B2B VS B2C transactions for VAT (Digital Market Supply) Purposes

The draft regulations for VAT on DMS were published during the height of COVID-19 in the year 2020.

The regulations and the parent Act (VAT Act) have undergone multiple amendments since then that have left a good number of taxpayers confused. One particular area of confusion is the applicability of VAT (DMS) to B2C and B2B transactions.

Lets examine the initial draft against the regulations and the subsequent amendments

In the draft regulations, a person from an export country who makes B2C supply of?digital services to a recipient who is in Kenya was required to register for VAT through a simplified VAT registration framework as provided under the regulations , declare and pay VAT

The initial draft contained the below definitions for B2B and B2C:

“B2B” means business-to-business transactions between VAT registered entities;

“B2C” means business-to-consumer transactions where the business is registered for VAT while the consumer is a person not registered for VAT;

The proposal meant that business entities in Kenya that are registered for VAT were not to be charged VAT(DMS)

The final draft of the regulations was published in September 2020 through legal notice No.190.

The regulations veered from the draft significantly; the regulations redefined B2B and B2C as below:

"business-to-business transaction" means a transaction between a supplier from an export country to a tax registered or non-registered business entity in Kenya that is required to account for tax on imported services under section 10;

"business-to-consumer transaction" means a transaction between a supplier from an export country and a consumer in Kenya;

B2B transactions were therefore reframed to mean transactions between a business from an export country to any business in Kenya whether registered for VAT or not.

Consumers were redefined to mean individual customers (non business customers)

The regulations further provided that B2B transactions were to be accounted under reverse VAT mechanism while B2C transactions were to be subjected to VAT(DMS)

To confirm whether to charge VAT(DMS), digital service providers in the export country were obligated to confirm from the Kenyan buyers whether they were eligible to account for VAT on reverse mechanism or not

The Finance Act 2021 amended the VAT Act to bring more clarity on the supplies subject to reverse VAT. The Finance Act 2021, made it clear that both registered and non-registered persons would be deemed to have made a supply of imported services, accordingly they would be liable to account for reverse VAT, where applicable.

The Finance Act 2021 in actual sense strengthened the definition of B2B transactions as contained in the VAT(DMS) regulations,then.

The CS for the National Treasury issued the Value Added Tax (Digital Marketplace Supply) (Amendment) Regulations, 2022 , through a Legal Notice in April 2022 which was published in the Kenya Gazette in May 2022

The amendments to the?VAT(DMS) regulations deleted the definitions of B2B and B2C thus removing the distinction between the two.

Subsequently, the Finance Act 2022 amended the VAT Act to exempt imported digital market supplies from reverse VAT. This is?in line with VAT(DMS) regulations amendments 2022.

As such all imported digital services, except where provided by?the law ?are now subject to VAT(DMS). The distinctions between B2C and B2B is no longer relevant to VAT(DMS)

On , 19/08/2022, in its published notice the Kenya Revenue Authority notified exporters of digital services into Kenya and local businesses that;

Kenya Revenue Authority wishes to clarify to the public and all VAT registered taxpayers that the Value Added Tax (Digital Marketplace Supply) Regulations, 2020 exempts registered non-resident suppliers of digital services from issuing?electronic tax invoices as required under the Value Added Tax (Electronic Tax Invoice) Regulations, 2020.

However, the non-resident suppliers of digital services are required to issue invoices or receipts showing the value of the supply and the tax charged.

VAT registered taxpayers in Kenya who import such services may claim the input tax so charged at the end of the tax period in which the importation occurs in line with the provisions of the VAT Act, 2013. The necessary enhancements have been made to the iTax system to support this compliance framework.

This implies that local VAT registered business can now claim input VAT emanating from digital services transactions with Non-residents.

Zoom announced it would begin charging Value Added Tax (VAT) to all customers that have a ‘Sold To’ address in Kenya effective September 1, 2022.

“We are writing to inform you that on or shortly after 1 September 2022, Zoom Video Communications, Inc will begin charging VAT on all supplies made to all customers in Kenya due to recent changes introduced by the Digital Marketplace Supply (Amendment) Regulations, 2022 and the Finance Act, 2022,” Zoom said in a statement.

?Ten 10 days ago Facebook(Meta)?announced that all Kenyan adverts ,both business and?non-business would attract ?16% Value Added Tax (VAT)..This was effective 01/11/2022

Due to updates to value-added tax (VAT) laws in Kenya, Meta is required to charge VAT on the sale of ads to advertisers, regardless of whether you’re buying ads for business or personal purposes. All advertisers with a business country of Kenya will be charged an additional 16% VAT on advertising services purchased beginning 1 November 2022.

If you’re registered for VAT and provide your VAT ID, your VAT ID will show up on your ads receipts. In the event that you’re entitled to recover VAT, this may help you recover any VAT you paid to the Kenyan tax authorities if you are a VAT registered business in Kenya.

As a matter of fact, I personally incurred a 16% VAT charge two days ago for a business advert payment I was making to Meta. In the past, I was expected to self-declare the VAT under the reverse VAT mechanism

Exporters of digital services into Kenya should therefore consider??VAT registration whether their transactions are B2B or B2C. They should also consider the fact that some digital services are exempted from VAT (DMS)