There is a silent but herculean digital revolution currently going on in Kenya which many people can see but have not pondered the massive disruption that is underway. Currently Kenya is at the apex of technological advancement leading the pack in Africa. Technological innovations are slowly but steadily destroying the conventional way of doing business. This is evidenced by the trade wars that have been recently witnessed in Kenya which is a tip of the iceberg. From the taxi wars between conventional taxi operators and uber recently witnessed to the legal battle for online land transactions, technology is making several traditional businesses uneasy.
Among the factors that have propelled Kenya in the technological arena is the landing of fiber optic cables that have seen Kenya’s internet speeds soar to a high of 13.7Mbps, the highest is Africa as per Akamai’s state of internet report of last year. This was way ahead of the USA and Australia though they disputed this.
Smartphone penetration has also seen a steep rise with Jumia Business Intelligence putting the smartphone penetration in Kenya at 60% of the population. Additionally, mobile payment platforms have been developed and continue to be innovated hence slowly becoming the number one choice for payments in Kenya.
All these factors are a perfect recipe for growth of digital transactions. We have witnessed a massive interest in the e-commerce especially from startups in Kenya. While most of the e-commerce previously known was dominated by big US tech companies, startups in Kenya have got onto the train.
Almost every startup in Kenya has an internet based business model and they seek to eliminate the need for a physical location for the business.
The internet and smartphone penetration has catalyzed the growth of e-commerce in Kenya and the rest of the world.
While this is a welcome move, it poses great challenges to revenue authorities in Africa and indeed the rest of the world on how to target these businesses in revenue collection/administration
We have already seen action from Kenya Revenue Authority in a bid to bring to the fold the big US tech companies such as Google, Facebook and Amazon. Most companies are using Google, Facebook and other social sites as marketing platforms and paying huge sums for such services. This is a huge revenue leak for the government given that this income has been generated in Kenya hence subject to tax in Kenya. While tax may be accounted for on major transactions, the majority of such transactions are not brought to tax. It is commendable that KRA is trying to catch up with technology.
The major challenge is that such organizations operate in many countries and hence are able to take advantage of scale and report their incomes in jurisdictions that are tax-favorable. This is perfectly legal and hence the authorities have to think harder on how to legitimately bring such incomes to tax. This is complex since transactions over the internet are intricate and require experts to design tamper proof regulations that bring such income to taxation despite their borderless nature. The digital transactions do not require physical presence for business to be conducted.
In a bid to bring such incomes to tax, Kenyan tax laws require a non-resident company that derives income from Kenya through creating a permanent establishment by virtue of its operations to account for tax in Kenya. These rules are not adequate since their activities are done online and hence have no physical presence.