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Kenya publishes regulations to implement the digital services tax


Even amid a pandemic, globally the conversation on the taxation of the digital economy remains. Just recently, the United States Trade Representative Office announced that it was initiating investigations into countries that had enacted digital taxes on the ground that they target American companies unfairly. The investigation extended to Austria, Brazil, the Czech Republic, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom. Interestingly, Kenya was spared from the investigation, which was peculiar considering that Kenya is in the middle of negotiating a Free Trade Agreement (FTA) with the United States. Whether the digital services tax and the proposed VAT on digital services will jeopardize the negotiations is a different conversation altogether.

The taxation of the digital economy has its roots in the Base Erosion and Profit Shifting (BEPS) Project spearheaded by the Organisation for Economic Co-operation and Development (OECD) and G20 countries. The tax challenges of the digitalization of the economy were identified as a significant area in the project leading to the BEPS Action 1 report. Whereas countries are implementing digital services taxes that are restricted to the digital sector, the BEPS Action 1 Report found that the whole economy was digitalizing and as a result, it would be difficult, if not impossible, to ring-fence the digital economy. Further, the report found that the digital economy raises broader tax challenges which it identified as nexus, data, and characterization. The report did not recommend any solutions and instead called for more work to be done in the area.

Since the publication of the report, the Task Force on the Digital Economy issued an interim report in 2018 providing an in-depth analysis of the changing business models and identified the three characteristics frequently observed in highly digitalized businesses. The characteristics identified are scale without mass, heavy reliance on intangible assets, and the importance of data, user participation, and their synergies with intangible assets. Subsequently, the Inclusive Framework agreed to examine two proposals on addressing the tax challenges of the digital economy – that is, (1) reallocation of profits and new nexus rules and (2) an anti-global erosion proposal or “right to tax back”. The Inclusive Framework continues to consider the proposals and feedback from various stakeholders, and it had been anticipated that a consensus will be reached in 2020. However, the pandemic delayed discussions on the issue and there are also doubts as to whether such a consensus can be reached anytime soon.


The lack or delay in achieving a global consensus on taxing the digital economy has led to the imposition or proposals to impose unilateral digital taxes by different countries, including Brazil, Italy, India, and South Africa. Kenya first joined the bandwagon in 2019, when it passed the Finance Act 2019 (FA 2019). The FA 2019 amended the Income Tax Act of Kenya (ITA) to provide that income accruing through a digital marketplace is chargeable to income tax. The FA 2019 defined a “digital marketplace” as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. Further, it provided that the Cabinet Secretary (CS) of the National Treasury and Planning shall make regulations to provide for the implementation mechanism. On June 30th, 2020, the President assented to the Finance Act 2020 (“FA 2020”) which among other amendments, introduced a Digital Services Tax (DST), effective on 1 January 2021.

According to the Income Tax Act, the DST will be payable by persons whose income from the provision of services is derived from or accrues through a digital marketplace. The tax will be levied at the rate of one-point-five percent (1.5%) of the gross transaction value of the service and will be payable at the time of the payment transfer to the service provider. The DST will be an advance tax for resident persons and non-resident persons with a Permanent Establishment (PE) in Kenya and a final tax for non-residents with no PE in Kenya. The government expects to collect an approximate KES 2 Billion from the new DST in the financial year 2020/21.

Pursuant of the amendments to the Income Tax Act introduced by the FA 2019 requiring publication of regulations to effect income tax on digital market places, the CS of the Treasury published the Draft Income Tax (Digital Service Tax) Regulations, 2020 (the “DST Regulations”). We highlight the provisions of the DST Regulations below.

DST Regulations

1. Chargeable Services

The DST Regulations propose for the DST to apply to a myriad of digital services that we consume daily. The regulations propose the following services to be chargeable to DST:

  • streaming and downloadable services of digital content;
  • transmission of data collected about users which have been generated from such users’ activities on a digital marketplace, however, monetized;
  • provision of a digital marketplace, website or other online applications that link buyers and sellers; subscription-based media including news, magazines, and journals;
  • electronic data management including website hosting, online data warehousing, file-sharing, and cloud storage services; supply of search-engine and automated help desk services including supply of customized search engine services;
  • tickets bought for live events, theatres, restaurants, etc. purchased through the internet; and
  • online distance teaching via pre-recorded medium or e learning, including online courses.

Also, the DST regulations propose to apply to any other service provided or delivered through an online digital or electronic platform but excluding such services that are subject to withholding tax under the Income Tax Act.

The curving out of services already subject to withholding tax from DST is a positive inclusion that would have subjected payments made for sales promotion, marketing, advertising services to a double tax at source. In any event, the source deduction method is meant to capture payments made to non-residents which the withholding tax already netted.

The proposed DST Regulations also curve out services provided by a licensed financial service provider carrying out online services that facilitate payments, lending, or trading of financial instruments, commodities, or foreign exchange. Considering that the DST is targeted at foreign digital service providers who pay no or nominal taxes in Kenya due to the dependency of the traditional tax framework on a physical location, this makes sense since licensed financial providers have to be incorporated in Kenya, creating a nexus for taxation under Kenyan tax laws.

