Terms of Reference
Firm or Individual: Consultant / Consortium
Program: Youth Impact Labs
Project Title: Taxation of the Digital Economy in Kenya
From: 30th March 2020 To: 8th May 2020
Task Manager: Enock Wangila, Partner Engagement Analyst
Context: The digital economy is growing exponentially. It is expected that by 2022, 60% of global GDP will be digitized. The change occasioned by technology has transformed industries and sectors resulting in new business models and new economic opportunities.
Traditional barriers to growth and scale such as the need for a physical operation to operate a business have been broken by technology. With technology, the possibility to scale and scale fast is now well within reach. Uber, Airbnb and Amazon are prime example of how technology innovation has disrupted sectors and created new economic opportunities globally.
Digitalization has present new challenges to tax policies for governments. Local and international tax laws were built upon a brick and mortar business model. However, with the wave of technological changes, new business models are challenging the existing taxation laws which prescribe taxation rights based on whether an organization has a permanent establishment in a country.
Organizations are now leveraging digital technologies to operate across borders without the need for a physical presence. There is also a heavy reliance on intangible assets such as algorithms and intellectual property, and data and user participation to create value and generate profits.
There is a global push to amend tax legislations to bring the digital economy into the fore. This push is driven by the need to: eliminate disparities in taxation between foreign and domestic businesses; reduce tax avoidance especially by large multinationals; and create fair tax policies that recognize the contribution of user data and participation to value creation.
While over 100 countries across the continent have announced or implement unilateral tax measures to tax the digital economy, the Organization for Economic Cooperation and Development (OECD), with cooperation from 130+ countries, is leading a process to address tax challenges of the digitalized economy with expected ramifications on the international taxation system.
In Kenya, digital technologies have fueled innovation and positioned the country as a leader in technology innovation on the continent. A bulk of these innovations have been in the financial sector, retail sector, transport sector and the hospitality industry.
In the retail and transportation sectors, digital technology innovations have resulted in the emergence and rise of digital marketplaces to serve the immediate need for goods and service by customers. These digital marketplaces are creating new economic opportunities for first-term entrepreneurs/workers while expanding the market for existing entrepreneurs/workers.
In November 2019, the Finance Bill 2019 was assented into law. The Act introduced amendments to existing legislation targeted at taxing the digital economy, specifically, digital marketplaces.
The effected changes were:
- The government broadened the VAT obligation of non-resident vendors of digital services by expanding the tax base to include supplies made to any person, a change from the previous law which only covered supplies made to registered persons.
- VAT would be applied to supplies made through a digital marketplace
- Income accruing through a digital marketplace would be taxable
In subsequent legislation, the government is set to prescribe additional specific measures on how these taxes, here in referred to as digital marketplace taxes, would be implemented. The government also reintroduced turnover tax for business whose annual turnover is less then KES 5 million. These regulations are set to have an effect on the digital economy ecosystem, including affecting platforms and platform workers.
Youth Impact Labs Program Overview: Mercy Corps exists to alleviate suffering, poverty and oppression by helping people build secure, productive and just communities. At Mercy Corps, we seek to create transformative change by tackling societal problems. Mercy Corps’ Youth Impact Labs program is an initiative geared to address the problem of youth unemployment in East Africa and the Middle East.
Catalyzed by funding from Google.org, Mercy Corps’ Youth Impact Labs (YIL) identifies and tests creative, technology-enabled solutions to tackle global youth unemployment, accelerating job creation so every young person has the opportunity for dignified, purposeful work. The program focuses on vulnerable youth aged 15-35 in the Middle East and East Africa regions through its two strategic office locations, Nairobi and Jordan. In Kenya, Impact
Labs focuses on digital marketplaces and platforms that offer services to micro and small businesses; agricultural supply chain management; and digital work. Mercy Corps’ Youth Impact Labs seeks to build a strong regional pipeline of innovators ready to create high-impact, scalable employment opportunities across various markets – for today’s youth and generations to come. Below is the criteria we use to select partners:
- Innovative: Bold solutions testing new business models and new technologies
- Scalable: Solution can be replicated in on a larger scale
- Sustainable: Innovation is financially self-sustaining
- Impact: Solution would great substantial new work opportunities
Mercy Corps’ Youth Impact Labs supports social enterprises through financial and technical support, issued in the form of milestone-based grants. Through our post-investment support function, on-boarded partners also get access to Google volunteers, to support development of technology solutions, and business support service providers, to provide tailored business support service to actualize scale.
Purpose of the Engagement: This study aims to map out the typical financial flows and tax incidences of gig workers, examine the potential impact of additional tax measures on worker earnings & participation in the gig economy and provide recommendations on best practices for taxing a nascent but promising sector.
The study will apply a qualitative approach, a human centered design approach is highly recommended, and will be anchored on worker personas and definitions of a typical gig worker across four categories of online gig workers: blue-collar workers, riders, online merchants and online professional freelancers.
