The Digitisation Of The Economy Will Cost You A Pretty Penny

The budget could have knocked over the tech industry with a feather yesterday when it announced the government’s grand plans to tax the digital economy. Coming in at 1.15 per cent of gross transaction value (e-commerce). This translates into online businesses paying tax for podcasts, apps, stash of magazines, right down to that lovely selection of e-books you have been enjoying downloading and padding your e-library with. This, of course, we have been promised, will not be done within a state of upheaval. The government pledges to construct “a framework.” Built around all of us, encompassing our habits and behaviours, seeing how we are all such digitised beings.

The beauty of the taxation is it acknowledges this is an industry that exists. Not as part of an array of MSMEs as is the case with the apparel industry on my former beat, where there is no financial recognition of the contribution thousands of creatives wake up to work at every day. It is deemed so insignificant the government has never particularly attempted to come at it tongs ablaze. Instead, that honour goes to the textiles industry, drawing the attention of the ministry of industrialisation. And when such a situation arises, or rather, in this case, fails to arise, creative endeavours that do not erupt into a GDP contribution means you are a tree that falls in the government forest sight unseen. But I digress.

If you are reading this chances are you are on Twitter and already familiar with the hashtag #TaxMadnessKE, where there is a string of vents by people who have declared the government insane for even attempting to squeeze the life force out of a blossoming industry yet to find its financial footing and framework.

“This translates into online businesses paying tax for podcasts, apps, stash of magazines, right down to that lovely selection of e-books you have been enjoying downloading and padding your e-library with.”

The Draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020 breaks down the list of taxable as follows:

Taxable supplies made through a digital marketplace shall include electronic services under Section 8(3) of the Act and: –
(a) Downloadable digital content including downloading of mobile applications, e-books and movies; Goodbye free apps that cram my phone. I swear I will be more selective.
(b)Subscription-based media including news, magazines, journals, streaming of TV shows and music, podcasts and online gaming; Hello Netflix (users have grown by 700% in the past three years) and Showmaxx. I knew ye while I could still afford ye…
(c) Software programs including downloading of software, drivers, website filters and firewalls; Like downloading Chrome or Opera Mini for your phone.
(d)Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services; Good thing cloud is the future.
(e) Supply of music, films and games; If taxation be food for the soul, play on!
(f) Supply of search-engine and automated helpdesk services including supply of customised search-engine services; Your problems will now come at a cost.
(g) Tickets bought for live events, theatres, restaurants etc. purchased through the internet; we have taken a liking to Ticketsasa, Mookh, Buupaas and their ilk and someone up there has noticed too. 
(h)Supply of distance teaching via pre-recorded medium or e-learning including supply of online courses and training; MOOCs and their darned high drop out rates. Maybe now we will think twice before signing up. That, or we might actually start finishing our hard-earned not-so-free courses…
(i) Supply of digital content for listening, viewing or playing on any audio, visual or digital media; Is my playlist being attacked…?
(j) Supply of services on online marketplaces that links the supplier to the recipient, including transport hailing platforms; After all now we have developed the habit of ordering for essentials online thank you very much Jumia and Glovo.
(k) Any other digital marketplace supply as may be determined by the Commissioner.

“The US and France are at odds over who should be able to tax revenues of global technology giants like Facebook and Google. France has already started taxing them, and the US has threatened steep tariffs in response.”

The last part demands closer attention. While smoke may be coming out of ears, it is also apparent that the taxman is yet to set anything in stone. This callout “To ensure wide consultation and public participation as stipulated in the Constitution of Kenya and the Statutory Instruments Act, 2013, the Kenya Revenue Authority invites sector players, tax professionals and members of the public to submit their comments on the draft regulations.” Comments – these being every opinion trending on Twitter under #TaxMadnessKE – it is said, “should be addressed in writing to the Commissioner-General, Kenya Revenue Authority, PO Box 48240-00100, Nairobi or emailed to stakeholder.engagement@kra.go.ke to be received on or before Monday, the 15th of June 2020 to facilitate the review and finalisation of the Regulations. For further clarification and facilitation, please contact the Contact Centre on Tel: 020 4 999 999, 0711 099 999 or Email callcentre@kra.go.ke.”

It tallies with what Jerome Ochieng’, the PS ICT Ministry stated during a Zoom webinar, The Future of Work Beyond COVID-19 as the budget was being read that “we need to sit down with KRA to resolve this and make sure that we are on the same page.” This, coupled with the notice by KRA, leave room for negotiations.

That is, however, more than can be said for the next step. The one initiated in 2018 and has been gaining momentum since before we were clear on who and what would be taxed, how they would be taxed and yes, even why they would be taxed. By 2019, the Income Tax and VAT Acts was introduced by the Finance Act, 2019. By the 7th of November 2019, it was evident that goods and services in the digital marketplace would be subjected to income and VAT tax. The Kenya Revenue Authority was hellbent on expanding its tax base.

How have other parts of the world handled digital taxation with their export country, in this case, North America? An article aptly titled The World Can’t Agree On How To Tax Big Tech Companies, begins with a sense of foreboding; “The US and France are at odds over who should be able to tax revenues of global technology giants like Facebook and Google. France has already started taxing them, and the US has threatened steep tariffs in response.” It is not a great introduction to what are hopefully soon to be tax laws in the spirit of putting together a much-needed economy stimulus package thanks to COVID-19. Taxing Facebook, Uber, Google, Bolt, listed tech companies not without their fair share of controversy and thrive; who make enough money to power a medium-ish kingdom, appears lucrative and smart. But can a company without a substantial physical presence in one country be pragmatically taxed, or is this simply an idea? To be more specific, if this is a company hosted over the internet in a legal form, can it be taxed? Italy, Turkey and Austria enacted digital service taxes, and naturally went for the kings of tech only to be met with an American firewall. The US will simply not have it.

“THE US IS READY TO GO TO WAR – TRADE WARS THAT IS – WITH ANYONE ATTEMPTING TO TAX SILICON VALLEY.”

In Talks on Taxing Tech Companies, It’s America vs the World, by the New York Times notes that the US is ready to go to war – trade wars that is – with anyone attempting to tax Silicon Valley. “Some 130 countries are engaged in the discussions, through the Organisation for Economic Cooperation and Development, that are trying to set new rules for taxing multinational companies in an increasingly digital economy.” The difficult part is the Trump administration. It states that certain businesses should be able to choose whether to pay taxes or not. At the time, a meeting had been scheduled for Berlin in July 2020. That was before the novel Coronavirus hit. The standoff between France and the US is primarily seen as “a massive trade war.” It will take the universal harmonisation of digital taxes across countries to get this party without borders started.

The beauty of the taxation is it acknowledges this is an industry that actually exists. Not as part of an array of MSMEs as is the case with the apparel industry on my former beat, where the nil by growth does not erupt into GDP contribution. Currently deemed financially insignificant, it takes more than it gives such that the government has not particularly attempted to come at it tongs ablaze. That honour goes to the textile industry. It must be said though, that taxing an elusive industry has its disadvantages. KPMG’s 2020 Finance Bill reiterates this point by declaring “While the tax is a recognition of the growth of the digital market at the expense of brick and mortar establishments, it will be difficult to implement due to the amorphous nature of digital transactions.”