Kenya is set to start levying a tax for any transactions that happen on online services. The proposed digital tax in Kenya will be in the form of an additional 1,5% digital tax on the value of any online transaction.
The digital service tax law was signed by Kenya's president, Uhuru Kenyatta, during November 2019. What is interesting is that the law defines a digital marketplace whose transactions are eligible to be taxed as "a platform that enables direct interactions between buyers and sellers of goods and services through electronic means."
“Notwithstanding any other provision of this Act, a tax to be known as digital service tax shall be payable by a person whose income from services is derived from or accrues in Kenya through a digital market place.”
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How Big Tech avoids paying tax in African countries
The main reason why Kenya has chosen to go the route of introducing a digital service tax mainly has to do with the fact that most Big Tech companies are not incorporated, from a products and services point of view, in any African country from which they generate an income.
At best, most will have a separate legal entity which is solely to employ staff in the specific country. As a result, such Big Tech companies can sell their services in African countries without paying any taxes on them. This is because they are incorporated in countries such as Ireland or the Isle of Man for any of their users outside the USA.
It is easy to frown upon Kenya's decision especially when considering that the digital marketplaces, as they are defined in the law, will likely pass down the cost on to their customers in Kenya by increasing prices. On the other hand, it is somewhat understandable because, ideally speaking, a government creates (through infrastructure, laws, and other methods) the environment in which businesses can operate. To sustain such an environment requires all businesses benefiting from it to contribute through taxes.
Kenya's digital service tax and who will be affected
As mentioned, the definition of a digital marketplace as defined by the law is quite broad. To date, as I understand, this covers every digital platform and online service that generates any income from Kenya. This includes online news subscription services, paid subscription podcasts, streamed video and music, transport platforms such as Uber and Bolt, Amazon, and many others.
However, the question becomes how does Kenya enforce such a law?
According to Kenya's Revenue Authority, the enforcement and collection of the digital service tax will happen through VAT (Value Added Tax). All companies that have been identified as offering digital services in the country will, going forward, be required to register for VAT or appoint a tax representative in Kenya.
Should companies fail to register for AT or appoint a tax representative, Kenya's policymakers have said that the guilty company will risk “restriction of access” to operating in Kenya.
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