Perspectives on the taxation of the digital economy

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There is an unmistakable focus on the digital economy, both internationally and locally. The discussions have revolved around the disruptive and transformative nature of digitalization of economic activities. Technological transformation exemplified by such pervasive digitalization has the potential to enable societies and countries fast-track their socio-economic development. The digital economy is increasingly becoming ubiquitous in all sectors. It is having a bearing on how business is transacted in sectors as diverse as tourism, betting and gaming, retail, management and engineering consultancy, software development, services, entertainment, education, transport and logistics, and so on. In all these instances, productivity and competitiveness are attributed to the continuous adoption of technological innovations.

Within the Kenyan context, the widespread adoption of mobile money has not only facilitated financial inclusion, but has also made it more convenient and cheaper to transact business within and across borders. The statistics on the impact of mobile money are telling. According to the Central Bank of Kenya (CBK), total money transferred through mobile platforms was Sh 3.64 trillion in 2017, jumping to Sh3.98 Trillion in 2018. Similarly, the Kenya Bureau of Statistics (KNBS) analysis shows that the value of mobile commerce transactions was Sh3.2 Trillion in 2017, increasing to a value estimated at over 6 Trillion in 2018. Given these numbers, it is no wonder then that financial inclusion which was around 27% in 2006 in currently above 82%, thanks to the influence of mobile money.

The foregoing illustrates the potential of the digital economy. A pertinent question then is; what are its unique attributes that may have implications for taxation? First, business models and value creation that rely on digitalized processes vary from the traditional ones. Such business processes do not neatly align with the conventional supply chain processes associated with ordinary ‘brick-and-mortar’ organizations. Second, online transactions are not bound by boundary or geographical restrictions. Value can be created by people and companies on different continents, generating divergent views about what constitutes permanent establishment for tax purposes or whether the discussion should actually be about where profit is generated. Third, products sold through digital platforms may take the form of either physical or intangible products, examples of the latter being e-books, streaming services, and software, among others.

It is these complexities that have made the taxation of the digital economy a topical issue globally, with the Organization for Economic Corporation and Development (OECD) taking the lead in driving the dialogue. At the same time, different countries have pursued varying approaches in their quest for effective taxation of online business activities. Given this scenario, what are the imperatives for effective digital economy taxation?

First, regulatory and policy framework will have to be in place. The recently developed Digital Economy Blueprint signals the country’s policy and strategic direction. Equally, the Kenyan tax laws have provisions that largely cater for all transactions, including those conducted through digital platforms. Where there is need for clarity or new provisions, the Finance Bill 2019 and the new Income Tax Bill currently under development are both incorporating the unique requirements of the digital economic activities.

Second, the successful taxation of the digital economy pre-supposes close collaboration between the public and privates sectors, on the one hand, and cross-boundary collaborations between different tax jurisdictions, on the other. Strategic partnership between the private and public sectors will bring the required synergy, characterized by continuous consultations and consensus. That way, the technological innovations by the private sector and the government’s efforts will mesh into a coherent and complementary framework. In addition to the KRA’s Annual Tax Summit, the recently concluded Fintech Festival offered a platform in terms of institutionalizing public-private dialogue. Internationally, the exchange of information and treaties between countries has the potential to enable the taxation of the digital economy.

Third, the digital economy is best taxed through equally digitalized systems and processes, backed up by solid infrastructure and skilled human capital in the areas of data, IT and software development. It is through the integration of disparate systems with the attendant ability to share information across databases that will facilitate optimal taxation and allow for effective support to taxpayers. To that end, KRA has been implementing modern technology to facilitate tax administration over the years.

Dr. Omar, is the Kenya Revenue Authority Commissioner for Strategy, Innovation and Risk Management

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