Kenya began collecting the digital service tax (DST) on January 1, 2021, targeting revenues earned by digital service providers including US tech giants Google, Netflix, Meta, Twitter and Microsoft.
But the taxman now finds itself in a dilemma two years later, faced with two different models of computing the tax amid growing pressure to abandon its hardline stance and join other countries that have adopted a globally negotiated unified solution.
History of DST
In 2012, G20 proposed to tax the data economy to enable countries to tap into taxes from companies on digital platforms through the Organisation for Economic Cooperation and Development (OECD)’s inclusive framework composed of 141 countries where Kenya is a member since 2016.
This was either through DST, withholding tax, equalisation levy that was adopted by India or anti-avoidance rules adopted in Australia and UK’s diverted profits tax (DPT).
Nigeria also runs the tax as a Significant Economic Presence similar to DST but computed differently. The organisation later felt the taxing system was sub-optimal because every country will have its own way of taxing it at a time they are avoiding double taxation.
What are the tax rates? The rate ranges from 2.0 percent to 12 percent in different jurisdictions. Kenya introduced 1.5 percent of the gross annual turnover, Tanzania and France charge a rate of 3.0 percent, and the UK 2.0 percent. As a result, collections from the tax head have been low, with the Kenya Revenue Authority (KRA) collecting Sh174 million in the six months to December 2022, and Sh241 million in the year ending June 2022. Collections are expected to go up once the rate is reviewed.
Who is targeted by the tax?
DST, as the name suggests, only applies to services which are provided through digital channels. It is imposed on owners of the platforms that charge a commission on the sellers and usually are non-residents such as Google, Netflix, Meta, Twitter and Microsoft, Airbnb, Trip Advisor, and Booking.com.
DST does not apply to residents or local companies because they are subject to income tax and corporate tax.
DST also does not apply to those selling on digital channels such as merchandise sellers and digital taxi-hailing drivers because they are required to file income tax.
What reforms have been made to the international tax system by OECD countries?
In 2015, OECD/G20 began a discussion on a unified approach. In 2020, they made a proposal under a two-pillar approach.
Pillar One targets big companies and the most profitable especially multinationals with global sales above EUR 20 billion euros (Sh2.7 trillion).
The tax is to be computed globally by the parent entity and then distributed based on market consumption. This means the company will deduct 10 percent of their profits.
Out of the balance of the profits, 25 percent will be redistributed in every country where the company sells its services.
For Kenya, for example, to get the 25 percent share, sales in Kenya must be at least Sh128 million in a year for a company.
“Those rules are what some countries have had issues with,” Digital Service Tax lead Nickson Omondi told the Business Daily.
Four countries — Kenya, Nigeria, Pakistan and Sri Lanka — have not yet joined the agreement.
Pillar Two touches on global minimum corporate tax where every company which has a turnover of 750 million euros (Sh101.4 billion) has to pay at least a minimum rate of 15 percent of their profits.
How does this relate to the Kenya–US trade?
Most of the companies targeted are US-based and want Kenya to adopt a global approach other than DST to avoid facing separate digital services taxes from multiple countries.
The US has in the past threatened to impose sanctions on European countries that introduced the taxes.
Kenya is looking at whether to adopt the global deal or stick to keeping the DST. “We are in discussions with the US and of course, we are weighing our options. That is where we are still,” Omondi says.
“We are taking a lot of time to try and evaluate what we are getting out of the global deal. Because the rules are complex, what we need as input is complex. We are actually undertaking an impact assessment because we are binding the country into the future. The deal requires you to sign a multilateral convention that might have sanctions at the time to withdraw.’’
Kenya, he says, is alive to the global deal that is being signed mid-this year and if the other 140 countries sign it may be left alone in the cold.
“We don’t want to be an island after everyone has been onboarded. But again, as we want to join the bandwagon, we should have very good reasons. Kenya and Nigeria have similar sentiments.”
What other taxes still apply?
The taxpayers are not required to file corporate tax since they don’t have a permanent establishment. This makes DST equivalent to corporate tax.
However, they are required to account for the 16 percent VAT rate passed to consumers. Some of these taxpayers are also subject to withholding tax at the rate of 20 percent especially those providing services like software to companies, which has seen their collections above what is collected DST.
What currency is used in the declaration of the tax?
Section 15 of the Tax Procedure Act allows KRA to request taxpayers to support their declarations.
Section 23 was amended last year to allow non-residents to keep records and invoices in their currency and note the exchange rate. However, they are expected to support their declaration in Kenyan Shillings.
What will KRA do to ensure compliance?
KRA states the multinationals have been in compliance and plan to publish a list of fame to indicate all taxpayers who have registered as a public eye for those not registered.
It will also fish out those who are trading within the digital space and engage them through writing and virtual calls to explain the law in Kenya and the need for them to comply.
KRA plans to link its system to telecommunication companies, banks and the Central Bank of Kenya to increase tax compliance and be able to validate what they collect from the companies.
What have been the amendments to the law?
An amendment in Finance Act 2022 clarified that non-resident taxpayers with permanent establishment are not subject to DST provided that the DST is declared in Kenya for income tax purposes.
When DST started, it had residents and non-residents for a period of six months. After that residents were excluded.
If a company decides to come to Kenya, set up an office and offer similar services, DST will fall under normal income tax. The firm will pay corporate tax.