In order to maintain tax revenue, it is only natural that governments have tried to include digital income in their tax base. Kenyan governments have been attempting to tap into the global digital market for some time. Kenya’s revenue from the digital services market will reach US$ 4.4 billion in 2022. This is up from $ 1.9 billion in 2017.
Digital enterprises are able to avoid paying taxes when they earn income in multiple countries, and no state claims it can tax them. Companies also prefer countries with favorable tax laws that allow them to maximize profits.
Some states can impose taxes by exercising their authority on companies that are incorporated within the state’s boundaries. In the event that this is not true, the government must demonstrate substantial contact between the state and the company.
Kenya was one of a few African countries to have implemented a tax on digital services prior to the pandemic. Kenya’s 2019 budget report included the first digital service tax. The tax rules were rushed, and it wasn’t clear which party would be responsible for the tax.
The revised regulations on digital service tax that went into effect in January 2020 are much more specific about who and what is taxed. Kenya’s recent June 2021 Budget Report sought to expand the scope of the digital service tax. Kenya is also attempting to overcome a key challenge that governments have faced when implementing the digital tax. This is an equitable and fair collection of tax.
The impact of the new taxes on individuals and firms will remain to be seen. Large companies like Zoom, which has started to pay VAT on their services in Kenya, will weather the storm. Service taxes, for example, could be a heavy burden for struggling start-ups who have shifted to the digital space in order to survive. This could have the impact of strangling a young digital industry in the locality.
Evolution of digital tax
In Kenya’s first digital tax law, it was defined as a tax levied on all income derived from a digital marketplace. Digital marketplaces are electronic platforms that allow direct communication between buyers and vendors of goods and services. The law imposed an income tax of 1.5% on all internet-based earnings.
This definition of a digital marketplace is limited to platforms where electronic sales of goods and services are taking place. For example, the Amazon or Jumia platforms. The transactions were considered to be between legal persons classified as buyers or sellers.
Recent revisions to the budget statement for 2021/2022 were made in order to broaden the scope of digital tax. The digital tax is now applicable to any income derived from an online business or electronic network, including a digital marketplace.
Digital marketplaces now include online platforms where users can sell and provide goods or services to other users.
In addition, the law defines a platform to include any electronic application that allows users to connect directly or indirectly with digital service providers. Websites and mobile applications are included. The tax net is now broader to have a wider range of digital services. These include transactions that take place on a network, such as data exchange and licensing. They are third-party intermediaries or parties that assist businesses in exchanging data and electronic documents for the purpose of optimizing supply chain communication.
Changes bring clarity
These changes clarify what activities are subject to taxation, where they take place, and who is responsible. It removes, for example, the requirement that one be either a buyer or seller. Internet users and electronic network users who successfully sell goods over an electronic network mo,bile platform, or any other type of electronic network are now subject to the tax.
The same applies to all businesses conducted over the Internet or electronic networks. These changes do not only apply to traditional electronic markets such as eBay but also include social media, Facebook int,ranets, or private trade networks.
Digital services that are taxable include mobile applications, e-books, and downloadable digital content. Other over-the-top services are also listed, including movie streaming, data that is collected and sold, the provision of a digital marketplace, and subscription services. Electronic data management, including electronic ticketing and booking services and search engine provision, are also taxed. Online distance learning is also taxed.
This new law applies to everyone who earns income from an electronic network or online. This includes both residents and non-residents earning income through a digital marketplace. It means that all income derived from electronic networks or the Internet is subject to VAT and income tax.
This also applies to foreigners and non-residents who are in the business or profession of sending messages via cable, radio, or optical fibre for television broadcasting or Very Small Aperture Terminals (VSAT), the Internet, satellite, or other similar methods of communication, regardless of whether they originate from Kenya.