Overview
For some time now, tax authorities from around the world have been seeking to tap from the expansive digital economy. They have grappled with trying to tax companies that provide digital services across the cyberspace while being physically located in other countries. The emerging trend has been through the introduction of a tax known as the Digital Service Tax (“DST”). The tax, which has been introduced by the UK government, the EU, and other countries worldwide is a tax that is applied to companies in the digital service industry. The introduction of the tax has faced major opposition, especially from the US, which is home to the largest companies in the digital economy. The Organisation for Economic Co-operation and Development (OECD) and G20 countries began negotiations in 2013 to address tax matters related to the digitalization of the economy as part of a broader review of international tax rules. Though these negotiations are still ongoing, more countries from both the OECD and beyond have proceeded to introduce the tax. As of March, 2021, Austria, France, Hungary, Poland, Spain, Turkey and UK implemented a DST in their national tax regimes
This move has been fueled in part by the events of the recent past. The last two years have seen a rise in the provision of services and products over social media platforms especially due to the covid-19 pandemic which necessitated some stringent measures including issuance of travel bans and imposition of lockdowns in many regions globally. Yet, transactions had to continue as well as other business, an alternative to this was then the digital marketplace.
DST was first introduced in Kenya through the Finance Act, 2019 and implemented by the Finance Act 2021 and the Income Tax (Digital Service Tax) Regulations, 2020 (“Regulations”) which came into force on 2nd January, 2021. Application of DST became effective on 1st July 2021.
Under the Kenyan regime, DST is a tax on income accruing from a business carried out over the internet or an electronic network, including through a digital marketplace. In essence, any income accrued in or derived from Kenya by a non-resident person in relation to services provided over the digital marketplace is subject to DST. The Finance Act, 2021 has defined a Digital Marketplace (“DMP”) to mean an online or electronic platform which enables users to sell or provide services, goods or other property to other users.
Salient provisions of the legal regime on DST
i. Who is liable to pay?
DST is payable by Non-Residents. It applies to the income of a non-resident person that is derived from or that accrues in Kenya from the provision of services through a digital marketplace and is paid in Kenyan currency into the KRA account. A digital service provider is liable to payment of DST if the digital service is provided to a user located in Kenya.
DST is not chargeable on income that is derived from Kenya by non-resident persons who carry on the business of transmitting messages by cable, radio, optical fibre, etc. It is also not chargeable on income that is subject to the withholding tax regime.
ii. What is the DST rate?
DST is chargeable at a rate of 1.5% of the Gross Transaction Value (GTV). In provision of digital services, the GTV is the payment received as consideration for the services and in the case of a digital market place, GVT is the commission or fee paid to the digital marketplace provider for the use of the platform. This GVT is exclusive of Value Added Tax chargeable for the services. DST is paid on or before the 20th day of the following month in which the digital service was offered.
- iii. Registration
A non-Resident person without a permanent establishment in Kenya and who provides a digital service in Kenya is required to register under the simplified registration Framework while a non-Resident with a permanent establishment in Kenya providing digital services in Kenya is required to apply to the Commissioner for DST for registration.
iv. Sanctions for non-compliance
The applicable regime provides for various penalties for non-compliance with the provisions of the Act and the Regulations, including for failure to keep proper records, as required under the tax laws.
Conclusion
DST comes at a time when most economies if not all are struggling, amidst budget pressure and the heavy cloud of government borrowing and feeling the weight of the pandemic. Governments are looking into different ways of raising and increasing national revenue including imposing a tax on online transactions via digital marketplace by digital service providers and digital marketplace providers. A few gaps have been noted with respect to the DST regime in Kenya. Notably, neither the substantive Act nor the Regulations set a minimum threshold for applicability of this tax. This seems to be a departure from the practice in other countries like France, Italy, and United Kingdom, that have set both global and domestic revenue threshold. This means that in Kenya, DST is payable by all persons liable, regardless of their turnover and profitability. Despite this and other administrative gaps, Kenya seems determined in implementing the DST. The government is particularly hopeful that the tax will help increase its revenue collections and aid in its development programs. Observers are keen to see whether pressure from the US would lead to the government backtracking on this tax, especially in light of the ongoing negotiations for a bilateral trade agreement.
Article by Ann Yvonne Muriithi
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