This archive report was first published on 30 June 2020.
The digital economy has posed significant challenges to Kenya's tax base, with the country's Treasury Cabinet Secretary acknowledging in the 2019 Budget Speech that the reliance on intangibles, massive use of data, and widespread adoption of multi-sided business models have led to low tax revenue.
To address these challenges, the CS proposed a number of tax measures aimed at taxation of income generated from the digital economy, including the digital service tax (DST). The DST aims to expand the tax base by bringing the digital economy, which may not necessarily have a physical presence in the jurisdiction, to the tax net.
However, charging tax on digital transactions was already covered in the Kenyan income tax legislation, with the Finance Bill, 2020 proposing to introduce DST payable on income deemed to be derived from or accrued in Kenya through a digital market place at the rate of 1.5 per cent of the gross transactional value.
Experts warn that the proposed DST adopts an advance tax mechanism for resident entities and branches, which could negatively affect their cash flow and result in perpetual tax refunds, especially for businesses with low-profit margins or those making losses.
From a VAT perspective, the VAT Act, 2013 endeavoured to tax certain digital transactions which are categorised as electronic services, while the Finance Act 2019 empowered the CS to publish regulations to assist in implementing provisions relating to digital marketplace supplies.
As the world grapples with the taxation of the digital economy, Kenya can learn from global experiences, including the OECD's proposal to determine the tax base by applying the global profit rate of the multinational group to the revenue generated in a particular jurisdiction.
With the draft regulations for digital marketplace players being circulated for public participation, it is an opportune time for stakeholders to provide their input and ensure that regulations for taxation of the digital marketplace are practical and effective.
