On December 29, Judy Ochieng was watching Selina, her favourite TV show on GOtv when a message flashed on her screen, followed by a similar one in her phone.
“Dear customer, due to Government of Kenya 14 per cent to 16 per cent Value Added Tax adjustment, please be advised your new GOtv Max subscription will be USD 10.70 per month effective January 1, 2021,” read the message.
At first, Judy thought that Multichoice, which runs GOtv, DSTV and Showmax home entertainment services across Africa, was hiking the subscription fee from USD 9.80 to cover its operational costs in a period where most companies have been ravaged by the Covid-19 pandemic.
“Or it could be the usual price increases by service providers. I could not see a reason to raise the fee with the numerous job losses and business closures in the country,” the Nairobi resident, who sells men’s clothing via WhatsApp says.
Though the communication from her service provider was not clear, she would later learn that the increase was as a result of the new digital service taxes slapped on almost all forms of online businesses and subscription services operated in Kenya.
Introduced through the Finance Act 2020, the first tax, Value Added Tax (VAT) provided under the Digital Marketplace Supply Regulations, 2020 will be paid by a non-resident business from an export country providing a service to a Kenyan consumer.
The second one is the Income Tax provided under the Income Tax (Digital Service Tax) Regulations, 2020 which will be paid by a resident or non-resident person with a permanent resident in Kenya, and it shall also be paid by a non-resident without a permanent resident in Kenya.
“It shall be charged at a rate of 1.5 per cent of the gross transaction value of all digital services provided by the entity.”
Residents shall be able to offset this tax against their final income tax due at the end of a financial year. For non-residents and companies without a permanent establishment in Kenya, this will be a final tax.
According to a tax education document published by the Kenya Revenue Authority (KRA), the tax is due at the time of transfer of payment for services rendered via a digital marketplace.
“For residents and companies with a permanent establishment in Kenya, the Digital Services Tax will be an advance tax that they will offset against the income taxes due in the course of the year,” says KRA, which hopes to collect USD 50 Million in the first six months of implementation.
Both taxes shall apply to downloadable digital content including mobile apps from Playstore or App Store, e-books and films.
Over-the-top (OTT) services for streaming television shows, films, music, podcasts such as Netflix, Amazon Prime, Disney and any form of digital content will be taxable as well as providers of e-commerce services such as Jumia, Kilimall, Jiji Kenya, Naivas, Gadzone, Masoko and Cheki.
All subscription-based media including news, magazines and journals will meet the taxman, even as Nation Africa and Standard, Kenya’s main online news outlets test the idea of a paywall for news consumers this year.
Services regarding electronic data management provision including website hosting, online data warehousing, heavy file-sharing and cloud computing services will be taxed.
With the idea of cashless public transport gaining more attention this year, the government is also targeting booking and electronic ticketing services. Ride hailing services such as Bolt, Little Ride and Uber also fit the tax bracket.
Telemedicine apps such as My Dawa, Sasa Doctor, Livia, M-Tiba, Daktari Popote and Daktari Africa will also encounter a rise in the taxes they already pay.
Thousands of university students who do online research, translation, academic writing, Search Engine Optimization (SEO) and other digital marketing services for a pay, will also be required to pay 1.5 per cent of their transaction value to KRA.
As global education moves towards e-learning, online distance training through pre-recorded media or live online courses and training will also not be spared.
Vloggers and social media influencers making money out of selling their goods or services on social media platforms such as YouTube, Vimeo, Twitter, Facebook, Instagram, Snapchat, TikTok and WhatsApp are also required by law to register for the two taxes through the KRA i-Tax online portal, and remit the money on or before the 20th of every month.
It is an obvious expectation that the cost of these taxes will be pushed to consumers, hiking prices and making them less affordable in a period of contracted business activities and loss of livelihoods.
“I will not spend more than I used to. I will just downgrade my subscription,” said Judy.
Examples of how the taxes shall apply according to Mwenda Tevin, a technology policy researcher at the Kenya ICT Action Network (KICTANet):
Value Added Tax (Digital Marketplace Supply) Regulations, 2020
Online Streaming service company Boma (Business) from America (export country), is in the service of providing television and movie shows to Wanjiku a Kenyan Citizen (Consumer). The service is currently priced at Kenya Shillings 800/=. From 1st January 2021 the Business shall be required to raise the price charged to Wanjiku to accommodate the new VAT on Digital Market Place. The VAT is currently at 14% but may revert to 16% from 1st January 2021. Therefore, Boma shall now charge if we go with 16% VAT around Kenya Shillings 928/=. They shall then remit Kenya shillings 128/= to the Kenya revenue Authority.
Online Streaming service company Boma (Business 1) from America (export country) is in the service of providing television and movie shows to Mali Company a Kenyan Company (Business 2). This is a B2B transaction and thus Mali shall be required to inform Boma that this is a B2B transaction and they should not charge VAT. Mali will instead claim Reverse VAT.
Online E-commerce company (Uzo) from America (Export country) is in the business of allowing buying and selling of goods on its platform. Wanjiku (Consumer) based in Kenya buys a phone from them. They will not charge VAT on the goods. This is because when the phone comes to the country it shall be subjected to all the taxes that are imposed when importing goods to Kenya. Further the Digital VAT only applies to a services. The phone is not a service but a good.
