As the Organisation for Economic Co-operation and Development continue to deliberate on finding a consensus on a universally acceptable framework for the taxation of the digital economy, Kenya is moving ahead with a unilateral tax on digital services. In 2020, Parliament enacted the Finance Act 2020 which inter alia introduced a Digital Services Tax DST with effect from 1 January 2021 which is payable by persons whose income from the provision of services is derived from or accrues in Kenya through a digital marketplace.
The Digital Services Tax (DST) will be chargeable at the rate of 1.5% of the gross transaction value of the service and is payable at the time of the payment transfer for the service to the service provider. The DST is an advance tax for resident persons and non-resident persons with a Permanent Establishment (PE) in Kenya and a final tax for non-residents with no PE in Kenya.
The DST regulations are proposed to apply to any other service provided or delivered through an online digital or electronic platform but excluding such services that are subject to withholding tax under the Income Tax Act. This means that payments made for sales promotion, marketing and advertising services chargeable to withholding tax under the Income Tax Act will not be subject to the DST. It is important to note that this is a wide definition that is likely to net a wide range of digital services to the DST.
Digital Service Tax DST Regulations
The DST Regulations propose that a person shall be subject to DST if the person provides or facilitates provision of a service to a user who is located in Kenya. A user will be deemed to be located in Kenya if they (a) access the digital interface from a terminal (device) located in Kenya; (b) pay for the service using a credit/debit facility by a Kenyan company; (c) acquire the services using an IP address registered in Kenya or an international mobile phone country code assigned to Kenya; or (d) have a business, residential or billing address in Kenya.
The new Regulations propose to distinguish the gross transaction value of services provided by (i) a digital service provider, to be the payment received as consideration for the services and (ii) a digital marketplace provider, to be the commission or fee paid for the use of the platform. For context, the DST Regulations distinguish the two providers by drawing the line between direct providers of digital services and providers of platforms that allow for the interaction of buyers and sellers of digital services.
In addition, the DST Regulations propose that digital service providers or their tax representatives submit a return indicating the value of transactions and the tax be remitted by the 20th of the month following the end of the month that the digital service was offered. As mentioned above, there does seem to be a contradiction between the provisions of the law and what is proposed by the regulations. In addition, a person required to deduct, account and remit the DST to KRA will be required to keep records for a period of five years from the end of the reporting period.
Lastly, the DST Regulations propose that a person who fails to comply with the Regulations may be liable to restriction of access to the digital market place in Kenya until such obligations are fulfilled. This is may not be a sufficient penalty as consumers could easily use Virtual Private Networks (VPNs) to bypass the restrictions. But on the other hand, VPN services are also likely to be covered under chargeable services.
How Can We Help?
At Valsen Fiduciaries Group, we are at your disposal to discuss what the implementation of the Digital Service Tax in Kenya means for you and your organization. Please contact us through [email protected] or +248 2 525 217