Taxation of digital services

With the digital transformation of many businesses across the globe, the taxation system keeps transforming too in different countries. However, some changes are hard to implement. In this case, taxing the digital economy has been quite a challenge for over a decade.

The challenge of taxation of the digital economy was established as the main area that needed focus by the OECD and the G20. For instance, developed countries have it easier at establishing frameworks to tax digital economy. However, these frameworks may not necessary be suitable for a developing country to apply in matters taxing the digital economy.

This gave birth to the Base Erosion and Profit Shifting project which led to the BEPS Action 1 report that highlighted the importance of establishing an international framework for taxation of digital economy

In Kenya, taxation of the supplies made through a digital marketplace was introduced through the Finance Act of 2019. Following this, the Cabinet Secretary of the National Treasury and Planning, H.E (Amb.) Ukur Yatani, issued the VAT (Digital Marketplace Supply) Regulations, 2020 which are aimed at streamlining the taxation of these digital services.

These regulations cover the scope of taxable supplies, registration requirements, simplified registration for non-residents, rules on place and time of supplies, invoice and record-keeping requirements among others.

Scope of Taxable Digital Supplies

These regulations provide that taxable supplies made through a digital marketplace shall include electronic services as defined under the VAT Act and;
  1. Downloadable digital content including downloading of mobile applications, e-books and movies;
  2. Subscriptions-based media including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming;
  3. Software programs including downloading of software, drivers, website filters and firewalls; 
  4. Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
  5. Supply of music, films and games;
  6. Supply of search-engine and automated helpdesk services including supply of customized search-engine services;
  7. Tickets bought for live events, theaters, restaurants etc. purchased through the internet; 
  8. Supply of distance teaching via pre-recorded medium or e-learning including supply of online courses and training;
  9. Supply of digital content for listening, viewing or playing on any audio, visual or digital media;
  10. Supply of services on online marketplaces that links the supplier to the recipient, including transport hailing platforms;
  11. Any other digital marketplace supply as may be determined by the Commissioner

VAT Registration

The Regulations require that persons supplying taxable services through a digital marketplace to register for VAT in Kenya where;
  1. The digital marketplace supplies are supplied by a person from a place of export country to a recipient in Kenya in a Business to Consumer transaction;
  2. The person is conducting business in Kenya as provided under Section 8 (2) of the VAT Act, and any other of the following circumstances are present;
  1. The recipient of the supply is in Kenya; or
  2. The payment made to the supplier in the export country, for the supply of digital marketplace supplies, originates from a bank registered or authorized in Kenya, under the Banking Act, Cap 488; or
  3. The recipient of that digital marketplace supply has business, residential or postal address in Kenya.
A non-resident person who makes B2C supply of services to a recipient who is in Kenya shall be required to register for VAT through a simplified Vat registration framework as provided under these regulations shall declare and pay VAT at the rate of 14%.
A non-resident person who makes b2C digital marketplace supplies to recipients in Kenya, but not able to register under the Simplified VAT registration framework, is required to appoint a tax representative under Section 15A of the Tax procedures Act to account for the VAT on their supplies.

Simplified Tax Regime

Under these regulations, A non-resident digital market supplier shall be required to register under the Simplified VAT registration framework.

Applications for registration under the Simplified VAT registration framework shall be done through an online registration form prescribed by the Commissioner.

Applicants will be required to submit to the Commissioner through electronic means any documents necessary to substantiate the information provided in the application.

Upon registration, the applicant shall be issued with a PIN for the purposes of filing and payment of VAT accrued on digital marketplace supplies.

If the non-residents/ applicants cease to make taxable supplies, they shall apply for deregistration to the Commissioner as specified under Section 36 of the Vat Act.

The timelines for application to the Commissioner for registration by the non-resident digital marketplace suppliers will be within thirty days from the publication of these regulations.

Determining place of Supply

Under the regulations, a digital marketplace supply is deemed to have been made in Kenya where;
  1. The recipient of the supply is in Kenya.
  2. The payment proxy including credit card information and bank account details of the recipient of the digital supplies is in Kenya; or
  3. The residence proxy including; the billing or home address or access proxy including internet proxy address, mobile country code or SIM card of the recipient is in Kenya.

Time of Supply

The time of digital marketplace supply shall be the earlier of the date on which the 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.

Where an intermediary in Kenya makes a digital marketplace supply on behalf of a person, the intermediary shall be required to charge and account for the VAT on such supplies, regardless of whether they are registered for VAT or not.

Tax on a digital market place supply made by a non-resident person shall be the liability of the non-resident supplier or their tax representatives.

A registered person shall submit a return in the prescribed form and remit the tax due monthly to the Commissioner on or before the 20th day of the following month.

Tax Invoice

A non-resident digital marketplace supplier to consumer (B2C supply) shall be exempted from the requirements of an electronic tax invoice. However, the supplier shall be required to issue an invoice or receipt showing the value of the supply and the tax deducted.

Input Tax

Under the Simplified VAT registration framework, deduction of input tax will not be allowed. This cost may end up being transferred to the final consumer.

Amendment of Returns

Persons registered under the Simplified VAT registration framework who will make an over-declaration or an under-declaration will be allowed to amend the returns. However, where this amendment results in an overpayment, the supplier shall be allowed to offset this against VAT payable in the subsequent tax periods.

Record Keeping

A digital marketplace supplier shall 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 for every tax period.

In addition to the penalties prescribed under the Vat Act, any person who fails to comply with the provisions of these regulations shall be liable to restriction of access to the digital marketplace in Kenya

Penalties and offences

Our Perspective

The VAT regulations have been hosted on the Kenya Revenue Authority website. The Kenya Revenue Authority invited the public for their comments and suggestions in writing not later than 15th: June, 2020.
We had our own internal consultations and made our submissions to the Kenya Revenue Authority accordingly. For instance, some of the issues identified include;
  1. The introduction of the Simplified Vat registration with regulations which did not specify the threshold for registration under the Simplified VAT registration. Currently, the threshold for registration of VAT obligation is 5 Million. We hope that an appropriate threshold will be arrived at before the final gazette of these regulations.
  2. The Tax Procedures Act directs non-resident persons who do not have a fixed place of business in Kenya to appoint a tax representative in Kenya in writing to the commissioner. However, these regulations imply that the appointment of a tax representative is a choice and not mandatory. A proper reconciliation of these legislations should be done before final gazette of these regulations.
  3. These regulations do subject every non-resident digital marketplace supplier to VAT. This is bound to lower investment in the country for different suppliers. It will be prudent if an effective way is sought out to selectively tax the suppliers who do not contribute in anyway to the country’s revenue net and as well as encourage business supplies into the country.
We anticipate that the final regulations regarding the taxation of the digital economy will be released on the gazette notice by January, 2021. We anticipate that by then, the government will have finalized by putting the necessary measures in place to account for Digital Service Tax which was also introduced by the Finance Bill, 2020.
Ronalds LLP for Audit Tax Advisory

Chogo Erastors

Tax Expert -Ronalds LLP

This information is intended for general knowledge and does not provide any professional guidance nor constitute my advice for implementation. Ronalds LLP shall not be liable to any loss which may arise from the use of this document.

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