Kenya on the brink of taxing services sold via digital platforms

Kenya's draft VAT rules follow a familiar approach for online businesses on how to determine the end customer’s location and a simplified registration.

Jun 18, 2020

Kenya is on the cusp of introducing additional VAT (at a rate of 14%) rules taxing B2C services sold by non-resident businesses via digital marketplaces and websites.

The proposed rules are outlined in a draft regulations document – officially titled ‘The Value Added Tax (Digital Marketplace Supply) Regulations, 2020) – recently released by the Kenya Revenue Authority (KRA). The draft regulations follow a now familiar approach for affected online businesses regarding how to determine the end customer’s location and usage of a simplified online registration system. It is not clear yet if a threshold to registration will be included in the final regulations. It is also unclear how affected non-resident digital businesses will perform B2B number validation.

The KRA approach is heavily influenced by the Organisation for Economic Cooperation and Development (OECD) guidelines on the effective and efficient collection of VAT by digital platforms. The KRA draft regulations define potentially affected digital marketplace supplies as: “any supply of a service made over a platform that enables the direct interaction between buyers and sellers of services through electronic means.”

Digital services in the scope of Kenya VAT

The marketplace supplies (which can also be direct website sales) that are covered in Kenya’s draft regulations (note: this list is not exhaustive) include the following digital services:

  • Downloadable digital content including downloading of mobile applications, e-books and movies;
  • Subscription-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 help-desk services including supply of customized search-engine services;
  • Tickets bought for live events, theatres, 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 KRA Commissioner.

Kenya VAT background

A public consultation closed on June 15 for submissions on the proposed new rules. Publication of the final regulations should follow soon after which should also include the proposed implementation date of these new VAT rules in Kenya. Non-resident suppliers of the affected digital services will be required to register with the KRA within 30 days of the publication of the final regulations.

With these dates in mind we are expecting the new rules to come into effect in 2020. A quick VAT rule introduction becomes even more of a possibility given recent tax reductions that Kenya introduced to help with their pandemic response. As a result, there is a pressing need to finance these measures.

The plans in Kenya seem to resemble those already in place in Angola and Cameroon. Kenya, however, is following international trends when it comes to the taxation of foreign-supplied digital services. This is evident with the intended creation of a simplified registration system for affected non-residents. It will be interesting to observe the impact on compliance of the new measures. The proposed new rules are the first explicit mention where a supply through a digital marketplace is subject to VAT.

There has been a recent flurry of movement in Africa, a continent that was one of the first to tax the cross-border supply of digital services when South Africa did so back in June 2014.

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