KENYA DIGITAL SERVICES TAX
Digital Taxes
On 17th December 2020 the Kenya Revenue Authority (KRA) conducted a webinar on the new Digital Taxes due to come into effect on 1st January 2021. These are the Value Added Tax (Digital Marketplace Supply) Regulations, 2020 and the Income Tax (Digital Service Tax) Regulations 2020 (DST).
Background
Kenya has seen tremendous growth in ICT in the last few years. With the rising levels of internet penetration, the country has seen a rise in electronic commerce businesses. However, according to KRA the taxation of the sector is not in harmony with this growth. The new modes of businesses have poised taxation challenges not only in Kenya, but internationally as well. This is seen with the introduction of various digital taxes in a number of countries like France and the United Kingdom. The OECD is also trying to come up with a harmonised digital tax regime for its member countries. It is in this regard that Kenya Revenue Authority saw a need to tax the digital market. This is through the introduction of two types of taxes. These are VAT through the Finance Act 2019, VAT Act 2013 and The Value Added Tax (Digital Marketplace Supply) Regulations, 2020 and Income Tax through the Finance Act 2019, Income Tax Act, Tax Procedure Act and the Income Tax (Digital Service Tax) Regulations 2020. A digital marketplace is a platform enabling direct interaction between buyers and sellers of goods and services via electronic means.
Application
The VAT Tax provided under The Value Added Tax (Digital Marketplace Supply) Regulations, 2020 shall be paid by a non-resident business from an export (foreign) country providing a service to a Kenyan consumer. A Business in an export country providing services to a Kenyan consumer shall be required to charge, VAT on the service as this is a (B to C) transaction. While for a Business in an export country providing services to a Kenyan business (B2B), the Kenyan business is required to inform the business from the export country that this is a (B2B) transaction. Therefore, they shall tell them not charge the VAT. If they do not inform them, the business from the export country shall impose VAT and the Kenya Business will not be able to claim it. Further, the Kenyan business shall be required to account for the VAT through reverse tax.
The Income Tax provided under the Income Tax (Digital Service Tax) Regulations, 2020 shall be paid by a resident or non-resident person with a permanent resident in Kenya, it shall also be paid by a non-resident without a permanent resident in Kenya. It shall be charged at a rate of 1.5% of the gross transaction value of all digital services provided by the entity. Residents shall be able to offset this tax against their final income tax due at the end of a financial year. For non-residents and companies without a permanent establishment in Kenya, DST shall be a final tax.
N.B. KRA shall mainly rely on the principle of trust when it comes to enforcement of these taxes against non-resident businesses.
Scope of the Taxes
Both Taxes shall apply to:
1. downloadable digital content including downloadable mobile applications, e-books and films;
2. over-the-top services including streaming television shows, films, music, podcasts and any form of digital content;
3. provision of a digital marketplace;
4. subscription-based media including news, magazines and journals;
5. electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
6. electronic booking or electronic ticketing services including the online sale of tickets;
7. provision of search engine and automated held desk services including supply of customized search engine services;
8. online distance training through pre-recorded media or e-learning including online courses and training; and
9. any other service provided through a digital marketplace
N.B. DST shall also be levied on the sale of, licensing of, or any other form of monetizing data collected about Kenyan users which has been generated from the users’ activities on a digital marketplace.
Exemptions
VAT on Digital Market Place shall not apply to services exempted from VAT under the VAT Act. However, the platforms used to provide these services online shall not be exempted from VAT. For example, Education as a service is exempted from VAT but a platform used to conduct the online learning shall not be exempted from VAT.
Digital Service Tax shall not apply to:
a. Income taxed under provision of section 9 (2) and section 35 of the Income Tax Act
b. Online service provided by the government
c. Income already exempt under the 1st Schedule of the Income Tax Act
d. Online Services online services which facilitate payments, lending or trading of financial instruments, commodities or foreign exchange carried out by: a financial institution specified under the Fourth Schedule to the Income Tax Act; or a financial service provider authorized or approved by the Central Bank of Kenya
Registration/Payable date
The registration of both Digital VAT and DST shall be done on the KRA I-Tax platform. This shall be through the simplified tax registration framework. A non-resident company may also appoint a tax representative for purpose of complying with the Taxes.
