What you should know about the new Digital Service Tax

Digital Service Tax

By Hilary Kimuyu

Kenya Revenue Authority (KRA) has released a comprehensive list of digital services that will attract the 1.5 percent Digital Service Tax introduced via the Finance Act 2020. The Digital Service Tax (DST) came into effect on January 1, 2021

DST shall be imposed on the gross transaction value of the digital service at a rate of 1.5 percent. It will be applicable on the payment received on provision of the digital service, or on the commission or fee paid to the digital marketplace provider for the use of the platform.

The tax applies on a wide range of digital services, including commercial mobile apps available on Google Play Store and Apple Store; podcasts and TV shows available on foreign registered platforms such as YouTube Premium, Google Play, Netflix, Spotify and YouTube Music.

Other categories of services now within the taxman’s reach include subscription-based media, such as news, magazines and journals, provision of search engine and automated help desk services.

Others include Chatbots, remote support, instant feedback services and customised search engine services.

KRA points out that licensing, sales and other forms of monetising data collected from Kenyan users, online distance training delivered through pre-recorded media or e-learning platforms and courses, or any services provided through the digital marketplace, will attract the 1.5 percent tax.

For residents and companies with a permanent establishment in Kenya, the DST will be offset against the income taxes due in the year of income. For non-residents and companies without a permanent establishment in Kenya, DST will be a final tax.

The DST Regulations have elaborated the array of transactions taking place on digital platforms that attract the tax.

The tax implies that any income derived in Kenya through transactions across a digital marketplace shall be subject to tax. A digital marketplace is a platform enabling direct interaction between buyers and sellers of goods and services through electronic means.

The gazettement of the regulations breathes life into taxation of the digital economy in Kenya, placing it among the countries that are ramping up efforts to collect tax in the e-commerce space.

DST will, however, not apply to licensed financial services providers who carry out online services that facilitate payments, lending or trading of financial instruments, commodities or foreign exchange. This effectively exempts banks, licensed Saccos, micro-finance institutions, etc, from DST.

The tax will be due monthly, on or before the 20th day of the month following the one in which the digital service was offered.

DST shall be paid by resident and non-resident digital service providers and digital market place providers, or their appointed tax representatives (in the case of non-resident entities without a permanent establishment in Kenya).

Foreign companies who do not have a physical presence and address in Kenya may register under the simplified tax registration framework via the iTax portal. In the event that a non-resident without a permanent establishment (foreign company) chooses not to register through the simplified registration framework, they shall appoint a tax representative.

The tax representative shall be responsible for performing any tax obligations required, including the submission of returns and the payment of taxes.

For resident companies and companies with a permanent establishment in Kenya, the DST will be an advance tax that they will offset against income taxes due at the end of the financial year. However, for non-resident digital service providers without a permanent establishment in Kenya, DST will be a final tax.

The Government’s intention with this new taxation measure is to broaden the tax base through inclusion of business activity occurring in the digital marketplace.

Income sources that are already subject to withholding taxes are exempt from the digital service tax. This further rules out cases of double taxation for local businesses.