According to recent estimates, about 1.2 to 2 million people in Kenya earn a living by providing digital services in Kenya. And based on the 2023-2024 financial year, the Kenya Revenue Authority (KRA) collected over KES 10 billion from the digital economy alone. Thus, begs the question, just who is obligated to pay digital service taxes in Kenya, and what other taxes may apply to digital service providers?
Who Are Digital Service Providers?
Digital service provision refers to the delivery of intangible, automated, or internet-based offerings to consumers or businesses over digital networks. This encompasses a wide range of virtual products. Some of the services in issue might also be offered together with non-virtual products or services. This comes into play where a virtual product sometimes must be printed or a service is initiated virtually but might end up including and being incorporated in the physical movement of goods, services, etc.
So, how do these services play out in Kenya? First, we have the digital platform workers. Approximately 1.2 to 1.5 million Kenyans aged 18 to 35 offer digital services on both domestic and global online platforms. These also include digital content creators who use social media platforms to generate income.
Then, we have the e-commerce platforms which provide services such as deliveries within the country, and these employ at least 300,000 individuals. ICT professionals are also part of the digital service providers, and they include data scientists, cybersecurity analysts, and many others who make up at least 300,000 of the digital service providers. And that is not to mention the tens of thousands of Kenyans employed in sectors such as mobile network operations and telecom service providers. That is all to say that when it comes to digital service providers, Kenya has millions of people who meet the required criteria.
But are all these people liable for digital service taxes in Kenya, or is there more nuance as to their obligations to KRA?
Should Digital Service Providers Pay Digital Service Taxes?
Taxation tends to be a grey area in most industries, and the digital service sector is not an exception. So, what applies to these individuals?
To understand their tax obligations, we have to start with the Income Tax Act (ITA) in Kenya, which provides for the taxation of incomes made from the provision of digital services. In particular, Section 3 of the ITA is the charging section on income tax, which in Section 3 (2) (ca) provides for the taxing of income accruing from a business carried out over the internet or an electronic network, including through a digital marketplace.
Further, in Section 12E of the ITA, the law provides specifically for the Digital Service Tax (DST). The law here states that digital service taxes are payable by non-resident persons whose income from the provision of services is derived from or accrues from Kenya through a business carried out over the internet or an electronic network, including through a digital marketplace.
This, however, does not apply to a non-resident person with a permanent establishment in Kenya.
What the law simply says is that if you are providing digital services in Kenya and therefore making your income in Kenya, you are bound to pay digital service taxes. The law provides further that, if you are a non-resident person with a permanent establishment within the country, you are also bound to pay DST.
Generally, the ITA specifically provides in Section 3 that income tax is charged on the income that is accrued or derived from Kenya, whether by residents or non-residents. Section 12E of the ITA further states that DST is not applicable to non-residents whose income is accrued or derived from outside Kenya. This is a qualification on the issue of the source of income.
Nuances Applicable to Digital Service Taxes in Kenya.
As you can see, there are several factors to consider when it comes to who should pay digital service taxes in Kenya. Let’s break them down even further.
The Income Tax Act goes on to state in Section 4 (a) to the effect that where a business is carried out by a resident person partly within and partly outside Kenya by a resident person, all the gains and profits made by such a business shall be deemed to have accrued or to have been derived from Kenya. Such income, therefore, will be subject to taxation whether the same is from digital service provision or otherwise.
The watch words here or the determining factors in the taxation are thus as follows:
- The areas of operation,
- The source of the funds and
- The persons carrying on the business.
This focus revolves around the words accrual or derivation of income, residency and non-residency of the persons carrying on the businesses, and whether the businesses operate within or outside of Kenya.
Beyond Digital Service Taxes: Might You Owe More?
The previous sections are principally on income tax for digital service providers, as generally most businesses are bound to pay income tax. However, depending on the kind of business being operated, other taxes may be applicable.
These may include Value Added Tax (VAT), and there have been many tax disputes on this that have gone all the way up to the High Court. To fully understand whether your business is taxable on VAT and other taxes, you need to specifically consult lawyers who are well-versed in tax laws because the taxes are business-specific, such that what applies to one digital service provider may not apply to you.
Should you require more clarification on whether you need to be paying digital service taxes in Kenya or any other taxes for that matter, we are here. You can book a one-on-one consultation with a member of our team using the form below.
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