Taxpayers Should Acquaint Themselves With The Digital Service Tax

PwC Kenya has urged taxpayers to acquaint themselves and comply with the Finance Act 2020 on Digital Service Tax (DST) that introduced a tax of 1.5% of the gross transactional value-effective 1st of January 2021.

According to Nicholas Kahiro – PwC Manager and Corporate Tax Specialist, “The Kenya Revenue Authority (KRA) has further instituted provisions that have expanded the applicability of DST to cater for the changing marketplace with DST being one of the key revenue measures of KRA especially from corporate tax policy.”

He added, “DST is here to stay. Its main target is capturing non-resident compliance but, in its regulations, it has also touched on residents.”

KRA defines a digital marketplace as a platform that enables the direct translation between multiple buyers and sellers of goods and services through electronic means. It acts as an intermediary, must be electronic e.g. website, mobile app, etc.

The digital business models that are targeted include Online advertising, On-demand TV shows, video platforms, etc., digital payments – a cashless economy, and eCommerce and marketplace.

PwC views are that DST is applicable if there is an existence of a digital marketplace (multiple buyers and sellers, electronic and intermediary), generation of income from the provision of services through a digital market place and provision of digital services to a user located in Kenya, IP address, a debit or credit card located in Kenya.

The emerging issues on the tax provisions include compliance issues which comprise of registration and payment which include the appointment of tax representatives which has not yet been configured on iTax with the issue raised being non-resident entities subject to DST being forced to register in their own capacity which attaches a liability to their directors.

Secondly, DST is a prerequisite of VAT registration for digital marketplace supplies with the issue being entities not subject to DST being required to register. This may lead to administrative complexities and unnecessary queries from KRA.

Thirdly, DST return configured on iTax as a payment return and not a monthly return with the issue being the mismatch between the law and regulations.

The legal ambiguities include KRA’s general position that all services provided electronically are subject to DST even if no digital market pace exists with the issue being KRA issuing DST notifications and demanding DST without fully understanding the business operating models.

Secondly, commissions are subject to DST with the issue being a lack of consistency on tax positions on revenue streams. The last being interplay between DST and minimum tax with the issue is a lack of clarity on whether DST can be used to offset minimum tax.

The conditions set for VAT on Digital Market Place Supply (VAT DMPS) to apply include supply is by a person from an export country to a recipient in Kenya in a B2C transaction, supply is taxable such as subscription-based media content, etc. and offered via the digital market place.

Thirdly, if the recipient of the supply is in Kenya at the time of transaction and the payment for the services is made to the supplier in the export country from a bank registered under the Banking Act or from a bank authorized in Kenya but does not apply to B2B transactions.

PwC Kenya was this morning discussing some contentious issues on the interpretation of the DST and VAT provisions and how they could impact businesses. The legislation was enabled by an earlier Finance act of 2019 that amended section 3 of the Income Tax Act (ITA) that states that income accruing through a digital marketplace is income chargeable to tax.