KENYA PROPOSES A FRAMEWORK FOR VAT ON DIGITAL SERVICES
Taxation of the digital economy has in the recent years become the subject of wide policy debate globally. The tax challenges of the digital economy were identified as one of the main areas of focus of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project that led to the BEPS Action 1 Report on the need to establish an international framework for the taxation regime of the digital economy. Recognizing that the unilateral imposition of digital services tax (DST) is detrimental to cross-border trade, member countries of the BEPS inclusive framework have been working towards a globally acceptable method for taxing the digital economy. In addition, for purposes of Value Added Tax (VAT), the OECD members agreed and adopted the International VAT/GST Guidelines, 2017 that set internationally agreed principles and standards of VAT treatment on trade in services and intangibles. Despite these efforts, there is currently no global consensus on a comprehensive regime for the taxation of the digital economy and many countries have resorted to taking unilateral action by imposing a form of digital services tax including VAT/GST on the supply of digital services such as France, Australia, India, South Korea and Japan.
Kenya joined the bandwagon on taking unilateral action on digital services taxes, when it passed the Finance Act, 2019 which amended the Value Added Tax Act No. 35 of 2013 (VAT Act) to tax supplies made through a digital market place. The Act now defines a digital market place to mean a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. Notably, the amendment further required the Cabinet Secretary of the National Treasury and Planning (the CS) to publish regulations providing a mechanism for the implementation of the new VAT charge. The CS has now published the Draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020 (the Draft Regulations) pursuant to the provisions of section 5(8) of the VAT Act to solicit public comments and views. Interestingly, the Kenya Revenue Authority (KRA) recently published a public notice notifying the owners of digital market places (online trading platforms) that they are required to charge and account for the VAT on all sales made on their platform.
We highlight our analysis of the Draft Regulations in this briefing below:
Digital Market Supply
Under the draft regulations, a “digital marketplace supply” is defined as any supply of a service made over a platform that enables the direct interaction between buyers and sellers of services through electronic means and will be deemed to have been made in Kenya if the customer is located in Kenya or pays for the service from Kenya. The time of a digital marketplace supply is proposed to be the earlier of the date on which payment for the supply is received, in whole or in part or the date on which the invoice or receipt for the supply is issued.
Scope of Taxable Digital Services
The Draft Regulations proposes to charge to VAT a wide range of digital services as follows:
- Downloadable digital content including downloading of mobile applications, e-books and movies;
- Subscription-based media including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming;
- Software programs including downloading of software, drivers, website filters and firewalls;
- Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
- Supply of music, films and games;
- Supply of search-engine and automated helpdesk services including supply of customized search-engine services;
- Tickets bought for live events, theaters, restaurants etc. purchased through the internet;
- Supply of distance teaching via pre-recorded medium or e-learning including supply of online courses and training;
- Supply of digital content for listening, viewing or playing on any audio, visual or digital media;
- Supply of services on online marketplaces that links the supplier to the recipient, including transport hailing platforms;
- Any other digital marketplace supply as may be determined by the Commissioner.
VAT Registration for Non-Resident Suppliers
Under the Draft Regulations, suppliers of digital services from an export country (foreign jurisdiction) will be required to register for VAT in Kenya if they make a digital marketplace supply, under a new simplified registration framework. Where the supplier is unable to register for VAT in Kenya, the supplier will be allowed to appoint a tax representative under the provisions of the Tax Procedures Act (TPA). Upon registration, the supplier will be required to file returns, charge, account and remit VAT before the 20th day of the month following the end of the tax period. However, if an intermediary whose place of business is in Kenya makes a digital market supply on behalf of a supplier, the intermediary will be required to charge and account for the VAT on such supplies whether they are registered for VAT or not. Non-resident suppliers who are required to register for VAT will need to register within 30 days from the publication of the regulations after Parliament’s approval. A registered supplier from an export country who ceases to make suppliers in Kenya may apply to the KRA Commissioner for deregistration.
Simplified VAT Registration Framework
Suppliers of digital services from an export country who are required to register for VAT, will be subject to a Simplified VAT Registration Framework. The suppliers will be required to populate an online registration form and submit to KRA through electronic means any documents necessary to substantiate the information provided in the application. Until the regulations are implemented, it is unclear what this documentation will entail but we anticipate it will include identification documents such as the incorporation certificates of the supplier companies. Upon registration, the supplier will be issued with a Personal Identification Number (PIN) for purposes of filing and paying the VAT collected.