For this study, the four categories of online gig workers will be collectively referred to as BROOM (Blue-collar workers, Riders, Online professional freelancers and Online Merchants) to allow ease of reference. This study is targeted at contributing towards the current conversation about taxing the digital economy by providing nuanced insights, backed by evidence, to policymakers and other ecosystem stakeholders.
Under the supervision of the Partner Evaluation Analyst, Youth Impact Labs, the consultant will be responsible for executing all aspects related to this study including desk research, data collection, interviews, focus groups, data analysis and the development of the final report.
The consultant will focus on the following:
Developing personas for four categories of workers in the gig economy: blue-collar workers, riders, online merchants and online professional freelancers. The consultant will specifically:
- Develop unique personas for each of the four worker categories.
- Develop the persona profiles based on a range of factors, among them, the age of the worker, educational background, motivation for participation in the gig economy, number of gig completed and the number of income streams.
Mapping out cash inflows and outflows for a typical blue-collar worker, rider, online merchant and online professional freelancer. The consultant will map the inflows for both platform workers (those working on online gig work platforms and digitally-enabled offline platforms) and non-platform workers (those working offline, in the traditional informal economy) in each of the four worker groups. The consultant will specifically:
- Define who is a typical sophisticated and a non-sophisticated gig worker in each of the four worker categories. The definition will, at a bare minimum, capture the age of the worker, educational background, motivation for participation in the gig economy, number of gig completed and the number of income streams. The scope will span both platform and non-platform workers.
- Define the typical journey for a sophisticated and a non-sophisticated gig worker from customer acquisition to completing a single customer transaction for each of the four worker categories.
- Lay out the financial flows of a typical gig worker, capturing the revenue, all related expenses and the net earnings of the gig worker in a typical day/month. The scope will span both platform and non-platform workers.
- Map out all the enablers (platforms) involved in a single typical transaction for by sophisticated and a non-sophisticated blue-collar worker, rider, online merchant and online professional freelancer.
Providing context on all the applicable taxes to gig workers. The consultant will provide a narrative description of each applicable tax and how it is applied, including what it is applied on, the actual tax rate and the frequency of payment. The consultant will also provide a view of which of the applicable tax rates gig workers often comply with.
Mapping out all the points of taxation and tax incidence on a typical gig work transaction by a sophisticated and a non-sophisticated gig worker in each of the four worker categories. The consultant will map this out based on all the applicable taxes that were in force pre- and post- the enactment of the Finance Act 2019, factoring in the digital marketplace taxes and the re-introduction of turnover tax. The consultant will also complete a similar mapping exercise for the same category of workers working offline, in the traditional informal economy.
Analyzing the impact of the newly introduction of digital marketplace taxes and turnover tax on the net earnings of a typical sophisticated and a non-sophisticated gig worker in each of the four worker categories.
The consultant will specifically:
- Establish the absolute and percentage change in the net earnings for a typical sophisticated and a non-sophisticated gig worker in each of the four worker categories.
- Compare the above computed net earnings against earnings made by same category of workers working offline, in the traditional informal economy.
- Assess the potential impact of the above income disparities in accelerating or decelerating the pace of formalization among informal sector worker
Developing 2 case studies that highlight successful/unsuccessful tax measures implemented during the nascent stages of promising industries in the digital economy.
The consultant will specifically focus on:
- Providing an overview of the country and the state of the target sector/industry where the legislative measure(s) were applied
- Highlighting the specific tax measure(s) that were introduced by the government to the nascent sector/industry
- Highlighting the impact of the government’s taxation approach to growing or undermining the growth of the sector
- Highlighting any subsequent changes in tax legislation to the sector/industry, when they were effected and the impact on the sector/industry
Recommending best practices for implementation of the new taxes. The consultant will synthesis all the findings and provide a recommendation on the best approach of taxation of online gig workers with a view to ensure that tax measures are not punitive.
The consultant/s will employ rigorous methodologies with sufficient rigor to generate actionable insights across the focus areas. This shall include, but is not limited to desk research, interviews with various stakeholders including digital marketplace owners, government and platform & non-platform workers.
The consultant/s will deliver a final report that broadly maps out the financial flows of a gig worker and quantified the impact of new tax measures on earning and participation in the online gig economy. Mercy Corps will review a draft copy of the report for feedback for completeness and accuracy of consultancy objectives and results.
The report will be no longer than 30 pages excluding annexes.
Further, the consultant will co-facilitate a readout pre/post the launch of the study report.
The Consultant will:
- Develop an inception report at the start of the engagement that will include the research methodology and work plan.
- Conduct secondary research through a rigorous desk review
- Conduct primary data collection through use of interviews
- Develop a draft final report for review by the Youth Impact Labs team
- Facilitate a readout event to present the draft report to selected stakeholders
- Develop a final report that incorporates recommendations from the Youth Impact Labs team
- The estimated start date for this engagement shall be 30th March 2020 and is expected to be completed by 8th May 2020.
Detailed Terms of Reference
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Proposals must be sent digitally by 5:00pm March, 20th 2020 to firstname.lastname@example.org