The move by France and Internet giant Google to reach a Sh114 billion settlement sets a new precedent on how countries can regulate tech multinationals.
The four-year-long tax dispute saw French authorities raid Google’s Paris headquarters in 2016. The regulators claimed the company owed Sh182 billion in taxes on its economic activities in the country.
In the settlement, however, Google agreed to pay a Sh57 billion fine and Sh53 billion in additional taxes to the French government.
This comes at a time when Kenyan lawmakers and regulators are in the initial stages of implementing a new tax code and regulatory framework for tech giants.
Those likely to be affected include Google, Uber, Netflix and Facebook. The debate on taxing tech giants has however elicited mixed reaction across the board.
On one side are lawmakers who insist that tech giants operating in the country should remit a share of profits made from Kenyan users to the country.
In April this year, Nairobi Senator Johnson Sakaja argued that digital players such as Uber do not distribute the profits they earn to tax authorities or drivers.
“According to testimonies – and I have had meetings with these drivers of various hailing cabs, Uber, Taxify, Little Cab – the drivers have to work extremely long hours just to make a basic living, with some taking home less than the average minimum wage after paying their running costs,” Mr Sakaja told parliament.
“The fares being charged by these hailing cabs companies are extremely low and below the minimum rates prescribed by the Automobile Association and the Government, and the commissions taken are too high.”
Sakaja noted: “As soon as a customer pays for an Uber ride, 25 per cent immediately goes to the company in the Netherlands and nothing comes to our country.”
The Nairobi Senator, alongside other lawmakers, rooted for stakeholder consultation with the Ministry of Transport and Infrastructure Development, the Competition Authority of Kenya and the National Treasury to look into a policy that was favourable to all parties involved.
It is on this backdrop that the Kenya Revenue Authority (KRA), hard-pressed to meet revenue targets, proposed in the Finance Bill, 2019 to have the Income Tax and Value Added Tax (VAT) laws amended to tax earnings made from the digital economy.
The taxman fell short of the target last year by Sh100 billion.
KRA this month kicked off the search for a technology service provider that will install a monitoring and payments system to track and audit transactions between both local and international digital merchants and their customers.
The tax collection system entails an integrated payment gateway solution to identify and authorise payments through the settlement of data to and from merchants’ online portals to merchants’ banks.
KRA further wants the system integrated with all internal revenue systems for data sharing purposes and updating of tax-payers’ ledger accounts.
Technology companies have opposed the proposal with Google last month saying a digital tax could raise the cost of products and services in the country.
This, it claimed, amounts to double taxation and could precipitate a price war.
Google further told Parliament that some digital platforms are end-to-end encrypted and thus “enacting tax measures on these platforms would amount to breaking encryption and violating constitutional privacy rights of Internet users”
According to Google, the State needs to clarify the meaning of ‘income’ as to whether it refers to income to or income from or earnings through digital platforms (where there is no value creation besides interaction). Uber similarly urged Parliament to expunge the tax proposal, asking the Government to carry out adequate stakeholder engagement to find a balanced solution.
“Alternatively, they proposed that a simplified flat tax rate, for example, 0.5 per cent, be imposed on the revenues of entities operating in the digital market place sector in replacement of the corporate income tax, VAT and withholding tax provisions in the extant laws to foster compliance,” said the Parliamentary Committee on Finance and National Planning in its report.
E-commerce platform Jumia says it is already tax compliant and did not believe the digital tax would have an effect on its business operations.
The firm said KRA had not yet reached out on the proposal to create a system to integrate its payment collection platforms to the taxman’s auditing and monitoring system.
This indicates that the Government, though enthusiastic about the possibility of a new revenue stream from the lucrative profits earned by tech multinationals, is still fumbling for credible tax policy.
According to digital rights lobby Article 19 and the Kenya ICT Action Network, the State should rethink its definition of the digital market place. This will avoid constricting freedom of expression and the right to information.
In submissions to Parliament, the lobby groups argued that imposition of tax on the digital economy should be postponed until a thorough cost-benefit analysis has been conducted.
This will be in consideration of taking into account the difficulty in determining the economic presence in dynamic digital transactions. Parliament has however rejected proposals to scrap the proposal arguing that “transactions carried over the digital platforms are not different from those carried out through ordinary business activities thus the tax law should not discriminate imposition of tax based on the form the transaction is carried out.”
This puts lawmakers and tech giants on a collision course with one side rooting for compliance with local regulation and the other side protesting double taxation.
Joy Ndubai, a global tax advisor at ActionAid based in Nairobi, argues that the digital economy has sustained the ability of multinationals to operate in markets without regulation.
This, she notes, has enabled firms to access cheap labour, collect user data and profiteer from it.
Ms Ndubai says African revenue authorities and policymakers should evaluate several crucial concepts in determining whether current tax proposals could be appropriate.
This includes the presence of adequate information to benefit from profit allocation under a market jurisdiction framework as well as the presence of adequate capacity in the current systems to foster compliance of new laws.
“Policymakers will need to collaborate to address digital inequality and overall inequality as well as the legal protections required for our jurisdictions to ensure there is no misuse of data,” she explains.
According to 2018 data from the European Commission, global tech giants pay a 9.5 per cent average tax rate compared to 23.2 per cent for traditional firms.
Kenyan Business Feed is the top Kenyan Business Blog. We share news from Kenya and across the region. To contact us with any alert, please email us to firstname.lastname@example.org