Income Tax (Digital Service Tax) Regulations 2020
Online Streaming service company Boma (Business) from America (export country and non-resident) is in the service of providing television and movie shows to Wanjiku a Kenyan Citizen (Consumer). The service is priced at Kenya Shillings 800/=. From 1st January 2021 the Business shall be required charge a 1.5% Income Tax on the gross transactional value in this case on the Kenya Shillings 800/=. They shall remit this tax to KRA and Boma shall be able to offset it against their annual income tax.
Online Streaming service company Wazi (Business) from Kenya (resident) is in the service of providing local television and movie shows to Wanjiku a Kenyan Citizen (Consumer). The service is priced at Kenya shillings 300/=. From 1st January 2021 the Business shall be required charge a 1.5% Income Tax on the gross transactional value in this case on the Kenya Shillings 300/=. They shall remit this tax to KRA and Wazi shall be able to offset it against their annual income tax.
Online Influencer Maria is in the business of offering marketing and advertising service on hair products through Instagram. For each post she charges Kenya Shillings 10,000/=. If KRA determines that she is providing a marketing service through a digital service platform, she will be required to remit an Income Tax of 1.5% to KRA. This will be for the service she has provided of marketing the hair products on Instagram.
But what is worrying tax policy experts is KRA’s enforcement strategy is its statement that it will be relying on the principle of trust for eligible entities to pay the tax.
“This will make it easy for most digital service providers evade the taxes since the promotion services they offer are not attached to their bank or mobile money accounts,” Mwenda Tevin, who is also a member of the Internet Society told Afcacia.
He adds that Kenyans’ nature of circumventing the law will soon be evident once they realise the regulator is banking on their faith to remit taxes.
A grey area of the new regulations on businesses conducted on WhatsApp exist, where the taxman may find it difficult to get consistencies for goods or services sold and money paid.
“For goods sold on digital or social media platforms, the suppliers are required to declare the income earned under the self-assessment regime provided under the relevant Tax Laws,” KRA says.
Even more obscure is whether and how cryptocurrency traders, whose number has soared during the pandemic period according to Paxful, will pay this tax, given that the online trade happens in a decentralized blockchain network that cannot be interfered with by any government in the world.
“The Act may not affect the digital currency business much because it does not clearly state how crypto-based businesses fall within the bracket. Thriving crypto companies in Kenya are mostly foreign registered, so a general provision may not easily confine them into a tax bracket,” Mr Benjamin Arunda, author of Understanding the Blockchain told this writer.
Further, he noted, the crypto market where virtual currencies such as Bitcoin, Ether and Ripple are gaining global attention, is a totally unregulated sector globally.
“KRA has not figured it out well. This was supposed to target tech behemoths operating in the country but the way it has been enacted means small to medium businesses will also be taxed,” remarks Mr Tevin who is also a lawyer and a member of the Internet Society.
KRA, which is yet to release data on the number of registrations for the tax since January 1, has said it targets 1,000 business entities and persons in its efforts to“streamline revenue collection from e-markets.”
Mr Tevin says that the new regulations are ill-timed, could kill Kenya’s online entrepreneurial culture and may chase away foreign digital business investors.
“This is punitive, over taxation will dim startup culture and existing e-service companies may seek registration in other countries. Taxing the digital economy is a complex policy, Kenya needs more time.”
But KRA Commissioner for Domestic Taxes Ms Risaph Simiyu expounds that the tax establishes a level playing ground for all businesses.
“Income sources that are already subject to withholding taxes are exempt from the digital service tax. This dispels the fear that it might choke local businesses in the digital marketplace and start-ups contemplating an investment in online shopping. It further rules out cases of double taxation for local businesses,” she explains.
According to John Walubengo, tech consultant and lecturer at Multimedia University of Kenya, the digital tax regulations are inevitable, with predictions that the digital marketplace will account for more than 40 per cent of the online retail market in 2021.
“As the economy increasingly moves online, the government must cast its tax collection net there as well. The challenge is how to balance the online tax burden carefully not to strangle the emerging digital economy,” he told Afcacia.
He cautions against aping taxation models in developed economies and introducing them on emerging digital services in the local economy.
“There needs to be some sensitivity around the level of digital maturity to support the tax revenue anticipated from the online economy. The government is overtly aggressive on that perspective,” he stated.
Head of banking and financial services at Ashitiwa Advocates Mr Ribin Ondwari observes that while on one hand it is likely that the tax will stifle innovation, there is a stable ecosystem of online businesses that can be taxed, on the other hand.
“The digital economy has experienced rapid growth as a result of the pandemic. This is driving enough transactions on the online marketplaces to enable digital service providers sustain the additional cost and compliance requirements,” he notes.
KRA is optimistic that the tax will ensure non-resident enterprises, such as Google, Facebook, Twitter, Zoom, Airbnb and LinkedIn, which dominate the digital marketplace plough back the income they generate within Kenya.
“In other words, it provides an avenue for multinationals to contribute to the growth of the country where they derive their income,” says Ms Simiyu.