2. User Location

The DST Regulations propose that a person shall be subject to DST if the person provides or facilitates the provision of a service to a user who is located in Kenya. A user will be deemed to be located in Kenya if (A) they access the digital interface from a terminal (device) located in Kenya; (B) pays for the service using a credit/debit facility by a Kenyan company; (C) acquires the services using an IP address registered in Kenya or an international mobile phone country code assigned to Kenya; (D) the user has a business, residential or billing address in Kenya. Under the DST Regulations, the four elements will be considered separately in determining a user’s location.

3. Gross Transaction Value

The amendments introduced to the Income Tax Act by the FA 2019, did not define gross transactional value thereby creating ambiguity over the application of the tax. However, the DST regulations have attempted to define the term by distinction. The DST Regulations propose to distinguish the gross transaction value of services provided by (1) a digital service provider, to be the payment received as consideration for the services and (2) by a digital market place provider, to be the commission or fee paid for the use of the platform. Whereas this provides some clarity, it fails to distinguish instances where you have a hybrid provider who owns a digital platform and is also a supplier of digital services on the same platform. An important proposal on the gross transaction value is that it will not be inclusive of the Value Added Tax (VAT).

4. Liability to Deduct and Remit DST

The DST Regulations stipulate that payment of DST will be the liability of the digital service provider or any person that collects the payments for digital services. They further provide that a non-resident person without a PE may appoint a tax representative to account for the DST. The DST Regulations propose that where a non-resident person appoints a tax representative to account for the digital service tax, the tax representative shall remit the tax due to the Commissioner by the twentieth day of the month following the end of the month that the digital service was offered. We note that this is not aligned with the provisions of the Income Tax Act which stipulate that DST shall be payable at the time of making the payment of the service. Whereas this provides non-residents without a PE a window in which to remit the DST collected, it is unlikely to be enforced by Kenyan Courts on the basis that it is not in conformity with the Income Tax Act.

5. Appointment of Digital Service Tax Agents

We note that the FA 2020 also amended the Tax Procedures Act, 2015 (TPA) to provide for the appointment of digital service tax agents to deduct, collect, and remit the DST collected by KRA. The DST Regulations further propose the implementation of a digital service tax collection service (collection service) that DST agents will use to collect and remit the DST to KRA. Under the DST Regulations, digital service providers required to pay DST through an appointed DST agent will be required to use a payment service provider that is connected to a digital service tax collection service of an appointed DST agent to process payments for its services or a payment service provider appointed as a DST agent. We anticipate that financial service providers including mobile payment service providers will be the appointed DST agents. Consequently, it appears that KRA will integrate the collection service with these financial service providers to monitor digital transactions and assist KRA with enforcing DST obligations. In the long run, as the economy digitalizes, the collection service may turn out to be the most effective tool in general tax administration as well as in the fight against money laundering and terrorism financing.

6. Filing of Returns and Maintenance of Records 

Under the DST regulations, digital service providers or their tax representatives will be required to submit a return indicating the value of transactions and the tax remitted by the 20th of the month following the end of the month that the digital service was offered. Also, a person required to deduct, account, and remit the DST to KRA will be required to keep records for five years from the end of the reporting period per the TPA.

7. Offences and Penalties

The DST Regulations proposes that a person who fails to comply with the provisions of the Regulations may be liable to a restriction of access to the digital marketplace in Kenya until such obligations are fulfilled. The effectiveness of access restriction is one aspect of the DST implementation is one that we will need to adopt a wait and see approach. Governments across the world that have attempted to restrict internet access without any prior legal frameworks on data restrictions such as data localization requirements have not been successful due to the use of Virtual Private Networks (VPNs).


We note that under the Income Tax Act, businesses whose annual revenue is between KES 1,000,000 and KES 50,000,000 are required to pay 1% of their monthly revenues under the simplified Turnover Tax (ToT) regime. The introduction of the DST will mean that small businesses in the digital services sector that fall within the ToT regime, may find themselves in a position where the total tax bill is 2.5% of their revenue on account of both ToT and DST – which will highly affect their liquidity and survival considering the current economic climate. Whereas ToT is a final tax for qualifying small businesses, it remains unclear how these small businesses will recover any DST deducted at source. This is the same case if they opt to be taxed on their net income basis, which also increases compliance costs for small businesses.


Whereas we cannot establish when a global consensus on a solution that addresses the tax challenges of the digital economy will be reached, this marks an important step for Kenya in reducing tax leakages attributable to the digital sector. Developing countries like Kenya need revenue to address the economic and social challenges of their citizens, especially, in the post-pandemic recovery phase of the economy. While unilateral taxes are frowned upon as they are likely to result in compliance challenges for many multinational companies, they are also increasing pressure at the international level to find a consensus. We think that the DST is a placeholder for taxing the digital services sector and will likely be replaced by the solution agreed to at the OECD level. This is without prejudice to the challenges and difficulty in implementing the tax.

By Strathmore Tax Research Center

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