There has been a myriad of opinions on taxation of the digital economy especially in Kenya, with concerns on whether the law governing the introduction of Digital Service Tax achieves the objective desired by the Kenya Revenue Authority (KRA).
Kenyans at large have queried the scope of the DST and the types of entities it targets.
The DST, introduced vide the Finance Act, 2020 applies to both residents and non-resident companies deriving or accruing income from Kenya by providing services through a digital marketplace, which is defined to mean a platform that enables direct interaction between buyers and sellers of goods and services through electronic means.
Introduction of Digital Service Tax (DST) is meant to address taxation challenges arising from the digitalisation of the economy, which is experienced not only in Kenya but across many African countries and the world at large.
Digitalisation has enabled businesses to shift from the conventional brick and mortar operating models to the digital space.
The implication of this is that companies and especially multinational entities (MNEs) can carry out business and derive income from jurisdictions with no or limited legal or physical presence.
The current international tax rules allocate taxing rights to a country where a non-resident person creates sufficient physical presence in that country i.e. creating a “nexus” in that country.
The advancement of technology has increased the use of digitalised services resulting in businesses shutting down or downscaling their physical operations.
The lack of physical presence makes it difficult for countries to establish taxing rights over the profits of persons whose business activities are carried out through online platforms.
The introduction of DST by countries is meant to address such challenges hence achieve equity in taxation by ensuring that all persons accruing or deriving income from a country pay their rightful share of tax irrespective of whether they are conducting their businesses on an online platform or through the traditional brick and mortar.
Since Kenya as existing legal frameworks in taxation, DST takes this pathway to pave its existence and sustenance. The Income Tax Act provides that, income tax shall be charged for each year of income upon all the income of a person, whether resident or non-resident, which accrued in or was derived from Kenya.
The principle of “accrued or derived from” underpins the charging of income tax. DST being an income tax therefore applies a similar principle. Kenya is interested in the value such businesses/companies create from Kenya.
Income derived or accrued in other jurisdictions (unless deemed under the law as being accrued or derived in Kenya) are not chargeable to tax in Kenya as this would go against this principle.
Following the introduction of DST, the Income Tax (Digital Service Tax) Regulations, 2020 were gazetted to provide a mechanism for implementation of DST. The regulations came into effect on 2 January 2020. In the regulations, digital services upon which DST are applicable are outlined; the services are offered through digital/electronic platforms.
Kenya’s version of DST is in line with DST introduced by other jurisdictions including the Suggested Approach by African Tax Administration Forum (ATAF).
For instance, in the European Union countries and ATAF’s Suggested Approach, DST is applicable on: digital advertising services; sales (including listening, viewing, playing content on digital media) of any audio, visual or digital content in digital media; provision of user data; revenues of search engines, social media platforms and online marketplaces; and digital environments where users can interact with each other. These digital services almost mirror services upon which DST is applicable in Kenya.
DST was introduced in Kenya following a comprehensive public and stakeholder engagement undertaken by both the National Treasury and the National Assembly as per the requirement of the Constitution. In the development of the legislation, the impact of the tax to both the consumers and businesses was taken into consideration.
This, to a large extent informed the structure of the tax including the rate. When compared with other jurisdictions, Kenya’s DST rate of 1.5percent is the lowest with other jurisdictions charging between 2percent o 7.5 percent.
Kenya is an active participant in the deliberations at the global level seeking to address the challenges of digitalisation. To this extent, the introduction of DST is just the beginning and the government will continue to explore both policy and administrative measures that are necessary to enhance compliance in this area and thus promote equity in taxation.
Various international organisations such as the Organization for Economic Development (OECD,) United Nations (UN) and Africa Tax Administration Forum (ATAF) have sought to bring countries together to come up with solutions to address the tax challenges of the digitalisation of the economy and Kenya is key participant in these deliberations.
The OECD identified digitalisation of the economy as one of the main areas of focus of their Base Erosion and Profit Shifting (BEPS) Project and the OECD Inclusive Framework set out to develop a global consensus on the taxation of the digital economy. However, a global consensus remains elusive resulting in many jurisdictions adopting unilateral measures.
Some of the countries that have instituted or are proposing to introduce unilateral measures in the form of DST or similar taxes include: - India, Italy, France, Hungary, United Kingdom, Mexico, Austria, Czech Republic, Turkey, Belgium and Spain.