Tech firms face higher levies as Kenya plans to double digital service tax

Kenya plans to double the digital service tax (DST) to 3% beginning July this year, as the government taps the growing online economy to increase its domestic revenues and narrow fiscal deficit.

It is expected that the new rates, proposed in the Finance Bill by the country’s Treasury department, will be passed by the lawmakers. The increase comes slightly over a year after the DST came into effect in Kenya, affecting tech companies such as Amazon, Uber, Spotify and Netflix.

“The Third Schedule to the Income Tax Act is amended… by deleting the expression ‘one-point-five percent’ appearing in paragraph 12 (digital service tax rate) and substituting therefore the expression ‘three percent’,” Kenya’s Treasury cabinet secretary Ukur Yatani wrote in the Finance Bill 2022.

The DST is a tax on gross transaction values of tech companies within a particular country. In Kenya, East Africa’s biggest economy, companies or individuals (non-residents) are obliged to pay it if they “provide or facilitate provision of a service to a user who is located in Kenya.”

The taxable services, as per the country’s revenue authority, include over-the-top services like video-streaming and podcasts, subscription-based media including news, digital marketplaces, and downloadable digital content like e-books and films.

Others include electronic data management services, electronic ticket booking, online distance learning and the sale, and licensing or monetization of any data collected about Kenyan users generated from places like digital marketplaces. Overseas companies without offices in Kenya are required to register electronically or appoint a tax representative in the country to file the returns and make payments.

The uptake of DSTs was said to have been accelerated by the Covid pandemic and efforts by the Paris-based Organization of Economic Co-operation and Development (OECD) to ensure that countries increased taxing rights over the revenues of multinationals with operations in their countries.

In a tax deal brokered last year, out of the 140 OECD members, only 4 – including Kenya (which had already implemented DST) and Nigeria – abstained from an agreement that set a 15% minimum corporate tax rate for multinational enterprises.

OECD said that the move will ensure that these multinationals pay a fair share of taxes in countries where they have operations.

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