Due to its unregulated nature, it has been difficult for countries to tax companies in this sphere. Most tax systems worldwide are adapted for physical businesses, based on the presumption that companies have a physical office in a country to be taxed therein. Kenya introduced its Digital Service Tax (DST20) following taxation policy changes that are gradually spreading in continental Africa. It became the first of a string of countries in the continent to tax income from digital services. Its introduction has been championed as exemplifying Kenya's pioneering approach to technological innovation. This article gives an overview of the DST and its regulatory requirements.

Digital Service Tax

Section 12E of the Finance Act 2020 was inserted into the Income Tax Act, and a Digital Service Tax was introduced. The features of the DST include the following.

• Rate: The DST is charged 1.5 percent on the gross transaction value of digital services provided in Kenya.
• Scope: The DST applies to income from services provided through a digital marketplace, including:

- Downloadable digital content, such as mobile applications, e-books, and digital music

- Subscription-based media, such as news, magazines, and digital streaming services

- Online data storage and management services

- Online booking and ticketing services

- Online training and education services

- Digital advertising services

- Any other service provided through a digital marketplace

• Threshold: The DST applies to digital service providers whose gross annual turnover from delivering digital services made in and from Kenya is KES 50 million or more.
• Residence: The DST applies to resident and non-resident digital service providers who provide their services to users in Kenya.
• Exemptions: You need not withhold DST on any income already taxed by withholding from the source on your behalf under the Income Tax Act (for example, royalties or management fees).

Compliance Requirements

The Finance Act 2020 and the Digital Service Tax Regulations 2020 describe the reporting obligations of digital service providers:

• Registration: Any digital service provider who exceeds the threshold must register with the KRA within 30 days of becoming liable to pay DST.
• Returns and Payment: Registered digital service providers must file a DST return and pay the tax due by the end of the month after the end of each calendar quarter (i.e., 20 January for the fourth calendar quarter of the preceding year; 20 April for the first calendar quarter; 20 July for the second calendar quarter; 20 October for the third calendar quarter).
• Records: Any provider of digital services must keep records of all their transactions and the corresponding digital services used, including information about the location, nature of the service, value of the transaction, and DST charged. The provider must keep the records for at least five years.
• Penalties: Failure to register, file returns, pay the tax due, keep records, or fulfill other obligations outlined in the Tax Procedures Act 2015 results in monetary penalties and interest on unpaid taxes.

Implementation Challenges

The implementation of the DST has faced some challenges and criticisms:

Double taxation: In some cases, the DST creates double service providers who who are subject to income tax in their home country.

Costs of Compliance: The DST increases compliance costs for digital service providers, particularly those with a limited physical presence in Kenya, regarding registration, filing, and record-keeping.

Enforcement: A major limitation with the DST could be the KRA's ability to enforce against digitally enabled foreign suppliers that don't have physical presence or assets in Kenya. Enforcement can be difficult if business actors aren't within one country's borders. Researchers have found this to be a key problem in the implementation of the DST in the UK, where there was low compliance with the tax, according to a 2020 paper by economist Erika Schuster and her colleagues at the University of Bremen.

Scope: The breadth of digital services in the DST has resulted in questions about how they should be interpreted and classified, especially when services are bundled or mixed.

Conclusion

The introduction of the Digital Service Tax in Kenya is a welcome move. It will tax the digital economy and level the playing field for businesses. The DST will capture revenue from the growing digital economy and ensure that our taxation system is aligned to the realities of the digital age.

However, it does not solve the potential problems of taxing the digital economy, such as the risk of 'pyramiding' or double taxation, the added compliance costs and difficulty of enforcement for business, and interpretative ambiguities. The move to the DST means more debate and dialogue will be needed with digital service providers and other stakeholders.

Adapting the DST, exploring other options (such as multilateral solutions), and investing in digital infrastructure and capacity building to maximize tax revenues are all options Kenya needs to consider for an equitable, efficient and sustainable tax framework of the digital economy.

Therefore, the DST will be successful only if it finds a balance between revenue, business competitiveness, and consumer welfare while helping to innovate and grow the digital sector.