The Kenyan economy over the last few years has had a digital transformation. In that many services are being provided digitally and new services are coming up every day. The companies that have been providing these online services have been doing so without being liable to paying for local taxes.
The Kenyan government has been looking for ways to tax companies that provide digital services for years but without prevail. It needed to tax these companies because, it will have increased its tax base and make it a fair playing field for other companies that pay taxes.
Kenya alone is not the only country that has been trying to get money from digital services. Countries all over the world from Europe to South America have been trying to get a piece of the pie.
The Organization for Economic Cooperation and Development (OECD) in partnership with G20 came up with Base Erosion and Profit Shifting Project (the BEPS Project) to prevent tax avoidance. They realized that one of the ways that multinationals are not paying taxes is through provision of digital services.
This is mainly due to tax laws date back to the 1920s and taxation was and is tied to the physical presence of a business. Through digitalisation, many multinationals provide services to consumers in different countries without having a permanent establishment (PE) in the respective services. Hence, they do not pay their fair share.
The OECD and G20 released a proposal for a Unified Approach under Pillar One: in it the recommendations for nexus rules are that revenue thresholds be used to determine whether an entity has performed significant economic activities and generated taxable income within a given jurisdiction.
As coming up with a unilateral agreement with different countries takes some time, Kenya decided to introduce a digital service tax (DST) in 2019. Parliament passed the Finance Act 2019 (FA 2019) and made amendments to the Income Tax Act in 2019. The tax was said that any income accrued in Kenya through transactions across a digital marketplace shall be subject to income tax and value-added tax (VAT).
Whereby a “digital marketplace” was defined as a medium enabling direct interaction between sellers and buyers of goods and services through electronic means.
There was a lot of ambiguity with the finance act as it clearly states who would be liable to pay and did not address salient issues about the digital economy for example nexus rules and profit allocation.
A year a later on June 30th, 2020, Finance Act 2020 (FA 2020) was assented by the Kenyan President. FA 2020 introduced the Digital Services Tax (DST) which would be effective from 2nd Jan 2021. KRA defines DST as “Digital Service Tax (DST) is payable on income derived or accrued in Kenya from services offered through a digital marketplace.”
DST will be payable by persons whose income from the provision of services is derived from or accrues through a digital marketplace. The tax will be levied at the rate of one-point-five percent (1.5%) of the gross transaction value of the service and will be payable at the time of the payment transfer to the service provider.
DST is paid by:
- Digital service providers
- Digital marketplace providers, or
- Their appointed tax representatives
For locals and non-residents with PEs in Kenya, DST will be an advance tax that will be offset against corporate income tax for that year.
Non-residents without a PE, DST will be a final tax.
Digital services refers to, “any service that is delivered or provided over a digital marketplace to users in Kenya.” The digital services refer to
- Any downloadable digital content that includes mobile apps, films and e-books
- Streaming television shows, music podcast any other digital media through Over-The-Top services.
- Monetizing data collected from Kenyan users.
- Digital marketplace provision
- Subscription-based media
- Electronic data management
- Electronic ticketing services
- Search engine marketing
- E-learning and online courses
Gross Transaction Value
DST is charge at 1.5% of the gross transaction value of a service. The gross transaction value hasn’t been properly defined by the FA 2020, but DST tries to provide a distinction by saying:
- It is the payment received for providing of services.
- The commission paid to digital marketplace providers to use the various platforms.
According to the FA 2020, users in DST are:
- They access the digital interface from a terminal located in Kenya.
- They pay for the digital services using a credit or debit facility provided by financial institutions in Kenya.
- The digital services are gotten using an IP address registered in Kenya or a phone that has a country code assigned to Kenya.
- The user is a resident, has a business or has a billing address in Kenya.
Like any law there are certain businesses or organizations that are exempted from DST and they are
- Digital services provided by the Kenya government institutions.
- Sale of tangible goods online.
- Income of a non-resident person who carries on the business of transmitting messages by cable or radio communication, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, or any other similar communication;
- Income arising from online services that facilitate payments, lending or trading of financial instruments, commodities, or foreign exchange carried out by financial institutions specified under the Fourth schedule to the Income.
Any taxpayer who refuses to comply with DST will suffer the following:
- They will be restricted to use the digital marketplace in Kenya.
- There will be 5% penalty fee of the tax due if the business doesn’t submit DST on time.
- A fine of $1,000 every month until a maximum of $10,000 if not paid.
Interest charged at 1% per month or any part thereof on any unpaid tax.
KRA has a problem when it comes to collecting tax from businesses that do not have a permanent establishment in Kenya. It then decided to overcome this shortfall by asking foreign businesses to engage a tax service agent who will remit tax on their behalf.
The FA 2020 allows the provision of digital service tax agents. The agents are intermediaries of the state. The tax representative will be responsible for paying the required DST on the 20th of every month. They will deduct, collect, and remit the collected DST to KRA through the DST collection service. The agent will be appointed by the commissioner general of KRA.
The use of DST agents contradicts the DST rules because the payment should be done as soon as a transaction has occurred but by using the agents, payment is done on the 20th of the following month.
The following information would be required to register for DST:
- Name of the business.
- certificate of incorporation of the business.
- Tax identification number from the resident country.
- postal address of business.
- Business website.
- Name of the contact person responsible for taxation.
- Postal address of contact person.
- Email address of contact person.
- Telephone number of contact person.
DST registration will be done online on the iTax platform. Non-residents will register using a simplified tax registration through an online form on iTax through their tax agents.
Upon registration the business will receive a PIN from the Commissioner General for the purposes of filling tax.
To begin with there are technical challenges that the business service providers as well as KRA will have to overcome.
Firstly, when users decide to use Virtual Private Networks. Both the business and KRA won’t be able to tell whether the user is from Kenya or not.
With the rise of digital payments, KRA might not be able to track users who pay with digital currencies like PayPal, Bitcoin, and any other digital form of exchange.
The DST rules were introduced recently and most business are still adjusting their books and systems to comply with them. Setting up the infrastructure has proven to be a challenge.
Many businesses in Kenya are very small and don’t have the capacity to pay for DST. Taking for example an influencer who is paid KES 20,000 in a month, they will struggle to remit their incomes to KRA as its more cumbersome for them.
With regards to filing, KRA has two contradicting policies about DST payments. One is that they require the filings to be done at the time of transactions and the second option should be done on the 20th of the next month. There is not proper clarity on the issue.
OECD is meant to come up with a policy update on DST, which could make it more complicated for businesses. As they now rely on KRA’s judgement, OECD might come up with new policies all together.
There are countries that have tax treaties in Kenya and that would make it more complicated to apply DST. Digital services payments to countries that have income tax treaties with Kenya will not be subject to digital services tax, given the reliance on the concepts of residency and permanent establishment as a basis for determining the jurisdiction with the taxing rights.