KRA must bring digital economy into tax net

Kenyans have been eagerly waiting for the budget statement to be unveiled. While there is great potential to see development and further championing of the Big Four agenda by the government which is poised to greatly improve and impact the lives of Kenyans, the elephant in the room is the record high budget figures that come with this opportunity.

The Kenya Revenue Authority (KRA) faces the humongous task of collecting revenue from taxes imposed on the Kenyan citizenry. In the 2018 Economic and Budget Review report, the tax collector failed to meet its targets in at least four tax heads including income tax, Value Added Tax (VAT), excise and import duty streams.

The aforementioned finding saw the tax collector ramp up efforts to tighten the noose in these respective tax heads such as introduction of stiffer penalties and/or interest for non-filers in the area of income tax, the introduction of the VAT Auto Assessment (VAA) system for verification of VAT returns and the move to the iTMS system for customs management.

These efforts are welcome if meaningful development has to be pursued and achieved as the government relies on the support of its citizens. This notwithstanding the other inherent challenges we face in the country.

Come the 2019 Economic and Budget Overview, indeed the revenue collection efforts have seen some improvements in revenue collection compared to a similar reporting the last first quarter of 2018 even though the targets remain a bit out of reach by the tax collector.

All hope is not lost. That is the backdrop of the recent declaration by the tax collection agency of plans to go after online businesses for potentially unpaid taxes, among other measures. This has caught the fancy of most Kenyans given these businesses have enjoyed no form of regulatory patrol from any agency in Kenya so far.

New businesses are fast becoming the target of the revenues collection agency upon the realisation that it’s an undeniable fact that with the advent of the digital age and unicorn business models, there is great potential to cast the tax net wider to meet the ever burgeoning budget ceiling. In Kenya this can be seen and has been felt more with the rapid uptake by Kenyans of online business activities and online shopping malls that are alluring due to the element of convenience and offering a wide variety of selection and almost instant price comparison capability for consumers.

Manufacturers in low production cost jurisdictions for instance can sell directly to a consumer in Kenya without the need for middlemen services making it easy to price the goods competitively and reach markets previously unreachable.

The dilemma of taxing online businesses is nonetheless not a novel issue that only the KRA is having to grapple with. This issue has been a hot topic of discussion by the OECD member states and Base Erosion and Profit Shifting (BEPS) action plans specifically fronted for addressing the tax dilemma under the realm of taxation of digital economies.

There is a split consensus on whether to come up with specific taxes targeting the digital economy or subjecting these businesses to the existing international tax systems. The key challenge is the cross jurisdictional problem faced by countries attempting to implement a form of tax on these businesses. Some common approaches we can observe from around the world can be seen from the following jurisdictions;

The Budget in India in 2018 proposed that ‘Significant Economic Presence’ of a non-resident shall (mandatory term) constitute a business connection in India from April 2019 with as yet unspecified thresholds applying to transaction in respect of any goods, services or property carried out by a non-resident in India including provision of download of data or software in India, or systematic and continuous soliciting of its business activities or engaging in interaction with users in India through digital means.

The approach by India seems to cover a wider aspect of the exact nature of digital economic services including the aspects of intellectual property use that would normally raise a lot of questions in jurisdictions where the issue has not been addressed from a wider intellectual property angle.

There is consensus around the world that tax collection measures will have to evolve in line with dynamic business models which are rife in this digital era.

Such bold stances by other jurisdictions should point any Kenyan to the conclusion that KRA’s proclamation of efforts in coming after online businesses and other businesses that ply on digital technology is a tip of the iceberg and possible guidelines and policy action will potentially follow in the near future.

The writer is a Tax Consultant, PKF Kenya.