At the KRA first University Tax Symposium 2019 on October 4, brilliant minds converged to discuss viable ways of taxing the digital economy, a discussion that has thrived across experts globally.
Scholars and students from universities countrywide as well as tax experts from varied tax fields appreciated the efforts by KRA to automate processes. The group was excited about KRA’s intelligence-driven compliance methods such as the use of data to drive compliance.
Nonetheless, taxation of the digital economy remained the puzzle in the room that needed unravelling. KRA is focused on taxing the digital economy, given that the world has gone digital; this is a noble move meant to bring more taxes into the tax net.
Going digital could mean digitisation, which is changing from an analogue process to a digital one. It could also mean digitalisation—adoption of modern-day technology to change a business model. With these definitions in mind, we have an understanding that the digital economy is where the money is, since the world is either digitised or digitalised.
On the positive side we see digital technology as an enabler. With technology, it has become easier for taxpayers to file tax returns, tax information is much more accessible, and tax gatherers have better surveillance tools.
The ugly side is the disruptive nature of technology, which is every tax agent’s nightmare. Digital economy is the fastest-growing sector, with technology based companies commanding 56 per cent of the world’s market capitalisation in 2018 from a 16 per cent share in 2009 according to UCTADs digital economy report 2019. This is evidenced by the number of dollar billionaires in the Forbes list, the Top 10 is dominated by the Tech Gurus.
Most of these fast-growing Fortune 500 companies with their celebrity founders have literally taken governments on a chase for their money. Google, for instance, virtually paid no taxes in the UK in 2018 with more than $6.5 billion (Sh674.5 billion) worth of transactions. Facebook, in the same year, paid £15.8 million (Sh2.1 billion) in tax in the UK despite collecting a record £1.3 billion (Sh169.8 billion) in British sales. Between 2008 and 2015, Apple earned $305 billion (Sh39.8 trillion) before taxes and paid a foreign tax rate of only 5.8 per cent.
There are two guiding concepts from the Income Tax Act CAP 470 laws of Kenya on taxing income. One is in Section 3 (2) which states income is taxable in Kenya if it is accrued in or derived in Kenya. The second aspect is permanent establishment, which implies physical presence. Tax laws in Kenya and in many other countries create the distinction between doing business in a country and doing business with a country.
To explain this further, a Japanese firm for example with a branch in Kenya selling to Kenyans through that branch is doing business in Kenya so the income is derived in Kenya therefore taxable in Kenya. That would be different if the goods are bought by Kenyans from Japan, a case of doing business with Kenya which has no income tax implications.
Considering this example, think of a digital service like advertising made available in Kenya by a foreign company that has its presence in the clouds. Where is that business carried on? Kenyans did not go to another country to buy it; it was brought to Kenya through technology.
France has enacted a three per cent digital tax especially targeted at Google and Facebook on sales generated on such media. Uganda has a tax on social media meant to discourage idle talk. India in 2018 enacted law to include significant economic presence, expanding the definition of permanent establishment to include virtual presence. Kenya should note that revenue or profits generated by the digital economy do not accumulate with an agent or at some place to be repatriated later. The nature of digital transactions is business to customer (B2C), no agent, no government.
VAT Act Sec 8 (3) brings to tax electronic services for example on delivery of software, artistic work, games, self-education software, access to databases and other services of digital nature. That gives the revenue authority powers to charge VAT, but that would be possible if they can trace the transaction.
The yet to be enacted 2019-20 Finance Bill inserts the words digital marketplace in Sec 3(2) d of the Income Tax Act. This paragraph is intended to bring to tax e-commerce transactions and mobile apps.
The National Treasury and KRA continue to monitor the international conversation on taxation of the digital economy. Engagements with various stakeholders have so far been held to strengthen transactions to the taxman’s radar. The digital taxation concept is built on two premises: one, digital transactions are cashless. That is, they are settled in form of mobile money, credit cards, money transfer services and bank wires. The second premise is that a tax can be imposed on financial transactions. Currently, there is a 20% excise duty on all financial transactions.
The proposal is what if there was a very nominal tax on transfer of funds from Kenya and into Kenya. There is a special charge in most of the credit cards on transactions cutting across nations. The charge is commonly referred to as foreign transaction charge. Same charge applies on bank wire transfers for transactions across nations. This charge is different from local charges. So, on this foreign transactions charge, impose some nominal tax.
Deputy director, KCA University