Tax alert

Digital service tax in Kenya

Taxing the digital economy

Online transactions are generating billions of dollars every day and the taxman wants his slice of the pie. Whereas the Organization for Economic Cooperation and Development (OECD) calls for a global approach to taxing the digital economy, budget deficits and sky rocketing expenditure has governments the world over agitating for a share of the multinational tech companies exploits on the digital space.

Kenya, aware of the trade wars that have, and are likely to follow from the imposition of the Digital Service Tax, has veiled the DST on income accruing from the digital market place as applying to both residents and non-resident persons. To appease resident taxpayers, the government shall allow the tax paid at 1.5% of the gross transaction value as a credit which shall be offset against corporation tax payable at the end of the financial year.

At the heart of it, DST is not aimed at the ordinary Mwananchi selling bags and shoes online. Neither is it really targeting the local SME’s who are innovating in the digital space. It is the man behind the curtain who makes it possible for buyers and sellers to interact that the government is after. The online giants who specialize in artificial intelligence, cloud computing, digital streaming and ecommerce.

Granted, companies ought to pay taxes where they do business and the time has come for tech companies to pay the piper or at least that’s what world governments, Kenya included, are saying. Which begs the question, how equipped are revenue authorities to implement the digital service tax?

In Kenya, non-resident persons shall be required to appoint a tax representative failing which KRA may appoint a withholding DST Agent to deduct the tax at the point of processing payment for both resident and non-resident persons. Assuming KRA appoints a bank as a withholding DST agent, how will the bank identify the commission, which would be income subject to DST, VAT levied and the actual cost of goods in the case of e-commerce?

A more fundamental question, how does KRA intend on establishing a nexus without which it cannot tax the income of a non-resident? It will be necessary to come up with parameters defining what amounts to a digital permanent establishment (PE) or circumstances that will trigger a digital PE in Kenya. Without a nexus, KRA runs the risk of countless disputes. It is, after all, going after deep pockets.

The OECD is scheduled to release guidelines on taxing the digital economy by December 2020. In the event that this is not achieved, the guidelines released by Treasury shall take effect on 1 January 2021. While it is unclear how KRA will implement and achieve compliance, DST is a reality that businesses which render digital services to users located in Kenya need to come into terms with and make necessary adjustments.

Tax
by Maryann Kamau, Associate at Grant Thornton https://www.linkedin.com/in/maryannkamau/