Digitalization is a present reality in today’s world that one cannot ignore as it keeps on evolving. Globally, countries have come to terms with the impact that technological innovation has on their respective economies. Africa has not been left behind, many countries are trying to come up with measures that will ensure they get the most benefit out of it. Similarly, the taxation landscape is evolving in a bid to catch up with the digital world.
History of digital service tax in Kenya
In Kenya, taxation on digital transactions began way back in 2019. Through the Finance Act of 2020, Digital Service Tax was introduced, which became effective from 1st January, 2021. According to Section 12 (e) of the Income Tax Act of Kenya, digital service tax is defined as a tax paid on income that is derived in Kenya through a business carried out over the internet or an electronic network including through a digital marketplace. However, digital service tax is only limited to non-resident personnel without a permanent establishment, therefore, not applicable to resident persons and non-resident persons with a permanent establishment as they are subject to individual income tax and corporate tax.
What is a digital marketplace?
A digital marketplace refers to an online or electronic platform that enables buying and selling of goods, services and other property whereas a digital marketplace provider refers to a person who provides a digital marketplace. Moreover, a digital service refers to a transaction enabled over a digital marketplace.
It is a requirement for a person subject to Digital service tax to submit a return and pay the tax due to the Commissioner on or before the twentieth day of the month succeeding that in which the digital services were offered. Many a time, online businesses that are foreign-owned fail to understand their role when it comes to the remittance of digital service tax. Failure to account for digital service tax attracts penalties and interests on any tax amount that remains due to the government.
Rate of digital service tax
Digital service tax is applicable at the rate of 1.5% on the gross transaction value which is either of the consideration received for digital services or commission paid to the provider of the digital platform. Notably, gross transaction value is exclusive of VAT.
Categories and examples of digital supplies
Legal Notice No. 190 of 2020 describes what digital supplies are and also lists down the categories as well as examples of each category. These include:
- Downloadable digital content including downloadable mobile applications,films and ebooks.
- Subscription-based media including news, magazines and journals.
- Over-the-top services such as television shows, films, music and podcasts.
- Software programs including drivers, software, website fillers and firewalls.
- Electronic data management including website hosting, online data warehousing, file sharing and cloud storage services.
- Search engine and automated help desk services, customizable search engine service.
- Tickets for live events, theaters or restaurants.
- Distance teaching through pre-recorded media or e-learning including online courses and training
- Digital content for listening, viewing or playing on any audio, visual or digital media.
- Services that link the supplier to the recipient including transport-hailing services or platforms.
How to pay for digital service tax in Kenya
It is important for taxpayers to note that digital service tax is a final tax. When making tax payments, entities should do so in Kenyan currency(Kenya shillings) and deposit the tax amount due to the KRA account using any of the authorized commercial banks. KRA has enabled an electronic transfer to ease the payment of tax by taxpayers. KRA also plans to link its system to telecommunication companies, banks and the Central Bank of Kenya to increase tax compliance.
Global minimum corporate tax rate
The Organisation for Economic Cooperation and Development (OECD) is championing the implementation of a global minimum tax. The proposal includes a two-pillar solution to address the tax challenges arising from digitalization and globalization of the economy. The rules defined in the scope set out the mechanism for the Global Anti-Base Erosion (GloBE) under Pillar Two, which intends to introduce a global minimum corporate tax rate set at 15% of the revenues generated by multinational companies in a country in place of digital service tax. The minimum tax will apply to MultiNational Companies with revenue above EUR 750 million and is estimated to generate around USD 150 billion in additional global tax revenues annually. The GloBE rules provide for a coordinated system of taxation intended to ensure large Multinational Enterprise (MNE) groups pay this minimum level of tax on income arising from each of the jurisdictions they operate.
The International Monetary Fund (IMF) is backing the global minimum tax proposal. On the other hand, Kenya is yet to sign in support of that proposal since it is still interrogating the proposal and analyzing the net effect of doing away with the Digital Service Tax as it had projected a tax revenue of 13.9 billion from Digital service tax in the next 3 years.
In the near future we shall witness many changes to digital service taxation as the digital world is dynamic and it hasn’t been fully explored. The value of exchanging digital assets such as cryptocurrency and Non-Fungible Tokens(NFTs) is yet to be established. Countries signing into the minimum tax deal will forgo any emerging benefit from taxes in the future when it comes to digital transactions while on the other hand they might face sanctions if they don’t sign.
Now that you have a grasp of digital service tax learn more on how our tax team can help you. Our tax division recognizing that taxation constitutes a major business cost is able to provide advisory, agency and tax compliance services in a myriad of areas.
Read also: Kenya Tax Guide -types of statutory taxes