Kenya: Taxman Goes for e-Books, Movies, Online Classes in New Digital Tax

(file photo).
25 January 2021

The next online class, e-book, music download, movie streaming or air ticket that you buy over the internet could cost you more, as KRA moves to implement the new tax on digital services.

The digital service tax (DST), which became effective on January 1 this year, is payable at 1.5 per cent of the gross transaction value and is due at the time of payment for the service to the service provider, the Kenya Revenue Authority (KRA) has stated.

The tax introduced in the Finance Act 2020 applies on a wide range of digital services including commercial mobile apps available on Google Play Store and Apple Store; podcasts and TV shows available on foreign registered platforms such as YouTube Premium, Google Play, Netflix, Spotify and YouTube Music.

"It applies to transactions in a digital market place which is one where effectively buyers meet sellers," said Nikhil Hira, a tax expert and director at law firm Bowman's Kenya, adding that the tax would lead to higher cost of such services offered online.

Other categories of goods and services now within the taxman's reach include subscription-based media such as news, magazines and journals, provision of search engine and automated help desk services.

E-learning

Online distance training, including pre-recorded media or e-learning including online courses and training and any other service provided through a digital marketplace will also be affected.

Not left out of KRA's loop are betting, gaming and lottery services offered on foreign online platforms.

Kenyan residents and companies with a Permanent Establishment (PE) in Kenya will have a chance to offset DST against the income taxes payable in the course of the financial year, but non-residents and companies without a permanent establishment in the country will pay it as a final tax.

Loss-making entities will also pay DST as a final tax since they will not have income tax to offset against amounts paid during the year.

In a notice sent out last week, KRA notified e-commerce dealers that the tax is due. Taxpayers who are liable to pay DST are required to account for the levy by filing a return on the 20th day of each succeeding month.

The taxman says it pushed for DST to tap into the massive growth in electronic commerce brought about by expanded internet penetration in the country.

"Most companies and individuals have opted to choose a different path of online transactions. For instance, there has been a steady increase of consumer retail purchases from companies such as Jumia Kenya, Kilimall Kenya, Masoko and other international companies such as E-bay and Amazon," it said in a write up last year.

"The taxation of the sector is not in harmony with this growth. The new modes of businesses have poised taxation challenges not only in Kenya, but internationally as well.

"Like most of the jurisdictions, there is a need to cap tax avoidance so as to widen the tax base and generate more revenue for sustainability. It is in this regard that KRA saw a need to tax the digital market," it noted.

According to KRA, the tax implies that any income derived in Kenya through transactions across a digital market place shall be subject to tax, adding a digital marketplace is a platform enabling direct interaction between buyers and sellers of goods and services via electronic means.

Mr Samuel Mwaura, a partner in charge of taxation services at Grant Thornton Kenya, says a non-resident person who does not have a permanent establishment in Kenya and who is liable to pay DST shall be required to either register under the simplified framework or appoint a tax representative who shall account for the tax on their behalf.

Digital taxation

"DST shall be a final tax for non-resident persons without a permanent establishment in Kenya. For resident and non-resident persons with a permanent establishment in Kenya, the tax shall be offset against the tax payable by that person for that year of income," he adds.

In a previous commentary, Lynnet Mwithi, a manager with Taxwise Africa Consulting LLP, warned that while the digital economy if properly taxed would provide a good source of revenue for Kenya, key considerations should have been made before introducing blanket provisions to capture any and all transactions under the ambit of digital tax.

"First, Kenya should ensure, while taxing the stakeholders, not to hamper small and emerging entrants into the market.

"Most countries that have introduced the tax have opted to focus on the big players in the market by putting in place a high revenue threshold as part of their nexus rules. Kenya could consider following the same route," she said.

Ms Mwithi added that KRA should also have ensured that the legislation governing digital taxation is clear and leaves minimal room for ambiguity for the taxpayer.

For instance, there are various provisions that contradict the VAT Act outlined in the VAT regulations, such as the output-input mechanisms.

Kenya should also have considered proposed guidelines and best practices around digital tax, specifically the OECD guidelines on Action Plan 1 of the Base Erosion and Profit Shifting Project.

The OECD specifically advocates fusing a unified approach to tax the digital economy, as opposed to unilateral tax measures, added Ms Mwithi.

"Taxpayers operating within the digital economy should be aware of the related current and upcoming tax provisions in order to plan accordingly and ensure compliance," she said.

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