African route: Kenya Digital Tax & Nigerian Significant Economic Presence as nexus for 2020 digital economy taxation

Changes to the Kenyan Corporate Income Tax Act came into force last November 2019, subjecting to tax income accrued in or derived from Kenya by Digital Market Places: ” …a platform that enables direct interactions between buyers and sellers of goods and services through electronic means”.

A VAT change was also introduced, making digital market places goods or services subject to local Value Added Tax.

Relatively vague the Corporate Tax text still, to be clarified and extended by a future regulation from the National Treasury. No idea yet on how Kenya wants to fix or attract the value creation of this type of platforms to their territory without contradicting current Double Tax treaties.

Perhaps their idea is following the Nigeria steps.

The 2020 Nigerian Budget Law took note of some of the OECD action 1 solutions proposed during 2019 and passed corporate tax related provisions recording the Significant Economic Presence concept (SEP) in black and white.

According to the norm, when a SEP is found a nexus for the taxation of profit earned by non-resident companies engaged in digital, technical, management, consultancy or professional services whose revenue is obtained from a tax resident person in Nigeria will be created.

It is expected that the implementation of the rule will bring an obligation for a withholding tax to be made on the payments to the non-resident service providers.

The 2020 budget law aims to tax non-resident companies delivering very broad range of digital services, digital platforms and e-commerce commissions, and not only that but including online payment services and high frequency trading, on top of consulting and streaming services.

The budget law has not provided a definition of “significant economic presence,” and is requesting the Ministry of Finance to do that later through a Ministerial Order.

The movement represents a departure from the physical presence in Nigeria to generate a Corporate Income Tax Permanent Establishment for those companies captured by any minimum nexus drivers to be set by the Government in the next months.

The captured entities will be required to ask for a Tax registration number and file income tax returns in Nigeria. 

DET3 Comments

Kenya and Nigeria are being not as out of the mark or creative like Uganda as it seems that the idea in the Nigerian Government is following the OECD comments in terms of what could be the SEP triggering drivers and when a sustained significant economic remote connection with the territory exists.

But still, concrete definitions and operational details are required before the law can come effectively into force.

Guidance on how to define the SEP attributable profit will also be required and about how a credit system would work with the ex-ante withholding taxes to be potentially deducted straight from the payments by the payer.

Having standalone recommendations and interpretations from countries taking this SEP route like India, Italy and others, will create a very cumbersome landscape for multi country digital business offerings.

Even much more needed are the Kenya regulatory clarifications as their chosen route is not a kind of new hybrid DST as other countries did.

The new Corporate Income Tax Kenyan changes have to demonstrate viability within the international framework Kenya is part of through the OECD reinforced cooperation.

It is more obvious every day as we have repeated many times that we need a global consistent solution to be applied, interpreted and executed. 

We expect the much-needed Pillar 1 OECD concrete proposal to be released for discussion soon.

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