Taxation of electronic commerce (e-commerce)
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, a series of development has been experienced for the past years.
The taxation of the supplies made through a digital marketplace was introduced through the Finance Act of 2019. The Finance Act 2021 introduced income (digital service) tax that will be charged on income accrued from a business carried out over the internet or an electronic network including through a digital marketplace. The Finance Act 2021 redefined ‘Digital Marketplace’ to mean an online or electronic platform that enables users to sell or provide services, goods or other property to other users.
Additionally, regulations guiding the digital service tax have also been gazetted and circulated to the public. These regulations cover the scope of taxable supplies, registration requirements, and 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;
- Downloadable digital content including downloading of mobile applications, e-books and movies;
- Subscriptions-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
Taxation of the Digital Economy
Just like any other business, income derived from the digital economy si also subject to corporate tax at the rate of 30%. This is to mean that, every taxpayer in the digital space is obliged to file an income tax return and declare the tax payable to KFRA on an annual basis.
The deadline for filing of these income tax returns before 30th of the sixth month after the end every financial year. Failure to comply with the requirements will attract penalties at the rate of 5% for any tax that remains undeclared and an interest charged at 1% on a monthly basis.
Furthermore, the Finance Act 2021 requires non-resident persons dealing in digital economy to register for Digital Service Tax in Kenya. This is applicable at the rate of 1.5% of the gross transaction. This can be achieved through the use of a local representative.
The Finance Act of 2019 introduced VAT on digital supplies. Any transaction occurring over a digital platform will be subject to Vat at the rate of 16%.
VAT is payable on a monthly basis, on 20th of every following month. Failure to do so, a taxpayer will be subjected to penalties at the rate of 5% on the outstanding amount and an interest charged at the rate of 1%.
Kenyan laws require taxpayers whose business income in a year amount Kshs 5 Million and above and deal with taxable supplies to register for VAT obligation.
Kenyan residents who have a PIN will easily register for Vat through the i-tax platform. This however, is an online application that is subject to approval by KRA.
Given a case of the non-residents, the VAT regulations published in 2021 provide for a simplified form of registration that requires these persons supplying taxable services to consumers through a digital marketplace to register for VAT on Kenya.
Other recent tax developments in telecommunication industry
The Finance Act 2021 increased excise tax on telephone and internet data service from 15% to 20% this implies that Kenyans now spend 16% on VAT and 20% on excise tax amounting to a total of 36% of every airtime bought goes to the government.
The Finance Act 2021 took into consideration the plight of many artists by scrapping of the excise tax that was initially placed on ring back tone popularly known as Skiza tune. This implies that Kenyans now enjoy lower rate of ring back tune.
The government of Kenya is deploying a mix of policies and putting structures in place to ensure that there is equity and that the taxpayers in the digital economy contribute in remitting taxes and revenue generation.
We expect that more developments geared towards streamlining the taxation of the digital economy will be published with time while there is streamlining of the already existing provisions.