By: Fredrick Omondi & Norman Mekgoe – First Published on Deloitte
Following the introduction of a digital service tax (DST) in Kenya, with effect from 1 January 2021, the Kenyan Cabinet Secretary for National Treasury and Planning recently issued the draft Income Tax (Digital Service Tax) Regulations of 2020, which provides significantly more detail on the persons affected and the scope of DST.
This alert summarises the draft digital tax regulations as issued by the Kenyan Cabinet Secretary for National Treasury and Planning and addresses key technicalities of the Kenyan DST.
Who will be affected?
DST will apply to residents and non-residents who fall into either of the categories below:
- Digital market place providers – A person who provides a platform that enables the direct interaction between buyers and sellers through a digital market place, website or other online applications
- Digital service providers – A person who provides digital services through a market place, i.e. any service that is delivered or subscribed over the internet or other electronic network where the delivery of the service is automated.
Digital market place providers and digital service providers will be subject to DST in Kenya if they provide or facilitate the provision of services to a user who is located within the borders of Kenya. A user is considered to be located within the borders of Kenya, for the purposes of applying DST, if one of the following parameters are present:
- the user accesses the digital interface from a terminal, e.g. a computer, tablet or mobile phone, located in Kenya
- payment for digital services is made using a credit or debit facility provided by any financial institution or company in Kenya
- digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya
- the user has a business, residential or billing address in Kenya.
DST paid by a resident or non-resident, with a permanent establishment in Kenya, will be offset against their income tax liability for the applicable year.
Scope of digital services tax
The following digital services are subject to DST in Kenya:
- streaming and downloadable services of digital content, including but not limited to 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 monetised (i.e. cash, credit card, cryptocurrency, etc.)
- provision of a digital marketplace, website or other online applications that connects 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 customised search engine services
- tickets bought for live events, theatres, restaurants, etc. purchased through the internet
- online distance teaching via pre-recorded medium or e-learning, including online courses
- any other service provided or delivered through a digital or electronic platform, excluding any service whose payment is subject to withholding tax.
The regulations provide for an exemption for licensed financial service providers providing online services, i.e. facilitating payments, lending or trading of financial instruments, commodities or foreign exchange. Such services are not regarded as digital services and, therefore, will not be subject to the Kenyan DST.
Gross transaction value
Kenyan DST will be imposed at a rate of 1.5% on either :
- consideration received in respect of the service provided in the case of a digital service provider
- the commission or fee paid for the use of the platform in the case of a digital marketplace provider
excluding value-added tax (VAT) charged for the service.
Payment of DST
DST is due, and payable, on transfer of payment to the service provider and the liability for payment of DST falls onto the service provider or, alternatively, any person that collects payments for digital services. Any person who falls within the scope of DST has an obligation to register for such tax and accordingly remit payment to the Commissioner and submit a return.
Where a non-resident without a permanent establishment falls within the scope of DST, such non-resident is required to appoint a tax representative to account for the remittance of DST to the Commissioner.
Digital service providers, or their tax representatives, are required to submit a monthly return indicating the value of transactions undertaken and the DST remitted by the 20th day of the month following the end of the month that the digital service was offered.
Any person who fails to pay DST and comply with the compliance provisions will not only be subject to penalties prescribed by Kenyan tax laws, but will also be restricted from accessing the digital market place in Kenya until such time as the obligations are fulfilled.