How Kenya Balances Digital Tax Regulations

On January 1, 2021, Kenya started collecting the digital service tax (DST), which was aimed at the money made by companies that provide digital services, such as American internet giants Google, Netflix, Meta, Twitter, and Microsoft.

Yet, two years later, the taxman is in a difficult situation, having to choose between two separate methods for calculating the tax while coming under increasing pressure to drop its rigid stance and join other nations that have embraced and internationally negotiated unified solution.

Background of DST

The Organisation for Economic Cooperation and Development (OECD), a group of 141 nations, has an inclusive framework that was recommended by the G20 in 2012 to tax the data economy. Kenya has been a member of the OECD since 2016.

This was either accomplished by the UK’s diverted profits tax, Australia’s anti-avoidance laws, or the DST, withholding tax, equalization charge, and withholding tax that were enacted by India (DPT).

Similarly, to the DST but with a different calculation, Nigeria also administers the tax as a Substantial Economic Presence. Afterwards, the organization concluded that the taxation structure wasn’t ideal because each country would tax it differently while avoiding double taxation.

Which tax rates apply? The rate varies depending on the jurisdiction from 2.0% to 12%. Tanzania and France impose rates of 3.0 percent and 2.0 percent, respectively, while Kenya introduced 1.5 percent of the gross annual turnover. The Kenya Revenue Authority (KRA) only received Sh174 million in the six months leading up to December 2022 and Sh241 million in the fiscal year that ended in June 2022 as a result of the low tax head collections. After the rate is reviewed, collections should increase.

Who is the tax aimed at?

DST only applies to services delivered through digital media, as the name would imply. It is enforced on the owners of the platforms like Google, Netflix, Meta, Twitter, Microsoft, Airbnb, Trip Advisor, and Booking.com that often are owned by non-residents and charge a commission to the sellers.

Residents and local businesses are exempt from DST because they are also liable to income tax and corporate tax.

Due to the fact that they must file income taxes, those who sell goods and operate digital taxi services are also exempt from the DST.

What changes have OECD nations made to the global taxation system?

The OECD and G20 started talking about a coordinated strategy in 2015. They put forth a plan in 2020 using a two-pillar strategy.

Targets of Pillar One include large, successful businesses, particularly multinationals with global revenues of at least EUR 20 billion (Sh2.7 trillion).

The parent entity is to calculate the tax on a worldwide scale, and then distribute it according to market usage. This implies that the business will take a 10% profit deduction.

In each nation where the business offers its services, 25% of the remaining profits will be given.

For Kenya, for instance, a company’s annual sales must be at least Sh128 million to qualify for the 25% share.

Kenya, Nigeria, Pakistan, and Sri Lanka are the remaining four nations that have not ratified the pact.

The second pillar discusses the worldwide minimum corporation tax, which mandates that all businesses with annual revenues of at least 750 million euros (or 101.4 billion Shillings) must pay at least a minimum rate of 15% of their profits.

How does this apply to the trade between Kenya and the US?

The majority of the businesses targeted are situated in the US, and they want Kenya to take a more global strategy than only DST in order to avoid having to pay separate digital services taxes to several nations.

Sanctions against European nations that enacted the tariffs have previously been threatened by the US.

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.”