How The New Digital Service Tax Works

On January 2, 2021, Income Tax (Digital Service Tax) Regulations, 2020, that set the parameters for the taxation of income generated from a digital marketplace came into effect. 

This was a culmination of two amendments to the Income Tax Act (in 2019 and 2020) that introduced the Digital Service Tax (DST). 

In 2019, a ‘digital marketplace’ was defined as ‘a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means’. The regulations that came into force in January then defined ‘digital service’ as ‘any service that is delivered or provided over a digital marketplace.’

In the Finance Bill (now Act), 2021, Treasury further amended the Income Tax Act to expand the definition of ‘digital marketplace’ to ‘an online platform which enables users to sell or provide services, goods or other property to other users’ and ‘digital service’ as ‘a business carried out over the internet or an electronic network including through a digital marketplace.’

The Treasury said the amendment was a response to the government’s realisation that existing tax provisions did not cover all traders using digital service platforms for business transactions.

According to the Communications Authority of Kenya (CAK) in 2018, mobile data subscriptions stood at 46.63 million users and the value of mobile commerce transactions stood at Ksh1.6 trillion.

This rapid rise in levels of internet penetration in Kenya (further hastened by the pandemic), provided an opportunity for the taxman to expand the tax base. 

Up until the end of the 2020/2021 Financial Year, the DST affected any individuals or companies (both resident and non-resident) that enabled the provision of a service to any end-user located in Kenya, a fact that sparked a heated debate in the business world. 

Who is Subject To Pay The Digital Service Tax?

Kenyan citizens as well as foreign companies or individuals that provide digital marketplace services for Kenyans are subject to DST. [Note that for this Financial Year, Parliament clarified that Kenyan service providers will not be subject to DST).

Any non-residents (that provide digital services in Kenya) without a permanent residence in the country should appoint a tax representative to handle their DST obligations.

“Betting companies are liable to pay DST on income they earn from bets placed by punters through digital platforms such as a mobile app or website,” reads an excerpt from a statement issued by KRA on February 18, 2021.

Other digital services that are subject to the Digital Service Tax are highlighted below:

• Over-the-top services including streaming television shows, films, music, podcasts and any   form of digital content.    
• Downloadable digital content including downloadable mobile applications, e-books and films.    Sale of, licensing of, or any other form of monetising data collected about Kenyan users which has been generated from the users’ activities on a digital marketplace.    
• Provision of a digital marketplace.    
• Subscription-based media including news, magazines and journals.    
• Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services.    
• Electronic booking or electronic ticketing services including the online sale of tickets;    Provision of search engine and automated help desk services including supply of customised search engine services.    
• Online distance training through pre-recorded media or e-learning including online courses and training.    
• Any other service provided through a digital marketplace.
  

Notably, DST does not apply to income that is subjected to withholding tax in Kenya. It also doesn’t apply to online services that facilitate payment, lending or trading of financial instruments.

Foreign exchanges by financial institutions authorized by the Central Bank of Kenya (CBK) are also not liable to the DST.

How is The Digital Service Tax Computed?

The 2020 Amendment imposed a DST of 1.5% of the gross transaction value for the services conducted on electronic/online platforms.

The gross transaction value is the payment received as a consideration for a digital service such as the fee paid for the use of an online platform such e.g. streaming and downloadable services of digital content.

When is The Digital Service Tax Due?

Taxpayers are required to make their returns and payments relating to DST before or on the 20th day that comes after the month in which the digital service was offered.

How Can Taxpayers Register For The Digital Service Tax?

Non-Resident digital service providers without a permanent resident in Kenya can register for the DST through an online registration form via the iTax portal – itax.kra.go.ke/KRA-Portal/

What’s The Penalty for Failing to Submit The Digital Service Tax Returns?

Under the Tax Procedures Act, any individuals or companies that fail to comply with the DST regulations attract a penalty of 5% of the tax payable.

A monthly accrual of interest (1%) of the tax payable is also attached as a penalty for non-compliance.

Does DST apply to those selling goods via digital or social media platforms?

DST is applicable to digital services, thus for goods sold on digital or social media platforms the suppliers are required to declare the income earned under the self-assessment regime provided under the relevant Tax Laws.

Uproar

The government’s decision to enact the new tax laws drew heavy criticism from the business community.

In April 2021, tax and audit consultants PricewaterhouseCoopers (PwC) pointed out numerous ambiguities within the DST regulations that have been raising complexities in terms of administration.

“A detailed analysis of the legal provisions and DST regulations reveals some intricacies and potential adverse impacts on businesses...KRA has been issuing DST notifications and demanding DST without fully understanding the business operating models.

“The ability to offset digital service tax against other income taxes such as minimum tax as well as the VAT registration threshold for digital marketplace supplies is also not quite clear,” PwC said. 

The USA has been a major critic of Digital Service Taxes, since as early as 2018, when it threatened to impose retaliatory tariffs by arguing that DSTs unfairly targeted Multinational Corporations (MNCs) based in the U.S.

Digital services taxation is not unique to Kenya as many other governments around the world have similar regulations.

However, different countries implement this new tax with varying stipulations. For example, Austria only applies it’s 5% rate DST on digital advertising while Poland’s DST only applies to streaming services.

Poland’s DST rate is similar to Kenya’s (1.5%), with other countries opting for a higher rate such as Turkey and Hungary at 7.5%.

Kenya’s new tax laws targeting the digital marketplace may be subjected to several reviews, however, they have already raised the cost of some of the affected services. 

In May, for instance, Netflix reviewed its monthly charges upwards to include the tax. The standard package increased to Ksh1,100 from Ksh950 while the premium package rose to Ksh1,450 from Ksh1,200.