PwC Kenya has given an analysis to the proposed changes in the Financial Bill, 2020. In an attempt to tax income arising from a digital marketplace, the Bill has introduced a 1.5% tax on income from services accrued or derived in Kenya through a digital marketplace. The tax is applicable on the gross transaction value of the service provided and it is due at the time of payment. In addition, the responsibility to account for the tax is on the owner of the digital marketplace or an agent appointed by the Commissioner.
The definition of a digital marketplace under the Income Tax Act is restricted to businesses such as ride hailing and delivery applications that act as intermediaries. While the intention of the provision appears to be to bring into Kenya tax net non residents who operate digital marketplaces, the provision is restricted to apps that ‘derive and accrue’ such income from Kenya. Given that most non residents arguably neither derive nor accrue their income from Kenya, the drafting may potentially result in legal disputes as to its applicability to non-resident digital marketplaces.
The provisions relating to the appointment of the agents appear to be targeted to aggregators who handle cash transactions relating to such digital market places. For persons selling goods through a digital marketplace, it may difficult for such agents to determine the component of the transaction that represents the service fee in contrast to the product cost. It is likely that a blanket approach may be adopted that will result in the taxation of the transactions (and values) that are not subject to the digital services tax.
It is noted that Kenya is part of the OECD Mutual Inclusive Framework that is currently discussing the issue of taxation of digital services business. The introduction in Kenya of the digital services tax appears to have pre-empted the outcome of those discussions. It is also noted that the digital services tax may represent a significant obstacle to the start of any discussions between Kenya and the US in respect of the anticipated Free Tax Agreement.
Finally, it is noted that the Cabinet Secretary has not issued guidelines as required by Finance Bill 2019. As such, it is unclear whether these provisions are effective in the absence of such regulations.
Source – PwC Kenya