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The Introduction Of Kenya’s Digital Service Tax: A Conflict Of Interest Between The Kenyan Government And The Nascent Digital Economy In Kenya

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Kenya

On Jan 2, 2021, the Kenyan government began the implementation of its digital service tax (DST) which it proposed in 2020. According to the Kenya Revenue Authority (KRA), “The Digital Service Tax (DST) is tax payable on income derived or accrued in Kenya from services offered through a digital marketplace.” The Income Tax Act (ITA) defines a “digital marketplace” as a “platform that enables the direct interaction between buyers and sellers of
goods and services through electronic means.” The tax is charged at the rate of 1.5% on the gross transaction value.

As KRA projects, the digital service tax is expected to generate a revenue of $45.5 million by the first half of this year. The introduction of this tax will affect all businesses that operate within Kenya’s digital economy, including crypto exchanges, e-commerce platforms and many more, inclusive of non-resident companies that render digital services to Kenyan residents. However, through a shocking revelation by KRA, the tax would also be applicable to social media influencers. “Social media influencers will be liable to pay digital service tax since their income is derived from or accrued from the provision of services through a digital marketplace or by providing digital advertising services in Kenya,” KRA declared.

The Kenyan government believes that the digital economy in Kenya has experienced immense growth, yet all the growth has not impacted the country’s revenue. Joe Mucheru, Cabinet Secretary, Kenyan Ministry of Information and Communication Technology, says, “We cannot give up everything as a country and attract people, and then there’s nothing that we are necessarily benefitting as a country.” According to KRA, the DST is being implemented to “Address the changing business models, and expand the tax base and ensure equity, fairness and neutrality in taxation between traditional methods of doing business and the new ways of transacting over digital platforms.”

Emphasizing the importance of introducing this tax, commissioner of the domestic taxes department at the Kenya Revenue Authority, Rispah Simiyu, says, “The increasingly digital marketplace] is a promising platform for revenue generation, and realignment of tax collection mechanisms is of urgent necessity. It provides an avenue for multinationals to contribute to the growth of the country where they derive their income. This will strengthen the moral business case for international commerce as practiced in Kenya.”

However, many people believe that the Kenyan digital economy is still in its nascent phase, hence, the introduction of the new tax could impede its growth. According to a report by Citizen TV Kenya, several industry players express warnings that the new tax may thwart the growth of e-commerce in the country. The report indicates that many traders are requesting for more time because the industry is still in its infancy. A Kenyan digital marketer also took to Twitter to express her view on the DST, opposing the improper timing of introducing the tax. According to her, “No one is opposing DST as a policy in itself, but we will get there. Kenya is still navigating the digital tech world. Given that technology is undisputably our new normal, there will be time to properly allocate tax for big players in this industry. Not now.”

A major cause for concern on the DST is the existence of digital-driven businesses, especially e-commerce companies, who have very thin margins, and may be unable to adhere to the DST policy without increasing the prices of their services or risk collapsing. Forcing such businesses to increase the prices of their services to accordingly adjust their financial model will have negative effects on their Kenyan customers who will have to pay more to access these services. Considering that not every Kenyan will be willing to pay more to access these digital services, in the case of a price increase, the digital economy in Kenya may lose a lot of users, just like Uganda lost nearly 30% of its internet users between March and September, in 2018, due to the introduction of a digital service tax that required Ugandans to pay a daily duty tax of Ush 200 ($0.05) to access social media sites.

In a 2020 Tax Alert publication by Deloitte, the respected professional services firm suggests another cause for concern in Kenya’s DST policy. “Our view is that the GoK should have considered setting a minimum threshold for applicability of DST and exempting some businesses with low margins. Imposing DST on all digital services irrespective of the threshold is likely to result in undesirable implications especially for persons under the Turnover Tax Regime and minimum tax, and whose primary income is derived from provision of digital services,” the publication stated. Making references to foreign governments that have also implemented a digital service tax, Deloitte added that “In the UK, for example, only large businesses are liable to DST, that is businesses with in-scope annual global revenue of more than £500m, of which more than £25m are attributable to sales from the UK. For France, the thresholds are €750m and €25m for global and local sales, respectively while for Italy the threshold is €750m and €5.5m for global and local sales, respectively. In Kenya, the threshold could be aligned to the turnover tax threshold or other reasonable threshold.”

