Taxation of Kenya´s digital marketplace

published on 24 November 2020 | reading time approx. 3 minutes

Kenya's digital marketplace is the latest frontier in the modern economy to be targeted to expand the country's tax base and bring in significant additional revenue for the government. Taxation of the digital marketplace will come in the form of the newly introduced "digital service tax" and value-added tax (VAT) on taxable services supplied in Kenya through the digital marketplace by Business to Customer (B2C) transactions.

The Kenya Revenue Authority recently announced that they seek to collect KShs 5 billion in revenue from taxation in the digital economy in the first 6 months of 2021. The pressures created by the COViD-19 pandemic have elevated the digital economy as a safer means of doing business. The speed and breadth of the digital transformation in the world around us has brought about challenges in many policy areas, including taxation.

Reforming the international tax system to address the tax challenges arising from the digitalization of the economy has therefore been a priority of the international community for several years, with commitments to deliver a consensus-based solution by the end of 2020. In the succeeding paragraphs, we will take a brief look at the new measures and legislation brought in place to govern taxation of the digital marketplace in Kenya.

Digital Service Tax

The Finance Act 2020 introduced a digital service tax (DST) on income from services provided through the digital marketplace in Kenya. The DST will be applied at 1.5 percent on the gross transaction value (exclusive of VAT) and it is to be effective from 1 January 2021. One will be subject to DST if one provides or facilitates provision of a service to a user who is located in Kenya. The DST will apply to the income of a resident or non-resident person derived or accrued in Kenya from the provision of services through a digital marketplace. The National Treasury released draft Income Tax (DST) Regulations that are intended to guide the application and implementation of DST from 1 January 2021.

As per the draft Regulations, the digital services that will be subject to DST are wide-ranging and include: online streaming of digital content such as movies, music, online games and e-books; provision of a digital marketplace that link buyers and sellers; subscription-based media including news, magazines and journals; electronic data management including website hosting, file-sharing and cloud storage services; tickets for live events, restaurants etc. purchased through the internet as well as eLearning and online courses. The Draft Regulations also state that the DST will apply to 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 DST will however not apply to licensed financial services providers who carry out online services which facilitate payments, lending or trading of financial instruments, commodities or foreign exchange. This effectively exempts banks, licensed sacccos, micro-finance institutions etc from DST.

The DST will be due at the time of transfer of the payment for the service to the service provider. The KRA will appoint DST agents who'll collect and remit the DST to the revenue authority by the 20th of the following month from when the digital service was offered, which is similar to the current VAT collection system. Foreign companies who do not have a phsyical presence and address in Kenya will be required to appoint a local tax representative who will be required to remit the DST on their behalf. For resident companies and companies with a permanent establishment, the DST will be an advance tax that they will offset against income taxes due in the course of the financial year.

VAT on B2C Transactions

Aside from the DST, there will also be VAT charged on taxable services supplied in Kenya through the digital marketplace. The VAT will be applicable on B2C transactions. On September 25, The Value Added Tax (Digital Marketplace Supply) Regulations, 2020 were gazetted through Legal Notice No. 190 of 2020. The Regulations generally provide the mechanisms for accounting for VAT on taxable supplies made in Kenya through a digital marketplace by foreign suppliers. The term "digital marketplace" is defined in the VAT Act as "a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means."

Specifically, the Regulations provide a simplified tax registration framework for non-residents, scope of digital services that are subject to VAT in Kenya, the requirements and the process for VAT registration for non-resident providers of digital services, the appointment of local tax representatives and the rules for the accounting and payment of VAT. The Regulations also require that non-resident providers of digital services register for VAT in Kenya by February 2021 i.e 6 months from the date of the publication of the Regulations. A registered person shall declare and pay tax on the supplies made on the digital marketplace at the rate specified in section 5(2)(b) of the VAT Act, i.e., the current standard rate of 14 percent.

A person from an export country making a B2C supply to a recipient in Kenya who elects not to register, shall appoint a tax representative in accordance with section 15A of the Tax Procedures Act, 2015. The Regulations do not allow deduction of input tax for the B2C transactions for a supply on a digital marketplace therefore implying that the supplier incurs the VAT cost or passes it on to the consumer. Further a registered B2C supplier will be exempted from issuing the electronic tax invoice but still be required to issue a receipt showing the value of supply and tax deducted thereon.

Conclusion

The government's intention with these new taxation measures is to broaden the tax base through inclusion of business activity in the digital marketplace. While it is laudable that Kenya is one of the early adopters of taxation of the digital economy, it remains to be seen how effective the new legislation turns out to be and the levels of compliance by the indsutry players.