New digital tax mechanism promises Kenya windfall


President William Ruto, US Ambassador to Kenya Meg Whitman and Brenda Mbathi, the American Chamber of Commerce (AMCHAM) board President during the organisation's regional business summit in Nairobi. FILE PHOTO | PCS

Kenya could rake in over 10 times its current collection of digital services taxes from a new global taxing mechanism that is being championed by the Organisation for Economic Co-operation and Development (OECD).

Should the country ratify the new inclusive framework aimed at fighting tax avoidance by requiring large multinationals to re-allocate part of their profits to countries where they have operations, the Kenya Revenue Authority could collect between Sh3.3 billion ($25 million) and Sh5.3 billion ($40 million) in taxes, according to estimates by OECD, a club of rich countries.

KRA Digital Service Tax lead Nickson Omondi said this is a jump of more than 10 times compared to between Sh400 and Sh500 million that the taxman currently earns from DST annually.

“You see, this is a tax for every company with operations in Kenya, unlike DST which is only for digital service providers,” said Mr Omondi.

Last Thursday, President William Ruto announced that the DST, which is charged on income derived or accrued in Kenya from services offered through a digital marketplace, would be aligned with the OECD framework.

“The growth of digital commerce has forced many countries to impose Digital Services Tax measures on income derived in their tax jurisdictions. Kenya has also done the same,” said the President during the American Chamber of Commerce Regional Business Summit.

“Following discussions with players in this sector, we have made a commitment to review this tax regime and align it with the two-pillar solution currently being developed by the OECD inclusive framework. The framework will guide the taxation of digital commerce transactions,” he said.

Under the former administration of President Uhuru Kenyatta, Kenya withheld its backing for the two-pillar framework, citing clauses in the agreement which would have seen the end of the digital service tax which is currently charged at the rate of 1.5 percent of sales made by foreigners in the country.

The new OECD Inclusive Framework, which is aimed at addressing problems of base erosion and profit shifting by multinationals, has two pillars, with the first being aligning taxing rights more closely with local market engagement.

Under Pillar one, a portion of profits of the largest and most profitable groups is allocated to market jurisdictions.

With the first pillar, which targets large multinationals with €20 billion in worldwide revenues and a profit before tax margin of at least 10 percent, the profits will be allocated to market jurisdictions irrespective of any physical presence in those jurisdictions.

Pillar two introduces a minimum corporate income tax of 15 percent, with the parent company forced to top-up should the tax fall below this level.

While there have been minimum hitches on the application of Pillar two, which is set to take effect in January next year, the mechanics for Pillar one are yet to be completed.

In the case of Kenya, for example, Mr Omondi said the country has to ratify the convention, which means taking it through the whole process of enacting a law starting with public participation.

“Until then, we will keep our DST,” he said, adding that Kenya has room to increase the DST from 1.5 percent to six percent charged by other countries, earning it Sh2.4 billion in revenues.

KRA collected Sh174 million in DST in the six months to December 2022, keeping it on course to beat the full-year total of Sh241 million that was recorded in the year ending June 2022.

The taxman reckons that the revenue, netted from digital service providers including US tech giants Google, Netflix, Meta, Twitter and Microsoft, is expected to surpass Sh300 million by June.

KRA was targeting to register 50 extra businesses in the financial year ending June 2023 but has already surpassed this target with 64 companies now on its DST taxes books halfway through the year.

Under the Income Tax (Digital Service Tax), 2020 law, all businesses selling services online are required to pay a flat tax of 1.5 percent on the value of services offered through digital platforms after its implementation on January 1, 2021, in addition to VAT of 16 percent.

Services targeted under the taxes include e-books and movie sales, dating sites, music, and games, and subscription-based media including news, magazines and digital content.

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