Kenya has introduced additional VAT (current rate is 16%) rules taxing B2C sales by non-resident businesses via digital marketplaces and websites. Rules governing these sales were officially gazetted on September 10, 2020, and - by law - had to come into effect within six months, or March 10, 2021. It is important to note that Kenya's standard VAT rate reverted to 16% on January 1, 2021.
As well as the VAT developments, Kenya also introduced a Digital Services Tax (DST) that came into effect on January 1, 2021. Since the DST and VAT introductions, we have become aware of the Kenyan Revenue Authority (KRA) contacting affected digital services businesses to notify them of their tax obligations in Kenya.
Netflix became one of the first non-resident digital businesses to add VAT to the service they supply to customers in Kenya. In a May 2021 online report in The EastAfrican, emails from the U.S.-based tech giant to subscribers in Kenya stated: “Starting May 30, a value-added tax (VAT) will be included in your Netflix price.”
While it is clear affected businesses are beginning to register and comply we also understand that there are significant hurdles particularly in relation to the issuance of B2B invoices. However, the KRA is open to working closely with all affected stakeholders.
Characteristics of the Kenya VAT system
The gazetting of Legal Notice 190 of 2020 followed a prolonged period of preparation by the KRA. This planning included a very useful public consultation process that closed in mid-June 2020. The aim was to ease registration requirements for non-resident digital businesses selling B2C services to customers based in Kenya.
The rules are outlined in a regulations document – officially titled ‘The Value Added Tax (Digital Marketplace Supply) Regulations, 2020) – released by the Kenya Revenue Authority (KRA). The regulations follow a now-familiar approach for affected online businesses regarding how to determine the end customer’s location and usage of a simplified online registration system.
Here are some of the highlights:
- There is no threshold to registration, meaning non-resident digital businesses with B2C sales in Kenya will have compliance obligations from day one of the new rules
- Non-resident digital businesses that register under these new regulations will not have to issue an electronic invoice for the B2C supplies made. They will be required to issue a receipt showing the value of the supply made and the tax applied
- It is still unclear how the affected non-resident digital businesses will perform B2B number validations
The KRA approach has been heavily influenced by the Organisation for Economic Cooperation and Development (OECD) guidelines on the effective and efficient collection of VAT by digital platforms and includes collection of VAT by marketplaces. The recently gazetted legal notice states that a “‘digital marketplace supply’ means the supply of a service made on a digital marketplace”. There is no specific definition of a digital marketplace. However, the draft KRA regulations had a very broad definition. The draft regulations defined potentially affected digital marketplace supplies as: “any supply of a service made over a platform that enables the direct interaction between buyers and sellers of services through electronic means.”
Kenya VAT: digital services in scope
The digital service supplies (these can be sales on a marketplace or direct website sales) covered in Kenya’s regulations include the following digital services (note: this list is not exhaustive):
- Downloadable digital content including downloadable mobile applications, e-books and films
- Subscription-based media including news, magazines and journals
- Over-the-top services including streaming television shows, films, music, podcasts and any form of digital content
- Software programmes including software, drivers, website filters and firewalls;
- Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services
- Music and games
- Search engine and automated helpdesk services including customisable search engine services
- Tickets for live events, theatres or restaurants
- Distance teaching through pre-recorded media or e-learning including online courses and training
- Digital content for listening, viewing or playing on any audio, visual or digital media;
- Services that link the supplier to the recipient including transport hailing services or platforms
- Electronic services under section 8 (3); and
- Any other service provided through a digital marketplace (including direct sales on websites) that is not exempt under the Act.
Kenya VAT background
Kenya is following international trends when it comes to the taxation of foreign-supplied digital services. This trend is evident with the public consultation made in June 2020 and the planned creation of a simplified registration system for affected non-residents. It will be interesting to observe the impact on compliance of such a simplification.
There has been a recent flurry of movement in Africa, a continent that was one of the first to tax the cross-border supply of digital services when South Africa did so back in June 2014.
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