By John Walubengo
The rise of digital platforms has had profound implications for taxation policy and its implementation across many industries, especially the ICT industry. Traditionally, corporation taxes have been structured to be owed where the service is produced. However, this framework is ill-suited to the effective taxation of digital platforms and Over The Top (OTT) services.
Examples of digital platforms include but are not limited to Social Media platforms (e.g., Facebook (Meta), Twitter, TikTok, among others), eCommerce and payment platforms (e.g. Amazon, Jumia, GooglePay, among others) Gig Economy Platforms (Uber, AirBnB among others) Search engines (Google, Bing, etc). OTT services include the likes of Netflix, DSTV, YouTube, and WhatsApp.
Most of these digital companies are very profitable, with a global market reach, and their market capitalisation is often pronounced in billions of dollars – not even billions of shillings.
Many sovereign countries are reforming their tax laws to get a piece of the action. The basic argument is that these digital platforms provide services to local markets but extract revenues from foreign jurisdictions – where they file their tax returns.
The digitisation of the global economy has raised questions about how to tax global multinational corporations, commonly known as “Big Tech.”
Taxing the Big-Tech increases tax revenues
Large technology companies can provide a service in one location but recognise the income in a different jurisdiction, where the tax rate is lower, thus raising one of the central questions caused by the digitalisation of the economy: who should be allowed to tax digital services?
Digital marketplaces enable suppliers, consumers and platform operators to be located in different legal and geographic jurisdictions. Indeed, the physical location of digital platforms and the geographic definition of where value is created in their production value chain is highly ambiguous and, to a large extent, arbitrary.
In recent years, Kenya has joined a growing list of countries that have introduced a digital tax to these global operators, intending to increase tax revenue. Many countries are charging between 1% to 3% on the original price of the service as the digital service tax.
Some of the services caught up in this digital tax bracket include but are not limited to – Supply of downloadable digital content; subscription-based media, Software programs, supplies on online marketplaces; digital media content, data management services, search engine services, online education, Cloud provisioning, OTT service providers amongst others.
Whereas the taxman is happy to see the national revenue targets improve as big tech companies are roped into the domestic tax bracket, something else that may send a chill effect on the uptake of online digital services.
Big tech companies do not mind being taxed since they only pass on the cost to domestic consumers. This means your streaming services like Netflix or DSTV will be more expensive.
Your cloud storage services – at an enterprise level – will be more expensive as your cloud provider slaps the digital tax amount back to you. If you consume paid online educational materials, you must dig deeper to continue learning.
Another blind spot that the taxman often fails to see is that Kenyan digital companies such as PesaPal, Cellulant, and others operate in foreign markets. An aggressive digital tax regime locally would be reciprocated against Kenyan Software export markets.
In summary, we should tax big tech, but we also need to be sensitive to the impact or chill-effect that may have on the local consumption levels.
Additionally, we must remember that Kenyan digital products in future may be the ‘big-tech global giants’ we are trying to wrestle with today.
How would we want Kenyan digital products to be treated in those foreign markets?