TAXATION OF THE DIGITAL ECONOMY IN KENYA

Background

Over the last few years there has been a growing consensus among policy makers, academics and businesses that the international tax system has been outpaced by globalization and the growth and scale of multinational enterprise.

In the European Union, the European Parliament resolution of 16 December 2015 called for legislative proposals adjusting the definition of 'permanent establishment' to grasp the digital presence and introducing a definition of 'minimum economic substance'.

India was the first country to introduce digital tax called ‘Equalization Levy’ in 2016 at the rate of 6%. EL 1.0 was payable by Indian residents on online advertisement services purchased from non-resident companies. From 1 April 2020, the scope of equalization levy has been expanded to include 2% levy on all online sale of goods or services into India by non-resident e-commerce operators.

In Kenya, digital tax was introduced into our tax laws through Finance Act 2019.

 Parliament enacted the Finance Act 2020 which introduced a Digital Services Tax 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 market place.

The tax measures introduced simply highlighted that income derived in Kenya through transactions across a digital marketplace shall be subject to income tax and value-added tax (VAT)

A “digital marketplace” is defined as a platform enabling direct interaction between buyers and sellers of goods and services via electronic means.

Digital Service Tax (Income Tax)

Scope of Taxable Services

The digital services upon which the DST shall apply will include the following:

·        streaming and downloadable services of digital content such as movies, videos, music, applications, online games and e-books;

·        transmission of data collected about users which has been generated from such users’ activities on a digital marketplace, however monetized;

·        provision of a digital marketplace, website or other online applications that link buyers and sellers;

  subscription-based media including news, magazines and journals;

·        electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;

·        supply of search-engine and automated helpdesk services including supply of customized search engine services;

·        tickets bought for live events, theatres, restaurants etc. purchased through the internet; and online distance teaching via pre-recorded medium or eLearning, including online courses.

·        any other service provided or delivered through an online digital or electronic platform but excluding services that are subject to withholding tax as prescribed by the Income Tax Act.

The services of a licensed financial service provider carrying out online services which facilitate payments, lending, or trading of financial instruments, commodities or foreign exchange shall not be digital services for the purposes of these Regulations.

Determination of User Location

A person shall be subject to digital service tax if the person provides or facilitates provision of a service to a user who is located in Kenya.

A user of a digital service shall be deemed to be located in Kenya if any of the following parameters are present -

(a) The user accesses the digital interface from a terminal (computer, tablet or mobile phone) located in Kenya;

(b) Payment for the digital services is made using a credit or debit facility provided by any financial institution or company in Kenya;

(c) Digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya;

(d) The user has business, residential or billing address in Kenya.

Tax determining value

The digital service tax shall be imposed on the gross transaction value of the service which shall be –

 (a) in the case of a digital service provider, the payment received as consideration for the services; and (b) in the case of a digital marketplace provider, the commission or fee paid for the use of the platform. 

The transaction value of the service shall not include Value Added Tax charged for the service.

The digital services tax will be charged at a rate of 1.5% of the gross transaction value

Accounting and Payment

The Regulations provide that payment of the tax shall be the liability of the digital service provider or any person that collects the payments for digital services and shall be due and payable at the time of the transfer of the payment for the service to the service provider.

Non-residents may appoint tax representatives in Kenya who shall be responsible for remitting the digital service tax to the Kenya Revenue Authority.

Digital Service Tax Agents

The revenue authority will appoint tax agents who shall deduct, account and remit the digital service tax to the Commissioner through a digital service tax collection service

Record Keeping

The person deducting DST is required to keep records for at least 5 years

Returns

Digital tax agents will make a return indicating the value of transactions and the tax remitted by the twentieth day of the month following the end of the month that the digital service was offered.

Offences and Penalties

A person who fails to comply with DST regulations may be barred from accessing the digital market place until all such obligations are met.

Effective date

The regulations becomes effective on 01/01/2021

Is DST a final tax?

For resident and permanent establishment companies, DST will be an advance tax  that will be offset against income tax. I will be a final tax for non-residents without a permanent establishment in Kenya

Value Added Tax (Digital Marketplace Supply)

The Value Added Tax (Digital Marketplace Supply) Regulations, 2020 were gazette through Legal Notice No. 190 of 2020 dated 25 September 2020.

Scope of Taxable Supplies

The Regulations define the following supplies as taxable supplies at the digital market place:

·        Downloadable digital content including mobile applications, e-books and films;

·        Subscription based media including news, magazine and journals;

·        Over the top services including streaming television shows, films, music, podcast and any other digital content;

·        Software programmes which include software, drivers, website, filters and firewalls;

·        Electronic data management including website hosting, online data warehousing, file sharing and cloud storage services;

·        Music and games;

·        Search engine and automated help desk services including customizable search engine services;

·        Tickets for live events, theatres and restaurants;

·        Distance teaching through pre-recorded media or e-learning including online courses and training;

·        Digital content for listening, viewing or playing on audio, visual or digital media;

·        Services that link the supplier to the recipient including transport hailing services;

·         Electronic services under section 8(3) of the VAT Act 2013 ((a) websites, web-hosting, or remote maintenance of programs and equipment; (b) software and the updating of software; (c) images, text, and information; (d) access to databases; (e) self-education packages; (f) music, films, and games, including games of chance; or (g) political, cultural, artistic, sporting, scientific and other broadcasts and events including broadcast television.)

·        Any other service that is provided through a digital market place and is not exempt under the Act.

Registration

All digital suppliers are required to comply with these regulations not later than 25th February 2021. A person who fails to comply with these regulations shall be liable for penalties under the VAT Act or the Tax Procedures Act. Non-Residents businesses will be required to register for VAT with KRA or appoint tax representatives to account for VAT on their behalf.

Eligibility

The regulations are applicable to Non-residents digital service providers who provide digital services to final consumers in Kenya ie B2C transactions. B2B transactions are not eligible.

Eligible transactions are where the recipient of the service :

i. is in Kenya;

ii. makes payment for the services through a bank registered in Kenya; or

iii. the payment for the services is authorized in Kenya

Time of Supply

The transactions will be accounted for the earliest of:

i. the date the payment for the supply was received whether in whole or in part; or

ii. the date of the invoice or receipt issued.

Conclusion

Registered providers will need to determine if their customer is consuming the services in Kenya. They may rely on the following factors to determine this place of supply:

• ·     Postal address
•       Credit card or bank transfer details
•       IP address
• Mobile SIM card country code