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The Cabinet Secretary for the National Treasury and Planning issued the Value Added Tax (Digital Marketplace Supply) (Amendment) Regulations, 2022 (the DMS Amendment Regulations), through a Legal Notice dated 4 April 2022 which was published in the Kenya Gazette on 27 May 2022. The DMS Amendment Regulations were laid before the National Assembly on 09 June 2022 when the 12th Parliament was adjourned and are still yet to undergo the full legislative process and their legal validity is therefore in question.
The DMS Amendment Regulations amended the Value Added Tax (Digital Marketplace Supply) Regulations, 2020 (the DMS Regulations) by deleting various provisions, to the effect of eliminating the distinction between Business-to-Business (B2B) and Business-to-Customer (B2C) transactions. Based on these amendments and certain amendments proposed by the Finance Bill, 2022 (the Finance Bill) which are discussed below, non-resident suppliers who are registered for VAT in Kenya under the DMS Regulations are expected to charge VAT on taxable supplies made to all customers in Kenya.
Implications for Businesses
Prior to the amendment, the DMS Regulations provided that B2B recipients of taxable supplies made through the internet, electronic means and digital marketplaces had the obligation to notify non-resident suppliers of taxable services that they were a B2B customer. Therefore, the non-resident supplier would not be required to account for Value Added Tax (VAT) on supplies made to the B2B customers in Kenya. This was on the basis that B2B customers would be subject to the reverse charge VAT provisions on imported services under Section 10 of the Value Added Tax Act, 2013 (the VAT Act).
From a practical perspective, this requirement was onerous for non-resident suppliers who had to incur administrative costs to determine whether or not their customers in Kenya were B2B or B2C customers i.e., whether or not to charge VAT on taxable supplies made to their customers located in Kenya. The Finance Bill attempted to cure this challenge by proposing to exempt B2B transactions from reverse charge VAT.
The intended effect of the proposal in the Finance Bill, if enacted into law, is to ensure that reverse charge VAT is not applicable on taxable supplies made through the internet, electronic means and digital marketplaces by non-resident suppliers, on the understanding that such supplies will be subject to VAT pursuant to the DMS Regulations. The amendments to the DMS Regulations are therefore intended to align the VAT Act with the subsidiary legislation governing the DMS regime.
The DMS Amendment Regulations have made the following amendments to the DMS Regulations:
The amendments are a welcome move as they will reduce the administrative burden on non-resident suppliers who are currently required to seek confirmations from their customers on whether they are B2B or B2C recipients under the DMS Regulations. On the other hand, B2B customers who are registered for VAT should equally not be prejudiced as they will be expected to be in a position to claim the input VAT charged by non-resident suppliers when providing taxable supplies to their customers in Kenya.
We further note that the amendments did not delete paragraph 4 of Regulation 3 which provides that where a B2B customer satisfies the notification requirement, then the non-resident supplier shall not be required to charge VAT on the supply. In our view, the failure to delete this provision may have been an oversight since the amendments have primarily done away with the requirement to notify the non-resident supplier that they should not charge VAT on B2B customers, and this provision cannot therefore stand on its own.
Additionally, it is worthwhile to note that the DMS Amendment Regulations have also provided an exemption from VAT in relation to education services that are provided through pre-recorded media or e-learning, including online courses by:
This exemption is laudable given that online education has become increasingly necessary in light of the COVID-19 pandemic as many institutions moved their courses fully online and imposing VAT on these services would increase the cost of education and disadvantage many Kenyans who already find these online services inaccessible.
While we note that the DMS Amendment Regulations were made pursuant to Section 67 of the VAT Act, the Statutory Instruments Act (No. 2 of 2013) requires that statutory instruments such as the DMS Amendment Regulations should undergo a public participation process before being Gazetted. This is to ensure that the Government obtains feedback from stakeholders and to ensure a smooth implementation process. We would expect that the DMS Regulations underwent public participation, but it is not clear whether this took place prior to the gazettement.
In addition, the Statutory Instruments Act requires statutory instruments to be laid before Parliament within 7 days of publication, upon which the relevant statutory instrument is referred to the Committee on Delegated Legislation (the Committee) for deliberation. The DMS Amendment Regulations were laid before the National Assembly on 9 June 2022 pursuant to the requirements under the Statutory Instrument Act. However, the 12th Parliament was subsequently adjourned, and it is therefore the case that the DMS Amendment Regulations will not be considered by the Committee until such a time when the next Parliament is constituted. Under Section 67 of the VAT Act, Parliamentary approval is required for the DMS Amendment Regulations to take effect.
It is also worth noting that the validity of the VAT Regulations 2017 was challenged before the High Court in the case of Commissioner of Domestic Taxes vs W.E.C. Lines (K) Limited (Tax Appeal E084 of 2020). The Regulations had never been tabled before the National Assembly as required under Section 11(1) of the Statutory Instruments Act and on this basis, the Court in its judgement of 31 January 2022 rendered them null and void.
The validity of the DMS Amendment Regulations is therefore in question, in light of the procedural challenges highlighted above. We hope that the Government will provide further clarifications in relation to the legality of the DMS Amendment Regulations in due course so that taxpayers can have clarity on their compliance obligations.
Salma Khamala – Principle Associate
Abdullahi Ali – Associate