The business operating environment continues to evolve forcing most businesses to be innovative and agile to adapt to the disruptive environment. These changes have been experienced across many sectors and the financial sector has not been left behind. Some of the changes we have witnessed in the financial sector include: introduction of new currencies such as cryptocurrency, offering of online loans and cashless payment methods such as mobile, internet banking and cards.
The changes have been necessitated by a number of factors. Some of these factors include the need for the financial institutions to serve their customers better, win new customers, meet different customer needs, improve efficiency in the business operations as well as deal with business competition. Some are necessarily required to meet additional regulatory requirements. For instance the need to configure the systems to support the Kenya Revenue Authority (KRA) to collect digital services tax and excise tax at appropriate rates.
In determining whether to adopt these technological changes, the management of the financial institutions have mainly focused on the cost-benefit and the security of the new systems. These are key issues that need to be gotten right from the start since they can cause massive losses to a company. A porous system would expose clients' sensitive data to unauthorised access which may result in lawsuits to the financial players. Most businesses are aware of these risks and have heavily invested to get this right. Therefore, as players in this sector take into account the above factors, it will be imperative to take into consideration the tax impact of some of these new ways of doing business. The tax authorities are alive to these innovations and are working on ways to ensure appropriate taxation of the income streams and collect transaction taxes.
“Innovations like card payments have lately attracted attention in most of the tax jurisdictions especially on the payments made to the providers of these services.”
Tax laws have also been changing with a focus on international taxes as well as on new products in the financial sector. Thus, as banks and other financial institutions embrace new technologies to create efficiencies, it will be important to evaluate the tax implications of such innovations in order to optimize the tax costs.
Innovations like card payments have lately attracted attention in most of the tax jurisdictions especially on the payments made to the providers of these services. For instance in Kenya, the Tax Authority has issued notices to banks to account for Withholding Tax (“WHT”) and Value Added Tax (“VAT”) on payments made to the providers of cards and related services. This is following a previous ruling by the Court of Appeal which held that income earned by card companies on the card services amount to royalties which are subject to WHT and VAT.
There has also been focus on mobile money transactions by tax authorities for instance introduction of excise tax on these payments. In addition, operators in this sector have developed in-house platforms to enhance efficiency. The costs incurred in developing these platforms will have to be reviewed as these may be considered to be capital in nature and thus not deductible for corporate income taxes in some of the jurisdictions.
It is important to note that the providers of most technologies used in the financial sector are mainly non-residents of the countries in which these services are consumed. Enhanced information sharing among revenue authorities has increased transparency and therefore taxpayers need to ensure that the tax information in different tax jurisdictions is aligned.
The payments made to these technology providers will mostly attract transaction taxes such as WHT and VAT. The Tax Authorities will majorly review the payments to the providers to ascertain if the proper taxes were accounted for. WHT is applicable in most African jurisdictions on certain payments to both resident and non-resident persons. Payments to the technology companies such as royalties and support services are subject to WHT.
VAT is also applicable on imported technology services. Generally,most supplies by taxpayers in the financial sector are VAT exempt. As such, the parties importing services into the country will be required to account for VAT at the standard rate on the value of the imported service. In addition, the current tax law requires that any taxpayer supplying exported services charges VAT unlike previously where exported services were exempt from VAT. There is also legal precedence which is shaping the way the revenue authorities are administering taxes. In some cases, this differs from the established tax practice. Consequently, tax risk is heightened and should be properly analysed by tax specialists from the onset.
The role of the tax specialist will be to review the contracts and advise on the tax implications of the payments to be made under the contracts. This will help the financial institutions account for the taxes correctly and mitigate the tax risks emanating from non-compliance. For existing contracts, we recommend that a tax specialist is engaged to review the contracts and the various payment terms. This should result in ascertaining the level of tax compliance or any liabilities that exist. This review will be of benefit to the financial institutions especially because of amnesty programs that are sometimes availed to taxpayers. An example is the ongoing Voluntary Tax Disclosure Programme (“VTDP”) in Kenya where a taxpayer is entitled to a partial relief from penalties and interest upon the voluntary disclosure of the principal tax liability. The impact is the potential tax savings or amnesty on tax penalty and interest.
The business environment will continue to evolve in the future due to the disruptive trends being experienced globally. The financial sector will heavily be affected by these changes due to its role in the economy. As such, they will have to be innovative in the way they do their business. As they innovate, they should consider the tax implications as failure to do so may heighten tax risks.
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