There is no doubt that the DST policy is received with mixed feelings amongst observers and industry players. With Kenya’s DST in place, one cannot help but wonder if this is the right time for the government to tax the country’s digital economy in order to increase revenue, which could help in servicing the country’s heavy debt burden and effectively running its economy. On the flip side, there is a concern about whether the implementation of the digital service tax is a step that is too soon to be taken. It would be difficult to come up with an absolute answer to these questions now. However, the turnout of events in the course of the year may likely indicate if Kenya has taken a progressive step.

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Crypto Assets

Crypto prices drop as global market fear increases

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Top cryptocurrency prices have fallen amidst a drop in stocks and fears over China’s Evergrande debt crisis. In the last 24hour, Bitcoin dropped from $47,772 to $42,630 shedding about 8.58%. this is the lowest in price since another bull run began on Sept 5 after the April crash.

El- Salvador’s President, Nayib Bukele sees the fall as an opportunity to invest more. Recall that the country adopted Bitcoin as a legal tender on September 7. Despite the adoption, the price of Bitcoin has fallen by almost 14% since then.

Other coins have experienced dramatic crashes within the last 24hours. Solana, a coin that has experienced 355% growth within the last 3 months fell from $162 to $130 shedding about 11.39% within the last 24hours. Solana’s fall may be categorized by the 17-hour outage which the founder, Anatoly Yakovenko said was caused by bots “flooding the networks”

Ethereum fell by 9.37% while Dogecoin and Axie Infinity fell by 11.22% and 14.14% respectively within the last 24hrs hours. While crypto experiences dark Monday, El-Salvador keeps investing more money in Bitcoin.

A look at the global market

The global market is experiencing fear due to the Evergrande debt crisis. A report published by the University of Michigan shows that consumer’s sentiment is beginning to decline. This trend alone may impact the crypto market as well.

On the other hand, the global market downturn must have been spurred by the Evergrande debt crisis. The company grew to be one of China’s biggest companies by borrowing more than $300bn. Last year, Beijing made rules to control the debt owed by big real estate developers. This led Evergrande to offer its properties at major discounts to raise more money to keep the business afloat. Right now, the company is struggling to meet the interest on payment of debts.

Why would it matter if Evergrande fails?

The collapse of the multi-million dollars company would affect the global market; including the crypto market. Many people bought properties from Evergrande and they expect to make gains. If Evergrande falls, crypto investors will be forced to withdraw more money to keep their business running without the means to invest more. When one business fails, the other gets affected indirectly. This also applies to other firms that do businesses with Evergrande.

The potential impact on China’s financial system is another effect of Evergrande’s fall. In his statement to BBC, Mattie Berkink, the Economist Intelligence Unit (EIU), said that “the financial fallout would be far-reaching. Evergrande reportedly owes money to around 171 domestic banks 121 other financial firms” if the company fails, other lenders or businesses may be forced to lend less. Thereby leading to a credit crunch- a situation where companies struggle to borrow money.

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Bitcoin in Africa

The rise of CBDC in African economies

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Many nations have taken cues from the world of crypto and its resounding successes over the last decade. In order to avoid getting left behind, governments worldwide are increasingly turning their attention towards implementing some form of digital currency, a CBDC which in full is Central Bank Digital Currency. Although inspired by cryptocurrencies, CBDC’s are quite different from traditional crypto platforms. The main differences are that CBDC’s are unlikely to be decentralized, the supply of this currency regulated by the host’s country’s central bank as the CBDC is designed to operate as a sovereign legal tender, the digitized form of the host country’s fiat currency. Thus, a central bank may issue digitized tokens of its currency of which their value is pegged to the fiat currency of the nation in question, making CBDC’s stablecoins.

