What To Know About Digital Service Tax and Minimum Tax If You Operate An Online Business

As Covid-19 continues to sweep across the country, and as businesses continue to struggle the remain afloat in the face of the pandemic that no one knows when it will end, Kenya Revenue Authority seems determined to ensure that more businesses go down.

It is important to note that businesses in Kenya have been hit-hard by Covid-19. Hundreds of thousands of them have shut down and at least two million Kenyans have lost their jobs. For a business to shut down and for one to lose a job, is not something to smile about.

Come January 2020, two taxes are set to shape how online businesses are conducted in Kenya. These are; the Digital Services Tax (DST) and the Minimum Tax. There is a likelihood of many online businesses closing shop as soon as these taxes take effect.

What is Digital Services Tax (DST)?

The Kenya Finance Bill 2020 introduced a new Digital Services Tax on income from services provided through the digital marketplace in Kenya at the rate of 1.5 percent on the gross transaction value.

The DST will apply to the income of a resident or nonresident person derived or accrued in Kenya from the provision of services through a digital marketplace. One will be subject to DST if one provides or facilitates the provision of a service to a user who is located in Kenya.

A user of a digital service is deemed to be located in Kenya if any of the following parameters are present; he/she accesses the digital interface from a computer or other electronic devices located in Kenya; payment for the digital services is made using a credit or debit facility provided by any financial institution or company in Kenya; the digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya; and/or the user has a business, residential or billing address in Kenya.

The new tax will affect such digital services as streaming and download services of digital content; 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; among others.

According to Deloitte, without adequate guidelines and thresholds, the measure will pose administrative challenges. Ideally, it should be targeted at non-resident persons without taxable presence whose income/ sales arising from Kenya exceed a specified threshold. Though a global trend, there is still a lack of consensus on the application with certain countries contesting the unilateral measures adopted by those that have introduced this tax.

What is the Minimum Tax?

A new tax is known as “minimum tax” is to be introduced with effect from 1 January 2021. The tax shall be applicable at 1 percent of the gross turnover and shall be paid through a quarterly installment tax system by the 20th of the fourth, sixth, ninth, and twelfth months.

Deloitte says the minimum tax act appears to be a drafting error, as the Finance Bill has also proposed to amend Section 12 of the Income Tax Act to exempt persons from payment of installment tax if the minimum tax would be higher than installment tax.

Minimum tax should only be applicable where installment tax payable is lower than minimum tax and we expect this to be amended before the Bill is enacted. As many entities are likely to report losses under the current adverse conditions, this measure should be reviewed and aligned to best practice where minimum tax applies where an entity reports consecutive tax losses for at least 3 or 5 years.

What next?

If you run an online business in Kenya, it is important that you read and understand these two taxes that directly touch on your business. If they will become effective in January 2021 as planned, your business revenues are likely to be affected, and given that most online businesses don’t sell products of their own, a lot of confusion is likely to be registered.