PwC points out ambiguities in digital tax

Tax  and audit consultants  PricewaterhouseCoopers Kenya says there are ambiguities in the newly introduced digital service tax (DST) which could lead to administrative complexities.

This it said would result in unnecessary queries from Kenya Revenue Authority for institutions it applies to.

This comes as the effect of the DST, which came into effect on January 1 2021, starts to be felt by Kenyans who now have to pay more pockets  access online services such as Netflix and Ubereats.

“At first glance, the digital service tax may seem easy to implement. However, an in-depth analysis of the legal provisions as well as the digital service tax regulations reveals some intricacies and potential adverse business impacts,” said  tax experts at PwC.

PwC notes that taxpayers are grappling with the widening of the scope of digital service tax to include all services provided through a digital platform without regard as to whether the digital platform qualifies as a digital marketplace in line with the definition provided in the primary legislation.

“KRA has been issuing DST notifications and demanding DST without fully understanding the business operating models,” says PwC.

The tax man defines a digital marketplace as a platform that enables the direct translation between multiple buyers and sellers of goods and services through electronic means.

“The ability to offset digital service tax against other income taxes such as minimum tax as well as the VAT registration threshold for digital marketplace supplies is also not quite clear,” PwC notes.

Also of concern is the appointment of tax representatives which has not yet been configured on iTax, posing an issue for non-resident entities subject to DST who are now being forced to register in their own capacity attaching a liability to their directors.

The DST being a prerequisite to VAT registration for digital marketplace supplies has also posed a challenge to firms that don't operate on the digital marketplace being required to register for it.

The tax experts added that the DST return segment has been configured on iTax as a payment return and not a monthly return and this is a mismatch between the law and regulations.

According to the Kenya Revenue Authority, digital service providers operating in the digital market place should file a DST return and make payment for the tax due, on or before the 20th day of the following month that the digital service was offered.

“With the anticipated release of the Finance Bill, 2021, it may be worthwhile for the government to have considered the alignment of the digital service tax regulations with the primary legislation towards avoiding ambiguities and achieving its objective of increasing tax collections,” said Titus Mukora, Tax partner at PwC Kenya.

The tax experts have urged tax policymakers to make the necessary amendments to ensure that the digital service tax is easily adopted with minimal adverse impact to businesses, given the challenges currently facing taxpayers.

PwC also notes that the government could draw some lessons from international best practices and incorporate them in the local tax code considering the digital tax is not just unique to Kenya.

To ease the compliance process they recommended charging digital service tax on an annual turnover basis rather than a monthly transaction basis.

PwC adds that to reduce the strain on Kenyan start-ups and financially constrained entities in the digital space, robust to minimum revenue thresholds could be prescribed for purposes of determining applicability of digital service tax.

“The government’s revenue collection agent should ensure that there is enhanced ease in the compliance process. In the meantime, businesses should familiarise themselves with the digital service tax and comply with its provisions to avoid costly penalties due to noncompliance,” said Mukora.