At the start on the month of June 2020, Kenyans did two things, witness the maiden reading of the 2020/2021 budget and engage on the proposed Digital Service Tax (DST). As it turned out Kenyans were not the only ones talking about this as a quick search on Twitter revealed that in June 2020 the DST was also being debated in the UK. The issue of taxing the digital economy goes back a few years, with South Africa taking the first step in 2014 and India in 2016. Countries have increasingly been grappling with how to tax the digital economy, a new faucet of taxation that emerged in the 21st Century.
Multinational billion dollar companies such as Google, Amazon, Facebook and Uber, operate in most countries in the world but only pay taxes in their home countries.
The Maxims of taxation hope to ensure that a business pays it's taxes where it operates and generates value. Understandably, there is an apparent unfairness there given the rules and realities of taxation, with the ability of tech companies to operate like the ones listed above. Their billions are courtesy of a global consumer base and yet these companies give very little back to these countries in taxes. This has become a problem which many countries seem to agree on, galvanizing national efforts to get their fair share from these tech companies. This was the instigating factor, so to speak.
However, following suite many smaller companies across the world have risen from following same or similar business models, maximizing profits as far and wide as they can. Others are up and coming companies yet to discover their potential gain, now entering at a time when the digital economy is facing taxation.
One of the challenges has been international consensus on the technicalities that the digital economy presents. This has seen countries approach this taxation differently, one of those differences being the subject matter of the tax. A tax policy is expected to align with the principles of taxation.It needs to be simple, efficient and certain to mention a few. Taxable persons need to know what the tax is based on, how much and when that tax is to be paid and to whom. Some examples are necessary to understand this difference in approach.
India set up an equalization levy to tax non-resident technology companies offering digital advertising opportunities in 2016. Now, they have imposed a tax on over-the-top services like streaming services from 2018. India, one of the most densely populated countries in the world with a population of about 1.8 billion, a developing economy in South Asia, made $73.4 million through the equalization levy a year after its adoption.
South Africa was the second country to adopt a VAT on digital services in 2014. South Africa is one of Africa’s largest economies with a population of about 57 million and a reported collection of $161 million between 2014 and 2017 and $175 million by 2019 in taxes collected from digital services.
Kenya is a developing middle income country with a population of about 51 million and a high consumption of apps and OTT services. This makes it a high value market for advertising and app downloads with much revenue that continues to attract tech companies from across the world.
How has Kenya approached taxing the digital economy?
Through the Finance Bill 2020, a 1.5% tax rate has been proposed on the gross transaction value to be paid by a person, individual or otherwise, who is offering services in the digital marketplace. The digital marketplace is defined under the VAT Act as “a platform which enables direct interaction between buyers and sellers through electronic means.” Kenya’s approach has focused on digital supply of services in business-to-consumer and business-to-business models. The services included are digital content supplies such as ebooks and podcasts, learning material, electronic data management services like cloud storage and search engines, platforms that enable the offering services such as hailing and delivery apps and digitally supplied entertainment like music and movies. The criteria is set such that, if the supply is aimed at a person resident in Kenya, the payment is made through an institution registered in Kenya, or the address entered in the details is in Kenya, this is a digital marketplace supply in Kenya. Since the regulations are enacted under the Value Added Tax regime, non-resident and eligible digital marketplace suppliers are required to use the simplified VAT registration to enable them to remit taxes to KRA. Evidently, Kenya has cast its net wide, hoping to catch both the big and small digital suppliers across the digital consumption landscape.
While there is an acknowledgement of the global conversation and the good intentions behind it, a lot seems to be in issue for Kenyans.
Firstly, the definition is as broad as it is ambiguous; which some have argued will draw many into the tax base. In the case of the Uber driver using the platform to offer a service to a consumer, who does not qualify for VAT, is the tax levied on the amount paid by the user or on the commission paid to Uber for the transaction? This model of commissions to platform providers is common on a variety of platforms, it is unclear who the supplier is, the driver, the platform or both.
Secondly, it is unclear what sections of income are subject to tax. With this comes the possibility of being taxed on the same income multiple times, known as double taxation, if the tax authorities are not clear about this tax alongside other existing tax obligations. In the case of the driver, will he pay both personal income tax and digital supply tax on this income using the taxi hailing app.
Thirdly, the capacity to enforce and administer the DST requires infrastructure and capacity that the tax man in Kenya may not have, making its enforcement impractical and potentially costly. This leaves questions on who will have the burden to invest in enabling the monitoring and enforcement of the DST.
Lastly, because of the interconnected nature of digital platforms, the effect of taxing one person on the value chain is likely to transfer those costs down the chain in different ways. Where the cost of staying is too high and the cost of moving to a different jurisdiction is lower, we could be looking at a migration of digital suppliers. If for instance, a platform provider like Uber decides to halt their operations in Kenya and move elsewhere where the tax obligations are lighter, then that leaves many Kenyans in a difficult place with the services they offer. In addition, as with VAT, the monetary value of this cost may be transferred to the consumer, making a single ride more expensive.
An important point needs to stay at the fore of this conversation on digital services tax.
Majority of Kenyans start businesses to earn money to improve their lives. Many are the sole proprietors of young companies that are already so hard hit by the economic difficulty caused by COVD-19. It will bring many of these companies to their knees, with the odds already so significantly stacked against small businesses in Kenya. The reason behind this, though good and aligned with global direction, should not overpower the needs of Kenyans. The experiences of India and South Africa can serve as an example of keeping the target clear; to collect from those making significant gain and not paying taxes where the value is made. Kenyan companies are already paying Corporate Income Tax regardless of their turnover. Adding the DST puts more weight on their shoulders that was intended for the top grossing multinationals. The process of rolling this out needs to take into serious consideration that our digital economy is young and still needs a nurturing and protective environment to grow and thrive and must not be treated with the realities of more mature digital economies in mind.