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April 18, 2023
2023-0721

Kenya issues VAT (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023

  • Kenya has updated its value added tax regulations published in 2020 with a 2023 edition.
  • The updated regulations provide new tax filing requirements for the taxation of electronic, internet and electronic marketplace supplies.

Executive summary

The Kenyan Cabinet Secretary for National Treasury and Economic Planning has revoked the Value Added Tax (VAT) (Digital Marketplace Supply) Regulations, 2020 and issued VAT (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023 (the Regulations) with effect from 15 March 2023.

The new VAT Regulations are intended to guide taxpayers on the taxation of electronic, internet and electronic marketplace supplies. They also are intended to bridge knowledge gaps that existed in the repealed regulations.

The repealed regulations provided that only suppliers from export countries dealing in business to consumer (B2C) supplies were required to register for VAT in Kenya. The Finance Act, 2022 exempted digital services from the ambit of reverse VAT (VAT on imported services). The Kenya Revenue Authority (KRA) subsequently issued guidelines indicating that business to business (B2B) supplies were subject to VAT, effective from 1 July 2022. This change was not reflected in the 2020 regulations, however, which created a legal gap.

The Regulations provide guidance on:

  • The scope of taxable supplies
  • Registration requirements
  • Place and time of supply
  • Invoicing requirements
  • Claim of input tax
  • Accounting and payment of tax
  • Applicable penalties

Detailed discussion

The Regulations guide that all taxable electronic, internet and digital marketplace supplies made in Kenya will be subject to VAT at 16%.

The scope of taxable supplies

The scope of electronic, internet and digital marketplace supplies includes:

  1. Downloadable digital content, including downloadable mobile applications, ebooks and films
  2. Subscription-based media including news magazines and journals
  3. Over-the-top services including streaming television shows, films, music, podcasts and any form of digital content
  4. Software programs including software, drivers, website filters and firewalls
  5. Electronic data management, including website hosting, online data warehousing, file sharing and cloud storage services
  6. Music and games
  7. Search engines and automated helpdesk services, including customizable search engine services
  8. Ticketing services for events, theatres, restaurants, and similar services
  9. Online education programs, including distance teaching programs through prerecorded media, e-learning, education webcasts, webinars, online courses and training, but excluding education services exempted under the First Schedule to the Act
  10. Digital content for listening, viewing or playing on any audio, visual or digital media
  11. Services that link the supplier to the recipient, including transportation-hailing platforms
  12. Electronic services specified under section 8(3)
  13. Sales, licensing or any other form of monetizing data generated from users' activities
  14. Facilitation of online payment for, exchange or transfer of digital assets excluding services exempted under the Act
  15. Any other service provided through an electronic, internet and digital marketplace that is not exempt under the Act

Items (m) and (n) are new in the 2023 Regulations and were not in the repealed regulations. Their aim is to expand the scope of taxable supplies to include sales/licensing/monetizing data from user activities. The scope has been expanded to include facilitation of online payment for exchange or transfer of digital assets, although financial services that are exempt under the VAT Act are excluded.

Registration requirements

The Regulations provide that any person producing taxable electronic, internet digital marketplace supplies should register for VAT in Kenya within 30 days if:

  1. The supplies are made by a person from an export country for a recipient in Kenya
  2. The person is conducting business in Kenya in accordance with section 8(2)
  3. And any of the following circumstances applies —
    • The party receiving the supplies is in Kenya
    • The supplier in the export country is paid for the services from a bank registered under the Banking Act
    • The payment for services to the supplier in the export country is authorized in Kenya

It is notable that the prescribed VAT registration threshold of KES5 million shall not apply as stipulated under section 34 of the VAT Act 2013.

An applicant must register online using the form prescribed by the KRA. Upon registration, the KRA will issue the applicant a personal identification number (PIN) for the purpose of filing returns and paying tax.

Any person who fails to apply for registration will be liable for late registration penalties.

If a nonresident person ceases to make taxable electronic, internet and digital marketplace supplies for a recipient in Kenya, the nonresident should apply to the KRA for deregistration. This change is in line with VAT Act, which stipules that a person who has stopped making taxable supplies in Kenya, should apply in writing to the KRA seeking cancellation of the VAT obligation within 30 days of ceasing operations.

A nonresident person can also appoint a tax representative to account for VAT on their behalf.

Place of supply

The Regulations provide that an electronic, internet or digital marketplace supply shall be deemed to have been made in Kenya if the recipient of the supply is in Kenya and if any of the following is true:

  • The payment proxy, including credit card or debit card information and bank account details of the recipient, is in Kenya
  • The residence proxy, including the billing or home address, is in Kenya
  • The access proxy, including internet address or mobile country code of the subscriber identification module card of the recipient, is in Kenya

Time of supply

The Regulations provide that the "time of supply" shall be the earlier of:

  • The date on which the payment for the supply is received in whole or in part
  • The date on which the invoice or receipt of the supply is issued

Invoicing requirements

A supplier that is registered under the VAT (electronic, internet & digital marketplace supply) Regulations, 2023, is not required to issue an electronic tax invoice. The invoice/receipt issued shall be considered as a tax invoice and should have the following details:

  1. Value of the supply
  2. Tax deducted thereon
  3. Customer PIN

Claim of input tax

The Regulations restrict suppliers of electronic, internet and DMS supplies from claiming input tax. Input tax incurred is considered a cost to the business.

Accounting and payment of tax

All registered persons under the Regulations must submit a return in the prescribed form and remit the tax due in each tax period (a month) on or before the 20th day of the following month. Tax shall be paid by either the supplier or their appointed tax representative.

The Regulations further provide that, if an intermediary is responsible for making an electronic, internet or digital marketplace supply on behalf of another person, the intermediary will be required to charge and account for tax, whether or not the person is registered. The Regulations define an intermediary as a "person who facilitates the supply" of an electronic, internet or digital marketplace supply and "who is responsible for issuing invoices or collecting payments" in respect of the supply. This may include distributors, brokers/agents, payment providers or retailers.

The Regulations also allow returns to be amended; if the amendment results in an overpayment, the overpayment will be retained as a credit to be offset against VAT payable in subsequent periods.

Penalties

Offense

Penalty

Failure to apply for registration/deregistration

KES 100,000 for every month or part of a month commencing from when they were required to apply for registration/deregistration and ending on a month preceding application for registration/deregistration

Late submission of returns

KES 10,000 or 5% of the tax due, whichever is higher

Late payment

Penalty of 5% of the tax due and interest of 1% of the tax due per month outstanding

Next steps

The 2023 Regulations are aimed at eliminating uncertainties in the taxation of digital supplies in Kenya with regard to VAT. They are also consistent with the changes made by Finance Act, 2022 that requires suppliers in both B2B and B2C supplies to register and account for VAT in Kenya.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young (Kenya), Nairobi

Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

Ernst & Young LLP (United States), Pan African Tax Desk, New York

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 

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