The Kenya Revenue Authority (KRA) released the draft Income Tax (Digital Services Tax) Regulations, 2020 which are expected to come into effect in January 2021, which is just four months away. According to the regulations, Digital Services Tax (DST) shall apply to the income of a resident or non-resident person derived or accrued in Kenya from the provision of services through a digital marketplace and the tax shall be offset against the tax payable for that year of income.
According to the draft regulations, a digital marketplace provider is defined as a person who provides a platform that enables the direct interaction between buyers and sellers through a digital marketplace, website or other online applications. Examples of this would be the owners of platforms such as Jumia, Glovo, Amazon, Alibaba, Masoko and E-bay.
A digital marketplace was defined in the Finance Act of 2019 as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. This definition covers all types of marketplaces however the challenge is that in some instances despite buyers and sellers meeting through a particular platform no value is transferred for goods and services through the platform an example here is a Facebook page or group where buyers and sellers meet but payments are made through private arrangements. However, Facebook would be liable to pay digital services tax for advertising revenue it generates or if payments for goods and services were made within the platform.
Meanwhile, a digital service is defined as any service that is delivered or subscribed over the internet or other electronic network where the delivery of the service is essentially automated and a digital service provider is the person who provides the above services through a digital marketplace. Selling in the case of goods is a service hence the lack of reference to goods in the regulations.
A platform has been defined as an application, website, or other internet-based content service used to transact or facilitate trade through an electronic system which casts the net wide to not only include trading platform but also advertising, ride hailing like Uber, Bolt and Little and online rent arrangements like AirBnB and Booking.com as well as any online ordering platform.
The regulations introduce a digital service tax agent who may be appointed by KRA to deduct, account and remit the digital service tax to KRA through a digital service tax collection service. The agent may be appointed for:-
- Both resident and non –resident persons with a permanent establishment in Kenya
- A non-resident who has not appointed a tax representative.
What is the scope of DST?
The following description has been given to give an indication of the entities that will be subjected to DST:
- Streaming and downloadable services of digital content, including but not limited to movies, videos, music, applications, online games and e-books. These are utilized by several Kenyans in their day to day lives and common exampled include Netflix and Showmax for digital content and e-books bought through Amazon.
- Transmission of data collected about users which has been generated from such users’ activities on a digital marketplace, however monetized. Therefore, sale of data about users will be subject to DST.
- Provision of a digital marketplace, website or other online applications that link buyers and sellers; Examples include Cheki, Amazon, Alibaba, Jumia, Masoko to name a few.
- Subscription-based media including news, magazines and journals. Kenyans have embraced digital subscriptions which has given them access to international content which may have been difficult to come by in hard copy for example subscriptions to New York Times and the Wall Street Journal as well as digital subscriptions to local newspapers like Daily Nation and The Standard.
- Electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services; The market for website hosting and online data management is growing in Kenya with services from international players like AWS, Oracle, Huawei, Microsoft and Google being available to Kenyans as well as several local players.
- Supply of search-engine and automated helpdesk services including supply of customized search engine services;
- Tickets bought for live events, theatres, restaurants etc. purchased through the internet: Ticketing has been a thriving market with players like Mookh, MyTickets and Ticketsasa who will be subject to DST.
- Online distance teaching via pre-recorded medium or e-learning, including online courses; All online education and training will be subject to DST.
- Any other service provided or delivered through an online digital or electronic platform excluding any service whose payment is subject withholding tax under section 35 of the Act.
The role of financial service providers
Under the regulations the services of a licensed financial service provider carrying out online services which facilitate payments, lending, or trading of financial instruments, commodities or foreign exchange shall not be digital services for the purposes of these Regulations. This means that the money paid through a licensed financial services provider like a bank or licensed mobile money service providers or lenders is subject to DST. The question then begs what does this section mean for unlicensed service providers who offer unregulated services like lending? For example, will DLAK members have to pay DST for the loans they offer while banks or licensed mobile money service providers don’t?
How will payment for digital services tax be made?
The regulations prescribe a digital service tax collection service which means a tax collection service that identifies, deducts and remits digital service tax to the Commissioner which a digital tax services provider can be connected to.
