Developments in Taxation of Digital Economy in Kenya

In the wake of the COVID-19 pandemic, Kenya has had several legislative developments geared at improving if not maintaining, the stability of the fiscal economy.  This is evident in the enactment of the Tax Laws (Amendment) Act, 2020 which came into force on 25th April 2020 and subsequently, the Finance Act, 2020 which came into force on 30th June 2020 following the delivery of the Budget Statement for the Financial Year 2020/2021 on 11th June 2020. 

One of the significant amendments introduced by the Finance Act, 2020 is the Digital Service Tax (DST) which is a form of income tax chargeable on income which is derived from the provision of services through a digital marketplace.  Worthy of noting is that, the Finance Act, 2019 paved the way for the taxation of income accruing through the digital marketplace in Kenya by inserting the definition of a digital marketplace within the Income Tax Act and further inserting a provision according to which income that accrues in a digital marketplace is chargeable to tax in Kenya. 

Going forward and subject to the new provisions, persons who provide services through digital platforms will be required to deduct and remit 1.5% tax on the gross transaction value at the time of the transfer of payment for the service to the service provider.  It should be noted that although the provisions relating to the Digital Service Tax are in force, the same will only become effective and applicable to taxable persons from 1st January 2021.  Further to the provisions of the Income Tax Act relating to the Digital Service Tax, the draft proposed Income Tax (Digital Service Tax) Regulations, 2020 have recently been published and made available for public comment.  These will also become effective from 1st January 2021.

In addition to Digital Service Tax, it is anticipated that, in the future, Kenya will have in place a regulatory framework for the indirect taxation of taxable supplies made through a digital marketplace based on the recently published Draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020.  It should be noted that the Finance Act, 2019, also paved the way for this through the insertion of certain provisions relating to the digital marketplace within the Value Added Tax (VAT) Act.  This will effectively result in an increase in the cost of these supplies due to the VAT element which is currently chargeable at 14%.

See full WTS Update for the Digital Economy here.