The Finance Act was published in the Kenya Gazette on 7th November 2019, bringing with it a raft of changes in other statutes such at the Income Tax Act, Value Added Tax Act, Excise Duty Act, Miscellaneous Fee and Levies Act, Tax Procedures Act, among others. With effect from 7 November 2019, goods and services supplied in the digital marketplace will now be subject to income and VAT tax. Section 4 of the Finance Act amends the Income Tax Act to include ‘income accruing through a digital marketplace’ as taxable income. Likewise, section 18 of the Act expands the VAT Act to be ‘applicable to supplies made through a digital marketplace’.
Draft regulations have since been published by the CS for National Treasury and Planning-Ukur Yattani- called the Value Added Tax (Digital Marketplace Supply) Regulations 2020 to provide for implementation of the afore-mentioned amendments providing for the taxation of digital marketplace supplies. These supplies are defined in the Regulations as any supply of a service made over a platform that enables the direct interaction between buyers and sellers of services through electronic means.
These supplies are further enumerated in the Regulations as:
(a) Downloadable digital content including downloading of mobile applications, e-books and movies;
(b)Subscription-based media including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming;
(c) Software programs including downloading of software, drivers, website filters and firewalls;
(d)Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
(e) Supply of music, films and games;
(f) Supply of search-engine and automated helpdesk services including supply of customized search-engine services;
(g) Tickets bought for live events, theaters, restaurants etc. purchased through the internet;
(h)Supply of distance teaching via pre-recorded medium or e-learning including supply of online courses and training;
(i) Supply of digital content for listening, viewing or playing on any audio, visual or digital media;
(j) Supply of services on online marketplaces that links the supplier to the recipient, including transport hailing platforms;
(k) Any other digital marketplace supply as may be determined by the Commissioner.
Digital businesses targeted in these new regulations include subscription-based media outlets like news magazines, television shows, music and podcasts, sale of electronic event tickets, software programs, web hosting services, transport hailing platforms among others. It will cost consumers more to stream movies from Netflix, buy goods from Glovo or Jumia, host your website or ride an Uber if these new rules are implemented.
Therefore, after the regulations are finalized, any person providing products and services through the digital marketplace shall be required to register for VAT and file VAT returns every 20th of the month else face penalties for not filing the returns. Further, non-resident suppliers that are required to register under the simplified VAT registration framework will be required to apply to the Commissioner for registration within thirty days from the publication of the regulations. Non-resident suppliers that are unable to register may appoint a tax representative to account for VAT on their supplies.
These developments in law indicate that the Government is targeting digital businesses in the wake of growth in the financial services sector through increased use of mobile money services especially since the onsent of the first reported case of Covid-19 in the country and the subsequent measures taken by the Government to mitigate its spread. It is no secret that Kenya Revenue Authority has been keen to increase the tax bracket to meet it’s targets (which it seems not to have met for several years) and help in the reduction of the country’s budget deficit.
Individuals who fail to comply with the provisions of these Regulations shall, in addition to the penalties prescribed under the VAT Act, be liable to a restriction of access to the digital marketplace in Kenya until such obligations are fulfilled. Besides that, the government also wants digital suppliers 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. The repurcussion for non-compliance as well the requirement for record-keeeping of all supplies will definitely raise some eye-brows from stakeholders in the field.
Kenya is now following in the footsteps of other countries that have introduced or proposed similar legislations such as India and Sout Africa. The challenge with enactment and implementation of such legislation is that of failure by multinationals operating within the Kenyan online marketplace to pay income taxes or corporate taxes, especially in developing countries despite receiving significant revenues from these markets. In principle, every country has the right to tax foreign corporations for benefits they accrue within its jurisdiction. However, Kenya should be aware that this has the potential of being murky waters if not treated carefully, with the prime example of the repurcussions that India faced from the US with the introduction of its Google tax.