connected to users of services, either directly or indirectly. This includes a website and a mobile app. These changes widen the tax net to cover a wide range of digital services. This includes transactions that take place over a network, such as data exchange and licensing. They are intermediaries or third parties that help companies exchange electronic data and documents to optimize supply chain communication.
Changes bring clarity
These changes provide clarity and clarify which activity is subject to the tax, where it is carried out and by whom. For example, it removes the limitation that specifically required one to be a buyer or a seller. The tax is now applicable to Internet users or users of electronic networks who successfully sell goods over an Internet or mobile platform or any other form of electronic network.
This extends to any activity carried out on the Internet or on any electronic network. These changes affect not only traditional electronic marketplaces like eBay, but also social media, Facebook, intranets or private business networks on the Internet.
Listed taxable digital services include downloadable digital content, mobile apps, and e-books. Also listed are the best services such as movie streaming, monetized data collected and exchanged, digital market delivery and subscription services. The same goes for electronic data management, including website hosting, electronic booking and ticketing services, and the provision of search engines. Distance education online is also taxed.
The new law concerns anyone who receives income online or over an electronic network. This includes residents and non-residents who derive income from a digital marketplace. In short, this means that any income from the Internet or electronic networks is subject to income tax and VAT.
It also affects foreigners or non-resident persons in connection with the transmission of messages by cable, radio, fiber optic, television broadcast, Very Small Aperture Terminal (VSAT), Internet, satellite or similar method of communication, whether the messages originate from or not from Kenya. or not.
Mercy Muendo, Senior Lecturer, Information Technology and Law, Daystar University