The second option will be a payment tax through the appointed digital service tax agent who shall use:
- A payment service provider that is connected to a digital service tax collection service of an appointed digital service tax agent to process payments for its services; or
- A payment service provider appointed by the Commissioner as a digital service tax agent.
The regulations have placed additional responsibility on payment service providers who now may be appointed as digital service tax agents. The key players in the Kenyan market are Safaricom though the M-Pesa payment platform and other players in the payments ecosystem like card issuers Visa, Mastercard, Paypal and other payment aggregators like Pesapal. A payment service provider has been described under the regulations as an entity that accepts, authenticates and processes payment transactions for merchants operating in the digital marketplace.
Determination of User Location.
This section of the regulations addresses the key issue of location in determining the tax obligation. Under the regulations a person shall be subject to digital service tax if the person provides or facilitates provision of a service to a user who is located in Kenya.
Under the regulations a user of a digital service shall be deemed to be located in Kenya if any of the following parameters are present
- The user accesses the digital interface from a terminal (computer, tablet or mobile phone) located in Kenya.
- Payment for the digital services is made using a credit or debit facility provided by any financial institution or company in Kenya.
- Digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya
- The user has business, residential or billing address in Kenya.
How will the gross transaction value be calculated?
Under the regulations the digital service tax shall be imposed on the gross transaction values which shall be calculated separately depending on whether the digital service being provided is on a primary service provision level or if the digital marketplace provider receives a commission. In the case of a primary digital service provider the payment received as consideration of the digital service will be used in the calculation of DST however for a digital marketplace provider only the commission fee paid for the use of the platform will be considered. For example, if you make an online order for your favourote Pizza directly from the supplier like Pizza Inn or Debonairs or Dominos Pizza, DST will be charged on the fee you pay to them directly however if you order for Pizza from any of the above three suppliers through Glovo, Uber Eats or Jumia Food the aforementioned intermediary agencies will have to pay DST for the commission they receive and not the entire cost of the meal. For primary digital service providers, the calculation of the transaction value shall not include the Value Added Tax (VAT)for the service so in the case of Debonairs, Pizza Inn or Dominos Pizza directly selling online to their customers, the cost of VAT will not be included in calculating DST mainly to avoid double taxation.
Accounting and Payments under DST
According to the DST regulations, DST shall be the liability of the digital service provider or any person that collects the payments for digital services. Further, digital service tax shall be due and payable at the time of the transfer of the payment for the service to the service provider. For example, this shall be due immediately you make the payment through your card issuer or through other digital payment platforms like PayPal, M-Pesa or Pesapal.
Non-resident persons without a permanent establishment in Kenya have the option of appointing a tax representative to account for the digital service tax. If so, the tax representative shall remit the tax due to the Commissioner by the twentieth day of the month following the end of the month that the digital service was offered.
The draft regulations also give the Commissioner the power to appoint a digital service tax agent who shall deduct, account and remit the digital service tax to the Commissioner through a digital service tax collection service for a resident person and non –resident person with a permanent establishment in Kenya or a non-resident who has not appointed a tax representative. What this means is that any entity which fails to remit DST and fails to appoint a tax agent may have one compulsorily appointed on their behalf by KRA.
Where a digital service tax agent is appointed they shall use a payment service provider that is connected to a digital service tax collection service of an appointed digital service tax agent to process payments for its services or a payment service provider appointed by the Commissioner as a digital service tax agent.
Obligation to submit DST returns:
Under the draft regulations a digital service provider or their tax representative shall be required to submit a return in the prescribed form indicating the value of transactions and the tax remitted by the twentieth day of the month following the end of the month that the digital service was offered. All players in the digital marketplace now have a monthly tax filling obligation, not just the big tech players but even MSME’s serving their customers through digital platforms.
Keeping of accounting records:
The draft regulations require the deduction, accounting and remittance of the digital service tax to the Commissioner and digital service providers shall be required to keep proper records in accordance with the Tax Procedures Act, 2015.
Offences and Penalties created regarding DST:
Any person who fails to comply with the provisions of the proposed DST may, in addition to the penalties prescribed under the Tax Procedures Act, 2015, be liable to restriction of access to the digital marketplace in Kenya until such obligations are fulfilled.
This means that digital services and marketplace providers may have their digital sites blocked for not complying with DST regulations requirements.