Kenyan President Uhuru Kenyatta has approved the 2020 Finance Bill, proposing amendments to multiple statutes including the Income Tax Act, the Value Added Tax Act of 2013, the Excise Duty Act of 2015 and the Tax Procedures Act of 2015.
The most notable aspect of the approval of this new bill is the foundation of the Digital Services Tax. This new bill will see the introduction of a digital tax at 1.5% the gross value of any online transaction.
The tax may put Nairobi on a collision course with Washington where the protectionist Donald Trump administration has opposed taxing revenue generated by tech giants such as Google, Apple, Facebook and Amazon.
That may feature in ongoing talks between the two countries over a new trade deal ahead of the current pact under Agoa framework that expires in less than five years.
Online transactions tax
What this means is that people whose income is from the “provision of services and products” sourced through the digital marketplace will have to pay the tax. What’s more, the digital service tax will be payable at the time of transfer of payment to service providers.
It is expected that businesses working on the digital marketplace as well as e-commerce companies in Kenya will all be eligible to pay the tax. Further, the law states that in the case of Kenyans or non-residents with permanent establishments in the state, the tax will be available for offset against their income liability for the same year.
According to the act, a “digital marketplace” is defined as “a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means”.
In terms of draft of the bill, the scope of taxable entities includes:
- Mobile applications, e-books, and movies
- E-learning, including the supply of online courses and training
- Supply of digital content for listening, viewing or playing on any audio, visual, or digital media
- Supply of search-engine and automated helpdesk services
- Software, drivers, website filters and firewalls
- Website hosting, online data warehousing, file-sharing and cloud storage services
When the bill was proposed, even loss-making entities were to be tasked to remit tax based on their sales and all companies would also be liable to a minimum gross sales tax of 1%. The new law comes into effect from January 2021.
Online businesses do not necessarily have physical addresses or legal structures in the jurisdictions they operate, making it easy to escape the taxman’s noose as well as counties which issue business permits.
“While the intention of the provision appears to bring into the Kenya tax net non-residents that operate digital marketplaces, the provision is restricted to apps that ‘derive and accrue’ such income from Kenya,” consultants at audit and consultancy PricewaterhouseCoopers (PwC) wrote in a note on the Bill.
The EU Commission proposes to tax the profits of firms via direct tax.
This approach taxes the gross income rather than the net income of the company. Under this option, companies with low-profit margins or losses would be affected if the gross income would be chosen for the tax base. During the G20 Summit last year, taxation of the digital economy including tech giants featured as a top agenda. These firms operate in virtual space rendering it cumbersome to bring them under the local tax radar.
The US has also been against this tax and it is likely that implementation of the tax could prompt a trade war with countries that may view it as targeting their corporates.