Electronic Tax Register (ETR)
For the purpose of a B2C digital marketplace supply, a supplier from an export country shall be exempt from the requirements of an ETR as prescribed under the Act and the relevant Regulations. However, the supplier will be required to issue an invoice or receipt showing the value of the supply and the tax deducted.
Deduction of input tax will not be allowed under the simplified VAT registration framework, although it is unlikely that a foreign entity subject to these regulations would have significant deductible input tax. The services of a tax representative, if appointed, will be used or consumed in Kenya and therefore subject to VAT.
A digital marketplace supplier from an export country will be required to submit to the Commissioner, a record of all the supplies made in Kenya indicating the value of the supplies and VAT deducted every month. Presumably, this will be part of their VAT return.
Offences and Penalties
The Draft Regulations proposes to restrict the access of a supplier who fails to comply with its provisions from the digital market place in Kenya until such time that the suppliers satisfy their obligations under the Draft Regulations.
Putting it into Perspective
The Draft Regulations come hot on the heels of the Treasury’s attempts to widen the tax base and boost tax collections to bridge the current fiscal deficit. Whereas the VAT charge on digital services tax was enacted into law in 2019, the timing of the Draft Regulations is an indicator of the urgent need to boost collections. However, as currently drafted, the Draft Regulations do no comprehensively deal effectively with what is a complex area of taxation. Subjecting every supplier of digital market places from an export country to the VAT regime regardless of their turnovers hinders the ease of entry and doing business in the Kenyan market. Considering that Kenya has been positioning itself as the preferred base for technology startups in Africa, KRA should consider an appropriate threshold before registration is required. Notably, countries that have enacted a digital services VAT/GST regime such as Singapore, only subject providers who meet a particular threshold to the regime. The Draft Regulations do not link registration to the VAT registration threshold of KES 5 million clarification should be provided as to whether suppliers of services in a digital market place will be required to exceed the VAT registration threshold in order to register for VAT in Kenya.
The registration requirement is also unclear given the Tax Procedures Act (TPA) which states that where a non-resident person with no fixed place of business in Kenya is required to register under a tax law, the non- resident person shall appoint a tax representative in Kenya in writing. The provision under the TPA is drafted to be mandatory and thus runs against the Regulations which provide that the appointment of a tax representative is an option to registration and not mandatory.
Considering the commencement date for the proposed Digital Services Tax (DST) under the Finance Bill, 2020 is January 2021 perhaps the 30-day registration period on publication of the final regulations should be aligned with the proposed DST and commence in January 2021.
The Draft Regulations provide that where a supplier overpays VAT, the excess can only be utilized as an offset against future VAT liabilities. However, the regulations fail to clarify whether a supplier in an overpayment position on deregistration will be entitled to a VAT refund.
The requirement to file, remit VAT and provide KRA with a monthly record of all supplies made in Kenya indicating the value of the supplies and VAT deducted every month, may pose a significant compliance challenge to many Multinational Enterprises. Perhaps the CS should consider adopting a quarterly payment and reporting system, to ease the compliance burden. This has been adopted by countries such as Malaysia to ease compliance.
We note that the provisions of the VAT Act will apply to registered tax payers in Kenya in relation to digital market supplies in the normal manner. Therefore, suppliers in Kenya with annual turnovers of KES 5m and above should register, charge and remit VAT. In the case of a business-to-business transaction involving the importation of digital services, the registered supplier will be subject to the reverse VAT mechanism and should account for the VAT charge.
Kenya launched and adopted the Digital Economy Blue Print in 2019 (the Blue Print) to provide a conceptual framework for Kenya’s transformation towards a successful and sustainable digital economy. Notably, the Blue Print addresses the quest on digital tax policy and cautions that care must be taken to avoid unintended consequences arising from tax policies on entrepreneurs and small businesses. It is against this backdrop that the CS and KRA should address the issues highlighted above to ensure that the Draft Regulations are not a burden but achieve balance between tax collection and creating a conducive business environment for providers of digital services. Finally, considering the United States’ opposition to the imposition of digital services taxes across the world and the ongoing negotiations on the US-Kenya trade agreement, we anticipate opposition from the United States to the implementation of the Tax.
For further assistance, please contact your relationship partner at Bowmans Kenya.