Kenyan VAT on digital services – the impending reality
The Kenya Revenue Authority (“KRA”) has recently released draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020 (“the Regulations”). In our opinion, the drafters have done a good job in putting together the first draft of the long-awaited guidance on the application of VAT on digital or electronic services.
In the recent past, taxation of the digital economy has become topical world over. In Kenya, several changes have been made to our fiscal laws to emphasize the government’s desire to tax this sector. Specifically, the Kenyan VAT legislation has provisions for the taxation of electronic services provided by non-resident suppliers to Kenyan non-registered consumers. Such services include but are not limited to, web hosting, self-education packages, software, access to databases, music, films, etc.
The non-resident suppliers of services are obliged to appoint a tax representative in Kenya to fulfil their VAT obligations, such as collecting and remitting the VAT charged to the revenue authority. However, in as much as the Kenyan law envisages the appointment of tax representatives, the operationalization of this requirement has not been possible owing to administrative challenges. The KRA’s iTax system has not been configured to support such compliance; in essence any non-resident service providers seeking to comply with the VAT legislation have been turned away.
It is perhaps comforting to know that Kenya is not grappling alone with the question of how to tax electronic services. Within the global arena, there have been rapid developments over the last couple of years with regards to these service offerings. Services that have traditionally been offered through other channels, primarily involving face-to-face interactions, are now offered electronically through the internet and more regularly across borders.
With the evolution of electronic services, key challenges for governments looking to tax such services have inter alia included the understanding, defining and tracking of the services. From a VAT perspective, countries have adopted the Organisation for Economic Co-operation and Development (“OECD”) guidelines on aspects such as the definition of the place of use or consumption as well as time of supply, which are not always easy to discern in relation to electronically supplied services.
Back in Kenya, digital taxation once again became a subject of keen interest when the Finance Act, 2019 was enacted in November 2019. The Act amended the VAT legislation to reiterate the fact that supplies made through a “digital marketplace” are subject to VAT. The term “digital marketplace” was defined to be a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. The Act also provided that the Cabinet Secretary responsible for the National Treasury (“CS”), would make regulations to provide the mechanisms for the implementation of these provisions. It is on the back of this provision that the CS has now issued the draft Regulations for public comments.
The Regulations have sought to define services subject to tax as envisaged in the VAT legislation. These have been defined to include electronic services such as downloadable digital content (e.g. mobile applications and e-books), subscription-based media (such as news, magazines, journals, and podcasts), search engine services, online courses and training and the provision of transport hailing platforms. While the Regulations have set out a list of ten (10) categories of electronic services, the Commissioner for KRA has been allowed leeway to determine additional digital supplies that will attract VAT.
According to the Regulations, a supplier of digital services will have to register and account for VAT on its supplies provided that the recipient of the supply is in Kenya, the payment for the supply originates from a Kenyan bank, or the recipient of the supply has a physical or postal address in Kenya. Internet Proxy (“IP”) addresses and mobile country codes will also be considered in determining the place of supply.
The Regulations make it clear that any such services supplied from a non-resident supplier to a registered person – also referred to as ‘Business-to-Business’ (B2B) transactions, will be accounted for through the VAT on imported services mechanism. The scope of the Regulations is therefore restricted to ‘Business-to-Consumer’ (B2C) supplies.
In our view, the Regulations take into account several OECD recommendations and seek to align to international standards. For instance, the Regulations propose a simplified VAT registration framework which includes the application for registration through an online form and exemption from the requirements to issue a tax invoice as envisaged under the VAT laws. Further, the Regulations also reiterate the need for non-resident suppliers to appoint tax representatives to act on their behalf in meeting tax obligations rather requiring the non-resident to directly register for VAT in Kenya. Additionally, the KRA has invited stakeholders to submit their comments on the draft regulations on or before 15 June 2020.
Unfortunately, the draft Regulations have not addressed certain aspects, which in our view should be considered by the CS in the final version. For instance, the Regulations are silent on the issue of registration threshold – we assume this will be aligned to the ordinary threshold of taxable supplies of KES 5 million per annum.
Further, the Regulations do not specify the documents needed for the simplified VAT registration application or the type of records to be kept by the registered suppliers, only stating that these will be required. Perhaps the CS can consider providing sample VAT registration and monthly return forms, which we hope will be abridged versions of the regular forms. In the absence of clarity on some of the issues highlighted above, it may not be possible for the digital services suppliers to register for VAT within thirty (30) days from the publication of the Regulations as stipulated.
The Regulations also provide that any service supplier registered under the simplified VAT registration regime will not be allowed input tax credits. Whilst it is unlikely the non-resident suppliers will incur significant VAT amounts in Kenya, it is our view the Regulations should allow for the recovery of VAT associated with maintaining the VAT registration in Kenya e.g. professional fees charged by the Tax Representative and other consultants such as accounting firms and lawyers. Additionally, the Regulations should guide on currency conversion as we expect most transactions to be designated in a currency other than Kenya Shillings.
In conclusion, the CS has taken a step in the right direction by seeking to operationalize the long-awaited VAT on electronic services. However, if the Regulations are to achieve the desired revenue collection, then simplicity, which has thus far been lacking, should be at the heart of the compliance system set in place. We urge the CS to actively listen to submissions received from stakeholders, many of whom already operate and account for VAT or its equivalent in other jurisdictions globally. The insights from the stakeholders are in our view invaluable to the CS if he is to achieve a win-win implementation of ‘the Value Added (Digital Marketplace Supply) Regulations, 2020’.