Trading across borders is the norm in the world today. Technology has made it possible for companies to source and operate from anywhere in the world thereby increasing access to world markets.  Consumers can order goods or services from anywhere in the world at a click of a button leading to an exponential growth of the e-commerce space. People can attend a conferences or even offer video and audio-based services across the globe from the comfort of their homes. The number of interactions and transactions across countries have risen tremendously with the value of global cross-border payments estimated to have increased from 21 trillion U.S. dollars in 2016 to 26 trillion U.S. dollars in 2020 (Statista[1]). In Kenya e-commerce (both domestic and cross border) is projected to reach 1.5 billion US dollars in 2021 (Statista[2]).

There is a growing interdependence of world economies and integration of cultures and populations. However, as world’s economies and businesses become more integrated, taxes remain jurisdictional. The cross-border transactions have tax implications. Domestic tax laws for each of the countries involved in a transaction apply independently. This may lead to double taxation where the same income is taxed more than once in different countries.

The Income Tax Act (ITA), Chapter 470, Laws of Kenya, governs the taxation of income in Kenya. Income derived or accrued in Kenya, by a resident or a non-resident person, is taxable in Kenya according to section 3 of the ITA. An example would be a subscription paid by a local to a company abroad for access to online content (over-the-top services), or a computer programmer in Kenya offering information technology consultancy services to an offshore company. The gains or profits are earned in Kenya in both cases and are therefore taxable in Kenya.

Taxable income is determined as per the provisions of the ITA and may be limited where there exists a double tax agreement (DTA) between Kenya and the country of a non-resident person. Transactions can be business to business (B2B) or business to consumers (B2C). Section 18 of the ITA outlines how taxable gains or profits of business in relation to certain non-resident persons is determined.

A non-resident person doing any business in Kenya is required to pay taxes in Kenya on the gains or profits from such business. Activities of a non-resident person can form a permanent establishment (PE) whose income is taxable in Kenya. A PE is a fixed place of business and includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, a building site, or a construction or installation project which has existed for six months or dependent agent. Transactions between non-resident person and its PE or related resident person are to be treated as if the parties are independent persons dealing at arm’s length for tax purposes. Interest, royalties or management or professional fees paid by the PE to the non-resident person and foreign exchange loss or gain with respect to net assets or liabilities established between the PE in Kenya and the non-resident person are not deductible in determination of a PE’s taxable income.

Despite the existing taxation frameworks, the growth in e-commerce has not been reflected in the tax revenue performance. This could be a result of a myriad of factors but key among them is the inadequacy of the existing tax systems to capture the peculiarities of e-commerce.

Notably, the nature of e-commerce poses taxation challenges which the conventional tax regimes have not been able to address. Some of the challenges include identification of taxpayers, determination of taxing jurisdiction, access to records and tax collection mechanisms. Countries have come up with innovative ways to deal with the challenges, as the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project continues to work on the two-pillar approach for taxation of the digital economy. Many countries have introduced VAT on electronic services and digital service tax to target e-commerce.

Kenya introduced Value Added Tax (VAT) on digital market supply through the Finance Act 2019. The Value Added Tax (Digital Marketplace Supply) Regulations, 2020, which operationalize the implementation of VAT on digital marketplace, were gazetted on 9 October 2020. VAT is chargeable on services supplied through a digital marketplace by a non-resident person to recipients in Kenya (B2C), and on imported service received by businesses (B2B) in Kenya. The Finance Act 2020 amended the ITA by introducing a digital service tax (DST) on income derived or accrued in Kenya by a person from the provision of services through a digital marketplace, effective from 1^st January 2021. DST is charged on the gross transaction value of the service at the rate of 1.5%. The gross transaction value of the service is the payment received as consideration for the services in the case of provision of digital services; and in the case of use of a digital marketplace, the commission or fee paid to the digital marketplace provider for the use of the platform. DST paid by a resident or non-resident person with a permanent establishment in Kenya, shall be offset against the tax payable by that person for that year of income.

By Anne Maina

KRA International Tax office

[1] Statista. Value of cross-border payments worldwide 2016-2022, by type. Accessed from: https://www.statista.com/statistics/609723/value-of-cross-border-payments-by-type/

[2] Statista. eCommerce Kenya. Accessed from: https://www.statista.com/outlook/243/247/ecommerce/kenya#market-users