Digital Service Tax Comes Into Effect From 1st January 2021

A new tax known as Digital Service Tax (DST), introduced by the Finance Act 2020, comes into effect on 1^st January 2021.

Digital Service Tax (DST)

DST is a tax payable on income derived or accrued in Kenya from services offered through a digital market place. A digital market place is a platform that enables direct interaction between buyers and sellers of goods and services through electronic means.

Persons liable for DST

DST is payable by the person who provides or facilitates the provision of a digital service to a user who is located in Kenya. The person can provide digital services either as a Digital Marketplace Provider, where the person provides the platform that enables the direct interaction between buyers and sellers of goods and services through electronic means or as a Digital Service Provider, where the person provides digital services through a digital marketplace.A user of a digital service is considered to be located in Kenya if;

1. the user receives the digital service from a terminal located in Kenya, where terminal includes a computer, tablet and mobile phone;
2. the payment for the digital service is made using a debit or credit facility provided by a financial institution or company located in Kenya;
3. the digital service is acquired through an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya; or
4. the user has a business, residential or billing address in Kenya.

DST Charge and Payment

DST is calculated at the rate of 1.5% of the gross transaction value of the digital service, exclusive of VAT charged on the service. The gross transaction value of the digital service is:—

• in the case of the provision of digital services, the payment received as consideration for the services; and
• in the case of a digital marketplace, the commission or fee paid to the digital marketplace provider for the use of the platform.

For resident or non-resident person with a permanent establishment in Kenya, the DST paid is an advance tax to be offset against the annual income tax payable by that person. For a non-resident person without a permanent establishment in Kenya, the DST will be a final tax. A person liable to pay DST is required to submit a return in the prescribed form and remit the tax due by the 20^th day of the month following the end of the month that the digital service was offered.

Digital Services liable to DST

The digital services for which DST is applicable has been widely listed and include:-

• downloadable digital content including downloadable mobile applications, e-books and films;
• over-the-top services including streaming television shows, films, music, podcasts and any form of digital content;
• sale of, licensing of, or any other form of monetizing data collected about Kenyan users which has been generated from the users’ activities on a digital marketplace;
• provision of a digital marketplace;
• subscription-based media including news, magazines and journals;
• electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
• electronic booking or electronic ticketing services including the online sale of tickets;
• provision of search engine and automated held desk services including supply of customized search engine services;
• online distance training through pre-recorded media or e-learning including online courses and training; and
• any other service provided through a digital marketplace.

The DST is not applicable to income liable to withholding tax. In addition, the following services will not be considered as digital services and the DST will not apply:-

1. online services which facilitate payments, lending or trading of financial instruments, commodities or foreign exchange carried out by a financial institution or a financial service provider authorised or approved by the CBK; and
2. online services provided by Government institutions

Registration for DST

A resident person, or a non-resident person with a permanent establishment in Kenya, who provides a digital service in Kenya is required to be registered for digital service tax. A non-resident person without a permanent establishment in Kenya who provides a digital service to a user in Kenya may either opt to register under the simplified tax registration framework or appoint a tax representative. The registered person will be issued with a Personal Identification Number (PIN) for the purpose of filing returns and payment of the DST. The challenge will be on the KRA to enforce registration and payment of the tax by non-resident persons without a permanent establishment in Kenya.

Penalties

A person who fails to comply with the DST requirements is liable to severe penalties under the law. Some of the instances where penalties may be imposed including failure to register, failure to keep records, failure to submit tax returns on the due date, failure to pay the tax on the due date, etc.

How we can assist

CM Advocates has a fully-fledged tax law advisory business unit that offers a vast range of tax advisory services. Our highly qualified and experienced personnel will assist with your tax matters and ensure that your business is tax compliant. We will assist in the compliance with the new DST requirements including assessing and advising whether your business is liable to pay DST, registration for DST and calculation and submitting the DST returns and payment of DST.Kindly get in touch with us for any clarifications and assistance on the above by contacting our Tax Advisory Business Unit members via +254 716209673 or on email via taxteam@cmadvocates.com.