The-Accountant-Jul-Aug-2017

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Public Policy Taxation of Exported Services By Ernest Muriu, ernest@ernestandmartin.com The treasury has finally issued the long-awaited VAT regulations, The Value- Added Tax Regulations, 2017 dated 30 March 2017. These regulations repeal the 1994 VAT Regulations. Paragraph 13 of the VAT regulations 2017 have redefined the tax treatment of exported goods and services. It provides that 13. (l) An exportation shall be a taxable supply- (a) in the case of goods, when the taxable supply involves the goods being entered for export under the East African Community Customs Management Act and delivered to a recipient outside Kenya at an address outside Kenya; or (b) in the case of services, when the taxable supply involves the services being provided to a recipient outside Kenya for use, consumption, or enjoyment outside Kenya. Provided that the exportation of services shall not include- (a) Taxable services consumed on exportation of goods unless the services are in relation to transportation of goods which terminates outside Kenya; (b) Taxable services provided in Kenya but paid for by a person who is not a resident in Kenya. (2) The documentation relating to a supply required as the proof of an exportation of goods or services shall be- (a) a copy of the invoice showing the recipient of the supply to be a person outside Kenya; (b) proof of payment for the supply; (c) for goods, a copy of- (i) the bill of lading, road manifest, or airway bill, as thecase may be; (ii) the export or transfer entry certified by a proper officerof Customs at the port of exit; (iii) for excisable goods, the documents shall be inaccordance with the provisions of the Excise Duty Act, 2015; (c) For services, such other documents as the Commissioner may require as proof that the services had been used or 30 JULY - AUGUST 2017
Public Policy consumed outside Kenya (3) Where the Commissioner has reasonable grounds to believe that goods treated by a registered person as exported may not have been exported- (a) the Commissioner may, by notice in writing, require the registered person to produce, within the time specified in the notice, a certificate signed and stamped by a competent authority outside Kenya stating that the goods were duly landed and entered for home consumption at a place outside Kenya; (b) The supply shall not be treated as exportation until the certificate referred to in paragraph (a) has been provided to, and accepted by, the Commissioner. For the case of goods, the goods will be zero rated, if the goods are processed under the requirements of East African Community Customs Management Act and delivered to a recipient outside Kenya at an address outside Kenya. In this case, a customs entry is required as proof of export. To prove that the goods were delivered to the recipient an import entry generated in the country of the recipient may be required or any other reasonable proof to show the goods were delivered. As per the main VAT act, services exported out of Kenya qualify for zero rate if provided for use or consumption outside Kenya. Regulation 13 has further stated that the services exported outside Kenya must be provided to a recipient outside Kenya for use, consumption, or enjoyment outside Kenya. It has also stated that zero rating does not apply to; (a) Taxable services consumed on exportation of goods unless the services are in relation to transportation of goods which terminates outside Kenya; (b) Taxable services provided in Kenya but paid for by a person who is not a resident in Kenya. The first proviso, excludes from zero rating all taxable services consumed on exportation of goods other than where the services are in relation to transportation of goods which terminates outside Kenya. This limitation appears to clarify the requirement set out in paragraph 10 of Part A of the Second Schedule that provides that the ‘Supply of taxable services in respect of goods in transit are zero rated’. This would therefore exclude from zero rating services such as outbound customs clearing services. The second proviso, excludes from zero rating all taxable services provided in Kenya but paid for by a person who is not a resident in Kenya. These are services that would be considered used, consumed or enjoyed in Kenya, but are paid for by a person who is not resident in Kenya. Such services include attending a training session in Kenya or a conference meeting in Kenya by an employee of a nonresident company. The use of the word enjoyment is not found in the main act but is an introduction into the VAT lingo by the regulation. An online dictionary defines enjoyment as the state or process of taking pleasure in something e.g. the enjoyment of good wine. It also means the action of possessing and benefiting from something. The regulations do not give any further guidelines on which services are: a) used, consumed or enjoyed in Kenya, b) are for the benefit of a nonresident or paid for by a nonresident, and c) subject to VAT in Kenya (the place of taxation). In the absence of any further local guidelines, we seek guidance from The International VAT/GST Guidelines (OECD guidelines) Published on April 12, 2017. (Citation:OECD (2017), International VAT/GST Guidelines, OECD Publishing, Paris. DOI: http:// dx.doi.org/10.1787/9789264271401-en). In an increasingly globalized economy, the OECD guidelines present a set of internationally agreed standards and recommended approaches to address the issues that arise from the uncoordinated application of national VAT systems in the context of international trade. They focus in particular on trade in services and intangibles, which pose increasingly important challenges for the design and operation of VAT systems worldwide. The OECD guidelines provide (in Guideline 3.1) that VAT for internationally traded services and intangibles should be taxed according to the rules of the jurisdiction of consumption (The destination principle). It further provides (in Guideline 3.2) that for the purposes of implementing Guideline 3.1, for business to business supplies, the jurisdiction where the consumer is located has the taxing rights over internationally traded services and intangibles. The location where the customer has located its permanent business presence is the first proxy used to determine where the customer intends to use the services or intangibles. This is referred to as the general rule. The general rule is applied after determining the nature of the supplies as well as the identity of the supplier and the customer. Paragraph 3.114 of the OECD guidelines provides that where services are rendered to the consumer and are consumed by the consumer at the same time and place where they are physically performed in the presence of both the person performing the supply and the person consuming the supply, the place of taxation is the place of performance. JULY - AUGUST 2017 31
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