Digital service tax & VAT Kenya

Digital transactions have grown rapidly in Kenya, necessitating a framework to tax non-resident companies providing services to Kenyan residents. The Digital Services Tax (DST) and Value Added Tax (VAT) for digital marketplace supplies were introduced to capture revenue from the growing digital economy and level the playing field for resident businesses.

What Are DST and VAT for Digital Services?

Kenya introduced DST in 2021 as part of the Finance Act 2020, in response to the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan. BEPS addresses how multinational enterprises exploit gaps in tax rules to shift profits to low- or no-tax locations, leading to reduced tax revenues for nations. 

One key aspect of the BEPS Action Plan is ensuring taxation aligns with the location of economic activity, particularly in the growing digital economy. DST was introduced in Kenya to tackle this challenge by taxing digital services provided by non-resident companies to Kenyan consumers.

Additionally, VAT is imposed on these transactions, ensuring that both direct and indirect taxes are collected.

These measures focus on capturing tax from foreign companies that operate through digital platforms but have no physical presence in Kenya, a challenge many countries face due to the rise of the digital economy.

 

Digital Services Tax (DST) Applicability

DST is a direct tax levied on income derived from digital services provided to Kenyan residents. Key conditions for DST are:

1. It applies to non-resident service providers delivering digital services to consumers in Kenya.

2. The DST rate is 1.5% of the gross transaction value.

The DST applies to various digital services such as:

• Streaming platforms (e.g., Netflix, Spotify).

• Digital marketplaces (e.g., Amazon, eBay).

• Online advertising.

• Subscription-based services.

• E-commerce platforms.

Example:

Suppose a U.S.-based web hosting company earns KSh 500,000 from Kenyan subscribers in a month. The DST is calculated as:

KSh 500,000 × 1.5% = KSh 7,500

The company must remit KSh 7,500 as DST for that month.

 

Value Added Tax (VAT) Applicabilty

VAT applies to digital services supplied by non-resident businesses to Kenyan residents at a rate of 16%. It's an indirect tax. This is collected on top of the DST. 

Example:

Consider an Indian cloud computing service provider that charges a Kenyan business KSh 1,000,000 monthly. The VAT would be:

KSh 1,000,000 × 16% = KSh 160,000

The company must charge this amount to its Kenyan client and remit the KSh 160,000 VAT to KRA.

 

Exclusions from DST

• If a non-resident company has a permanent establishment (PE) in Kenya, DST does not apply, as the company is subject to normal Kenyan corporate income tax - 30%.

• Services involving professional advice or consultations where the provider has a Kenyan office are excluded from DST but may still attract VAT.

 

Deadlines for Filing and Payment

Both DST and VAT are filed and paid for on or before the 20th day of the month following the transaction.

• Example: If a company sells digital services in October, DST & VAT must be paid by November 20th.

1. Late Payment: Interest of 1% per month on the unpaid DST will be levied.

2. Non-Filing or Underpayment: Penalties equal to 5% of the unpaid tax in addition to monthly interest charges.

VAT Penalties:

 

1. Late Payment: Interest is charged at 2% per month on the outstanding VAT.

2. Failure to Register or File Returns: Fines of up to KSh 10,000 per month or 1% of the tax due, whichever is higher.

When non-resident companies fail to comply with DST or VAT regulations, KRA has several mechanisms to ensure recovery of taxes:

1. Tax Treaties and Information Sharing

Kenya has Double Taxation Agreements (DTAs) with several countries, including the United Kingdom, India, South Africa, and Mauritius. These agreements allow Kenya to collaborate with foreign tax authorities to ensure compliance and recover taxes.

2. Registration and Compliance Notices

KRA can issue notices to non-resident companies to register for DST and VAT within a specified period.

3. Withholding Taxes

KRA can impose withholding tax obligations on Kenyan businesses transacting with non-compliant non-resident companies. This means the Kenyan customer would deduct the applicable tax (DST or VAT) before making payments to the non-resident company, effectively ensuring KRA receives the taxes due.

4. Blocking Access to Kenyan Market

For non-resident companies that persistently fail to comply, KRA may collaborate with the Communications Authority of Kenya (CAK) to block access to the company’s digital platforms in Kenya until they meet their tax obligations.

4. Legal Proceedings

KRA may initiate legal action in Kenyan courts or use international arbitration mechanisms to compel non-compliant non-resident companies to pay outstanding taxes.

 

In Conclusion

Kenya’s DST and VAT for digital services are critical components of the country’s strategy to tax the digital economy effectively, in line with global BEPS initiatives. These taxes ensure that non-resident companies contribute fairly to Kenya’s revenue base. 

However, compliance is key, and businesses must stay informed about filing deadlines, penalties, and KRA’s enforcement mechanisms, particularly when operating from countries with tax treaties with Kenya.

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Digital services Tax (DST) was replaced with Significant Economic Presence (SEP) Tax on Dec 27, 2024. click the link below to see the latest guidelines.

> Understanding Kenya’s SEP Tax for Non-Resident Digital Businesses