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By Steve Umidha
Kenya could be forced to review its intentions to tax Tech companies due to the absence of a well-structured approach towards aggressive tax policies, experts have said.
Treasury secretary Ukur Yatani in the Finance Bill read in June announced that the government will push forward with digital tax plans after it faced pressure over perceived low levels of tax paid by technology companies operating in the country.
The Bill targets technology firms using internet to market and sell products with a tax rate of 1.5 per cent of the value of transactions in a proposed change to the Income Tax law to cut down on revenue leakages.
And now, tax experts have questioned the government’s level of preparedness with the ambitious move that not only threatens the survival of those companies but one that is also expected to attract resistance.
“This is an important debate that has been going on for a very long time now and is being compounded by the absence of a unified approach geared towards aggressive tax plans,” says Thulani Shongwe the head of African Tax Administration Forum (ATAF) who believes more needs to be done with regard to the effective enforcement of such tax rules against companies that do not have a physical presence in countries of operations.
Many African countries including Kenya continue to express concerns over the tax challenges they face as their economies become increasingly digitalized while tax agencies like Kenya Revenue Authority (KRA) designed for brick-and-mortar activities still oblivious to new disruptive business models.
The challenge has become increasingly pressing, as economic changes have eaten away at governments’ tax bases, with more and larger multinational corporations and many are tech businesses – making it hard to identify where their profits are generated.
Digitalization according to Mr. Shongwe, further raises the question of how taxing rights on income generated from cross border transactions should be allocated between jurisdictions.
The allocation of taxing rights between residence and source jurisdictions, for instance, he says, has been an issue of considerable concern for African countries for many years with most of them having their tax bases eroded by Illicit Financial Flows due to multinational enterprises (MNEs) artificially shifting profits to jurisdictions where the profit are subject it little or no tax.
He’s now recommending among other factors a re-look into double taxation rules among different economies if Kenya and other economies are to succeed in their quest to tax the target tech firms.
Taxation of the digital marketplace in the country has proven to be a tough knack to crack, owing to the fact that online businesses do not necessarily have physical addresses or legal structures in the jurisdictions they operate, making it easy to escape the taxman’s trap and counties which issue business permits.
“Political backing and high level ministerial meetings among African leaders would play a critical role is addressing this challenge,” says Mr. Shongwe.
The proposed tax to start levying new tax on digital markets was first mentioned last year, and signed by the president early in November 2019. Through the Finance Act, the new law would broaden the Income Tax Act net to include income accruing through a digital market place.
The law defines the digital marketplace as a platform that enables direct interactions between buyers and sellers of goods and services through electronic means.
Like France and India before it, the move by Kenyan authorities is seen as a well calculated step in trying to get its cut of every digital transaction within its territory.
Kenya has argument that it is only fair to tap into the revenue accrued from the digital economy taking place within their territory, with companies registered elsewhere and operating in its territory earning income from the same but do not pay taxes.