Through the Finance Act of 2019, the government amended the Income Tax Act by introducing the Digital Service Tax on transactions executed through a digital platform. In August 2020, the government issued a draft of the regulations aimed at streamlining digital service taxation. Some of the views and suggestions submitted by the public regarding the frameworks proposed under these regulations were accepted and put into consideration.
Through the Legal Notice No. 207, the CS has published the Income Tax (Digital Service Tax) Regulations, 2020 that seek to guide all taxpayers on the administration of the Digital Service Tax.
The Digital Service Tax became effective on 1st January 2021 whereas the Income Tax (DST) Regulations, 2020 came into force on 2nd January 2021.
A summary of these regulations and our opinions of the same is summarized in this report.
The regulations introduce the following terms;
Just as defined by the Income Tax Act, this is a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. An example, in this case, includes Uber, Amazon, Jumia, Showmax, etc.
Digital Marketplace Provider
Digital marketplace provider is a person who provides a digital market place e.g., Uber providing Uber platform, Jumia providing online shop store platform, Showmax providing a streaming platform for digital content, etc.
This refers to any service that is delivered or provided over a digital marketplace. e.g., the uber rides, products on sale under Jumia, digital streaming and downloadable content on Showmax, etc.
Digital Service Provider
Digital service provider is the person who provides services through digital market place e.g., uber drivers/riders, Carrefour selling their products online via Jumia etc.
Applicability of the Digital Service Tax
Digital Service tax shall be applied on the gross transaction value of the digital supply rendered on a withholding basis at the rate of 1.5%.
In the case of the digital service providers, it shall be on the payment received with regards to the service provided whereas for the digital marketplace providers, the commissions or fees paid for the use of the platform.
The gross transactional value of a digital service shall not include the Value Added Tax charged for the service.
It is without a doubt that Digital Service Tax will be applicable to the Digital Service Providers and the Digital Marketplace Providers, provided they facilitate the provision of a digital service to a user who is based in Kenya.
According to the Regulations, a user shall be deemed to be located in Kenya if;
- The user accesses the digital service from a terminal located in Kenya via a laptop or computer, tablet, or mobile phone;
- Payment of the digital service is made using a debit or credit facility provided by a financial institution or company located in Kenya;
- The digital service is acquired through 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.
Exemptions from DST
DST shall not apply on the following;
- Income that is subject to withholding tax in Kenya;
- Online services that facilitate payments, lending, or trading of financial instruments, commodities or foreign exchange carried out by
- A financial institution specified under the 4th Schedule of the Income Tax Act,
- A financial service provider authorized or approved by the Central Bank of Kenya;
- Online services that are provided by government institutions.
In our own opinion, the Financial Institutions are expected to play a big role as digital service tax agents upon appointment by the Commissioner. It is important to note that Saccos are listed under the fourth schedule as financial institutions. As such, it is important that these institutions maximize on their exemption from the DST regulations in the execution of their sole activities.
Scope of Digital Service
DST is applicable on the following services;
- Provision of a digital marketplace that connects a buyer and the seller e.g., websites, webpages, applications;
- Streaming and downloading of digital content including mobile applications, e-books, movies, TV shows, music, podcasts, magazines, journals, online gaming, etc.;
- Sale or licensing of data of any form that is collected about Kenyan users generated from the users’ activities on the digital marketplace but however monetized.
- Subscription-based media including news, magazines, journals, etc.;
- Electronic data management including website hosting, online data warehousing, file-sharing, and cloud storage services;
- E-booking or e-ticketing including the online sale of tickets for live events, theatre events, hotels & restaurants, tour events, etc.;
- Supply of search engines and automated helpdesk services including supply of customized search engine services;
- Provision of distance teaching via pre-recorded medium or e-learning including online courses and training;
- Any other service is provided through a digital marketplace.
Accounting for Digital Service Tax
Both residents and non-residents persons shall be obligated to pay the tax if their income from the digital space is derived from or accrued in Kenya.
However, for residents and non-residents owning permanent establishment in Kenya, they will offset Digital Service Tax against their annual tax payable.
Digital Service Tax shall be final for non-residents without a permanent establishment.
Whether resident or non-resident, both digital service providers and digital marketplace providers will be required to register for DST obligation in Kenya.
A non-resident person who has no permanent establishment in Kenya and provides a digital service to a user in Kenya may register under the simplified tax registration framework. Where the non-resident does not choose the former, s/he is allowed to appoint a tax representative as provided by the Tax Procedures Act.
A resident person, or a non-resident person with a permanent establishment in Kenya, who provides a digital service in Kenya shall be required to apply to the Commissioner for digital service tax registration in the prescribed form.
A person who applies for registration under the simplified tax registration framework shall do so through an online registration form prescribed by the Commissioner.
During application, one may submit the following;
- The name of the applicant’s business including its trading name.
- The name of the contact person responsible for tax matters.
- The postal and registered address of the business and its contact person.
- The telephone numbers of the contact person the electronic address of the contact person.
- The websites or uniform resource locator of the applicant through which business is conducted.
- The national tax identification number issued to the applicant in the country of residence.
- The certificate of incorporation issued to the applicant’s business.
- Any other information that the Commissioner may require.
- Any other document that the Commissioner may deem necessary during the application.
One is allowed to make an application to the Commissioner for deregistration upon cessation in providing digital services in Kenya.
Accounting and Payment
Upon submission of a return in the prescribed form on i-tax, a digital service provider, digital marketplace provider, or a tax representative, shall be required to remit tax by the 20th day of the following month following the end month that the digital service was offered.
It is an obligation to the digital service providers to keep all the records of the supplies made in the country correctly.
Failure to comply with these regulations shall attract relevant penalties as prescribed under the Tax Procedures Act, 2015.
One is allowed to make a tax amendment in accordance with the Tax Procedures Act.
Where the amendment results in an overpayment for resident persons or non-residents with permanent establishments in Kenya, they are allowed to apply for a refund.
However, non-residents without a Permanent Establishment can only utilize overpayments resulting from these amendments as tax credits which will be offset against the Digital Service Tax payable in the subsequent periods.