FINANCE BILL

Digital service tax could only be payable by non-residents

Most countries globally charge the tax is on non-residents selling items to locals via online platforms

In Summary
  • This comes as the effect of the DST which took effect from January 1 2021 had started being felt by Kenyans accessing online services.
  • According to BDO Global, this proposal responds to the difficulty in collecting DST and the international developments on digital service taxes.
President Uhuru Kenyatta signing into law the Finance Bill./FILE
President Uhuru Kenyatta signing into law the Finance Bill./FILE

The newly introduced digital service tax(DST) could now only be payable by non-resident persons doing online sales to Kenyans if the finance bill 2021 comes into action.

This comes as the effect of the DST which took effect from January 1 2021  charged at 1.5 per cent tax on income generated through digital transactions had started being felt by Kenyans accessing online services.

According to BDO Global, an accounting and advisory network this proposal responds to the difficulty in collecting DST and the international developments on digital service taxes.

For instance,  the appointment of tax representatives had not yet been configured on iTax, KRA's online platform, posing a challenge to non-resident entities wanting to pay the tax.

Most countries globally charge the tax is on non-residents selling items to locals via online platforms.

"This proposal may be geared towards generating additional taxes for the government at the time when shortfalls are expected," noted the consultants at BDO Global.

The growth of online services  in the country saw KRA introduce the tax head to collect revenue from the digital marketplace.

Tax and audit consultants, PricewaterhouseCoopers KenyaPwC had noted ambiguities in the newly introduced tax (DST) saying this could lead to administrative complexities.

PwC noted that taxpayers were grappling with the widening of the scope of digital service tax to include all services provided through a digital platform without regard as to whether the digital platform qualifies as a digital marketplace in line with the definition provided in the primary legislation.

In the Finance Bill 2021, a"digital marketplace" is now to mean an online platform that enables users to sell or provide services, goods or other property to other users.

The PwC tax experts urged the tax policymakers to make the necessary amendments to ensure that the digital service tax is easily adopted with minimal adverse impact to businesses, given the challenges currently facing taxpayers.

"The government could draw some lessons from international best practices and incorporate them in the local tax code considering the digital tax is not just unique to Kenya," said PwC

The growth of online services  in the country saw KRA introduce the tax head to collect revenue from the digital marketplace.

Other proposals in the Finance Bill 2021 includeiInterest expense deductible to  capped at 30 per cent of operating profit .

Exported services will now be exempt from tax from zero rated while Input VAT incurred to make them will be nondeductible

Ordinary bread if the proposal is passed will be vatable, therefore be subject to 16 per cent VAT.

Common Reporting Standards will also be set to start where Kenya will share and receive financial/banking information on Kenyan residents with other countries.

Transfer Pricing documentation will include global Country by Country Reporting of activities of multinationals to KRA.

Exchange losses incurred in trading with non-resident related parties or with entities with special contractual or financing arrangements to be disallowed (I.e. franchise, licence and sole distributorship)

There will be 20 per cent excise duty on betting stakes, if enacted into law, the Kenya Revenue Authority (KRA) will take Sh20 out of every Sh100 wagered regardless of whether the punter wins or loses.

It will expand the list of taxes levied on the betting industry and punters.

If passed the record keeping and KRA audit window will be extended to 7 years from 5 years  while Overpaid Import Declaration Fee (IDF) and the Railway Development Levy(RDF)will be refundable.

The Finance Bill, 2021  was presented before Parliament by the Government and  published on May 5 2021,