Both VAT and DST shall be remitted to KRA on or before the 20th of the following month.
Examples of how the taxes shall apply
Value Added Tax (Digital Marketplace Supply) Regulations, 2020
Scenario 1
Online Streaming service company Boma (Business) from America (export country), is in the service of providing television and movie shows to Wanjiku a Kenyan Citizen (Consumer). The service is currently priced at Kenya Shillings 800/=. From 1st January 2021 the Business shall be required to raise the price charged to Wanjiku to accommodate the new VAT on Digital Market Place. The VAT is currently at 14% but may revert to 16% from 1st January 2021. Therefore, Boma shall now charge if we go with 16% VAT around Kenya Shillings 928/=. They shall then remit Kenya shillings 128/= to the Kenya revenue Authority.
Scenario 2
Online Streaming service company Boma (Business 1) from America (export country) is in the service of providing television and movie shows to Mali Company a Kenyan Company (Business 2). This is a B2B transaction and thus Mali shall be required to inform Boma that this is a B2B transaction and they should not charge VAT. Mali will instead claim Reverse VAT.
Scenario 3
Online E-commerce company (Uzo) from America (Export country) is in the business of allowing buying and selling of goods on its platform. Wanjiku (Consumer) based in Kenya buys a phone from them. They will not charge VAT on the goods. This is because when the phone comes to the country it shall be subjected to all the taxes that are imposed when importing goods to Kenya. Further the Digital VAT only applies to a services. The phone is not a service but a good.
Income Tax (Digital Service Tax) Regulations 2020
Scenario 1
Online Streaming service company Boma (Business) from America (export country and non-resident) is in the service of providing television and movie shows to Wanjiku a Kenyan Citizen (Consumer). The service is priced at Kenya Shillings 800/=. From 1st January 2021 the Business shall be required charge a 1.5% Income Tax on the gross transactional value in this case on the Kenya Shillings 800/=. They shall remit this tax to KRA and Boma shall be able to offset it against their annual income tax.
Scenario 2
Online Streaming service company Wazi (Business) from Kenya (resident) is in the service of providing local television and movie shows to Wanjiku a Kenyan Citizen (Consumer). The service is priced at Kenya shillings 300/=. From 1st January 2021 the Business shall be required charge a 1.5% Income Tax on the gross transactional value in this case on the Kenya Shillings 300/=. They shall remit this tax to KRA and Wazi shall be able to offset it against their annual income tax.
Scenario 3
Online Influencer Maria is in the business of offering marketing and advertising service on hair products through Instagram. For each post she charges Kenya Shillings 10,000/=. If KRA determines that she is providing a marketing service through a digital service platform, she will be required to remit an Income Tax of 1.5% to KRA. This will be for the service she has provided of marketing the hair products on Instagram.
Conclusion
The world economy is moving from the traditional brick and mortar concept of doing business to an online one. This has brought with it taxation challenges as the traditional taxation concepts, do not seem to be working in the digital era of doing business. Thus, this has brought out the need for an introduction of new models Taxation. One that various tax agencies around the world hope will be in line with the rise of digital businesses.
Please note that the information above is for knowledge purposes only and should not be construed to be legal advice or relied on as such.
For further enquiry on the Digital Taxes please contact KRA on digitaleconomy@kra.go.ke or 0202812053/0202816184
By: Mwenda Tevin
Mwenda Tevin is a lawyer and researcher with a keen interest in Law, technology and Policy. He is also a member of Young Kenyans in Technology, the Kenya ICT Action Network and the Internet Society.
LinkedIn: Mwenda Tevin