Africa has seen a rise in the use of cryptocurrencies and it’s still pushing frontiers in this sector. Although the use of crypto in many African nations is becoming more and more pervasive by the day, the tone of governments in many of these countries toward the sector is cautious at best and threatening at worst. However, a few nations have voiced interests in creating digitized versions of their legal tender to function as a CBDC. Amongst these are Ghana, Nigeria, Morocco, Kenya and Tunisia.

Many of these projects are still in the research phase or developmental phase however. A good example is Ghana’s proposed CBDC, the E-cedi being developed in partnership with German company, Giesecke + Devrient. Nigeria’s CBDC project, the eNaira has been announced and according to Nigeria’s central bank, this CBDC will be launched sometime in 2021. To that end, the CBN has partnered with fintech company, Bitt Inc. to serve as the technical partner in the eNaira’s development. Reportedly, the CBN had made the decision to digitize the Nigerian Naira in 2017.

While the pursuance of digital currencies in African nations is a welcome development, implementation of these schemes isn’t without challenges. Chief among the issues countries in Africa face would be the already existing financial service inequality and poor penetration of internet access in the continent. These challenges must be tackled in order to allow for mainstream adoption of CBDCs and the subsequent provision of financial inclusion. The benefits largely depend on the peculiarities of the nation deploying them. For instance, a digital currency is thought to help Nigeria increase foreign remittances, it’s second largest source of forex after oil. Whatever the outcome of these projects, it is becoming apparent that CBDC’s have come to stay.

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Bitcoin trades above $51k ahead of El Salvador’s adoption

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Bitcoin growth

Bitcoin price has rallied above $51,000 ahead of El Salvador’s adoption. The immediate surge in price may be due to the social media campaign that everyone should buy sats of Bitcoin to support El Salvador’s plan to make the coin a legal tender or it may be due to the news of El Salvador’s adoption of the coin as a legal tender on September 7. Users of social media platforms like Twitter and Reddit are discussing how they will buy Bitcoin of $30 each to mark the new El Salvador Bitcoin law.

The surge in Bitcoin’s price began in the last 24hrs with the price rallying around $51,955 with a 3.37% increase. This is an all-time high after the April crash that brought the price of Bitcoin from $64k down to $28k. The move by El Salvador to be the first country that accepts Bitcoin as a legal tender and the social media campaign that leads to a surge in price ahead September 7 are a repetition of events that occurred late last year and early this year with regards to institutional investors and how the price of Bitcoin skyrocketed.

El Salvador, a country in Central America, has been preparing heavily to adopt Bitcoin by installing ATMs to allow citizens to convert the token into US dollars. Last week, the country’s Legislative Assembly passed a law to allow for the creation of a $150m Trust to support the conversion of Bitcoins to US dollars.

To promote the use of Bitcoin, the government states that it will give the adult population of El Salvador $30 in Bitcoin once they download “Chivo” the wallet issued by the government. This was confirmed by the Finance Minister, Alejandro Zelaya.

What this means for Bitcoin investors

Apart from the adoption by Salvadorians, on-chain analytics show that Bitcoin is in high demand. The fourth halving that occurred will make Bitcoin become a scarce token in the nearest future. Thereby increasing the price sporadically.

With El Salvador’s interest in Bitcoin, other countries are likely to follow suit- Panama is considering following El Salvador’s lead. History will repeat itself as this development will serve as another crypto rout that occurred early this year when Tesla and MicroStrategy announced their support for Bitcoin.

El Salvador’s new law allows the use of Bitcoin as a legal tender it can be used to buy goods, pay for taxes and bank loans. This means more demand for Bitcoin, with the fourth halving that occurred, it means less supply. A common rule of economics for demand and supply will apply. Prices are projected to keep rising. At the time of writing this report, Bitcoin is trading at $51,839 with a projection of $52k before the end of today and higher tomorrow when Salvadorians begin to use the token.

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