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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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Jack Dorsey‘s Square to develop open source Bitcoin mining

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Jack Dorsey Bitcoin

On Friday, October 15, Twitter CEO Jack Dorsey announced that American fintech company, Square, would be looking to get into Bitcoin mining. Jack Dorsey who is also Square’s CEO announced this on Twitter which subsequently sent waves through the bitcoin market, surging its price to almost a record high, rising over $62,000 over the weekend. According to the Twitter boss, Square is looking to building an open source Bitcoin mining system that would be available to individuals and businesses.

Sharing his thoughts further on the initiative, he stated that “Mining needs to be more distributed” and that “the more decentralized [mining] is, the more resilient the Bitcoin network becomes. He also mentioned the apparent inaccessibility of mining stating that “Bitcoin mining should be as easy as plugging a rig into a power source.

Dorsey also believes that bitcoin mining “needs to be more efficient and that “clean and efficient energy use” would be undoubtedly beneficial to the digital currency in the long run.

Dorsey ended the thread by saying that a “technical investigation would be undertaken by a Square team led by Jesse Dorogusker, Square’s hardware lead. If successful, this initiative would be another of Square’s bitcoin focused projects which includes a Bitcoin hardware wallet.

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Financial Leaders from G7 Release Guidelines for Central Bank Digital Currency

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Source: World Atlas

At a meeting that was held in Washington, yesterday, October 13, G7 leaders discussed central bank digital currency and endorsed 13 public policy principles with regards to their implementation. The financial leaders from G7 agreed that CBDCs would complement cash and should not be detrimental to the monetary system. The G7 leaders have been discussing CBDCs this week concluding that they should do no harm and meet rigorous standards.

It should be noted that G7 includes finance leaders in advanced economic nations comprising of Canada, France, Germany, Italy, Japan, the U.S and the U.K. the G7 leaders make it mandatory that any newly launched CBDC should not harm the central bank’s ability to perform its duty of maintaining financial stability. In a joint statement by the G7 finance ministers and central bankers, they said that, 

“Strong international coordination and cooperation on these issues help to ensure that public and private sector innovation will deliver domestic and cross-border benefits while being safe for users and the wider financial system.” 

The joint statement further states that CBDCs are complements to cash and could serve as a liquid or safe settlement assets with an added advantage of anchoring existing payment systems. CBDCs issuance should be entrenched in a long-standing public commitment to transparency, rule of law, and sound economic governance. The statement added at CBDCs must be so efficient that they are fully interoperable on a cross-border basis. 

The G7 leaders agreed that they had a duty to minimize the incidence of ‘harmful spillovers to the international monetary and financial system” 

The G7 statement reiterated a similar statement earlier made by G20 that no global stablecoin project should begin operation until such a token has addressed legal, regulatory and oversight requirements. 

Countries like China and Nigeria are ahead of the pack with regards to the adoption of digital Yuan and Naira respectively. China’s crackdown on cryptocurrency may be a step forward for the country’s plan to promote its digital Yuan. Nigeria, on the other hand, postponed the launch of its eNaira in deference to the 61st anniversary of Nigerian independence on Oct 1. 

However, countries like the US and the UK are dragging their foot with regards to the introduction of CBDCs to their financial system. There are insinuations that America is in danger of being left behind technologically and financially if it doesn’t get serious with the implementation of CBDC in its financial system.

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Learning Guides

Understanding Speculation and Crypto Volatility

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Everyone who dabbles in the crypto industry learns almost immediately that the market is very volatile and oftentimes things can change very quickly. That volatility is the fundamental reason why some investors make absolutely stunning gains in so short a time and others lose a lot of money as well. Trading in crypto is one of the riskiest ventures any person can undertake and as they say, it’s not for the faint of heart. The risks can be mitigated of course and sometimes depends specifically on the coin or crypto asset being traded on, barring general market trends.

Nevertheless, to get to the bottom of the volatility concept, one must understand speculation in the market. To start off, the concept of speculation isn’t limited to cryptocurrencies, on the contrary, speculation has existed for as long as economics and trading has. But it is worth saying that speculation is often a feature of novel sectors, assets, commodities and the like. So, even though cryptocurrencies have been around for more than a decade, they’re still in their infancy as far as markets go. One could say that the market is still trying to find its feet.

One of the fundamental reasons why cryptocurrencies are so volatile is that they are fundamentally backed by nothing of value outside the attention that they get. Unlike many fiat currencies which are either pegged to another currency’s value or whose value is unilaterally determined by a central authority, cryptocurrencies only derive value as a function of how many people are willing to use is to transact, i.e. trust in the asset because other people trust it. As a rule of thumb, the larger the number of people who accept the asset, the more valuable it becomes.

This is one of the hallmarks of speculative trading. In the crypto world or in any market that’s novel and untested, many people are in it to win it which means their strategies in trade has the objective of making as much profits as possible in the short term. Therefore, the market enters a subtly dangerous cycle of rapidly changing prices of assets. Basically, investors typically buy assets when prices are low and wait. As more investors are attracted to the commodity for its low prices, it sets off a cascade where more people buy in, causing the price to steadily rise. 

However, all good things must come to an end and it almost always gets to a breaking point whereupon the price gets high enough for investors to begin to sell. This reverses the earlier cascade and as more and more investors pull out, the prices can fall dramatically causing even more to sell off in fear of losing whatever investments they have left. The prices having fallen resets the game and primes investors to begin buying again.

Volatility has been one of the talking points of many critics of cryptocurrencies often comparing it to a Ponzi scheme. And in certain cases, persons of interest with large pulls and audiences can substantially affect the rate at which prices rise and fall. Other factors include government regulations. Volatility at its core reflects the often chaotic nature of trade and market interactions and human hopes and fears.

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