Kenya: Digital services tax regulations provide details; scheduled effective date of 2021
Kenya: Digital services tax regulations provide details
Regulations implementing a digital services tax in Kenya are scheduled to be effective 1 January 2021.
A digital services tax was introduced by the government in 2019. The subject of the tax is certain supplies made through a digital marketplace, and a digital marketplace is defined as “a platform that enables direct interaction between buyers and sellers of goods and services through electronic means.”
A draft of digital services tax regulations (August 2020) was released as a guide for implementation of the digital services tax, and is expected to be effective 1 January 2021 (after publication of the final regulations).
Overview of the digital services tax
- The digital services tax rate is 1.5% of the gross transaction value. The gross transaction value is the payment received as consideration for the digital service. In the context of a digital marketplace provider, the transaction value is the commission or fee paid for the use of the platform.
- Digital services tax is payable on certain services, and payable by the digital service provider or any person that collects payments for digital services when transferring payment for the service to the service provider.
- Foreign companies that provide digital marketplace services to consumers in Kenya will be subject to digital services tax
- The digital services tax will be an advance tax for resident or non-resident persons with a permanent establishment in Kenya that provides digital services through a digital marketplace. A non-resident person without a permanent establishment in Kenya may appoint a representative to account for the digital services tax.
Prior to the release of the draft regulations, there was speculation about the mechanics of the digital services tax regime. The draft regulations clarify some of these issues even though several concerns remain.
For instance, tax professionals believe there is need for clarification on the due date for the returns and remittance of the payments to the Kenya Revenue Authority. The current version of the regulations appears to separate the return filing from the payment (which is not the norm with the other taxes).
There are also concerns about the lack of a turnover threshold for the tax, and this could lead to significant administrative burdens for companies with “low value” transactions. Many jurisdictions that have introduced a digital services tax have set thresholds to align the expected tax collections to the cost of compliance.
In the absence of updates to the existing income tax treaties, some believe that digital services payments to countries that have income tax treaties with Kenya will not be subject to digital services tax, given the reliance on the concepts of residency and permanent establishment as a basis for determining the jurisdiction with the taxing rights.
Finally, the short timeframe provided between the publication of the final regulations and the coming effective date of the digital services tax regime leaves little time for taxpayers to put in place the infrastructure to comply with the tax.
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