PUBLIC NOTICES 22/09/2023 Compliance by Non-Resident Digital Service Providers

The Kenya Revenue Authority (KRA) issued a public notice on September 22, 2023, reminding non-resident digital service providers of their Value Added Tax (VAT) and Digital Service Tax (DST) obligations. This notice underscored the KRA's commitment to enforcing compliance with the VAT Act, 2013, and the Income Tax Act, Cap 470, as amended by the Finance Acts of 2019, 2020, and 2022. Non-compliant providers were given a 30-day window to register and regularize their tax affairs through the iTax system, failing which the Commissioner would initiate stringent enforcement measures, including the appointment of tax agents. The directive highlights Kenya's proactive stance in taxing the digital economy, expanding the tax net to capture both Business-to-Consumer (B2C) and Business-to-Business (B2B) digital service transactions by non-residents.

On September 22, 2023, the Kenya Revenue Authority (KRA) released a significant public notice, drawing the attention of all non-resident providers and suppliers of digital services to their existing tax obligations in Kenya. This notice served as a firm reminder concerning compliance with Value Added Tax (VAT) on Electronic, Internet, and Digital Marketplace Supply, as stipulated under the VAT Act, 2013, and Digital Service Tax (DST) under the Income Tax Act, Cap 470. The KRA's directive provided a strict 30-day deadline for non-compliant entities to register through the iTax system, signaling an intensified enforcement drive against those operating within Kenya's digital economy without fulfilling their tax duties.

This development is crucial for legal professionals advising non-resident entities engaged in digital service provision in Kenya. It underscores the maturity of Kenya's digital tax framework, which has evolved significantly over recent years to ensure that the rapidly growing digital economy contributes equitably to the national revenue. The KRA's explicit warning of enforcement measures, including the appointment of tax agents, indicates a low tolerance for non-compliance and necessitates a thorough review of current tax positions by affected businesses.

This article will delve into the statutory and regulatory landscape governing the taxation of digital services in Kenya, analyze the implications of the KRA's notice, and provide practical considerations for practitioners navigating this complex area. It aims to clarify the obligations of non-resident digital service providers and the potential consequences of failing to adhere to Kenya's tax laws.

Kenya's journey to tax the digital economy commenced with amendments introduced through the Finance Act, 2019, which brought digital marketplace supplies within the ambit of the Value Added Tax Act, 2013. This legislative change was operationalized by the Value Added Tax (Digital Marketplace Supply) Regulations, 2020, gazetted on September 10, 2020. These initial regulations primarily focused on Business-to-Consumer (B2C) transactions. However, the landscape underwent further significant transformation with the enactment of the Finance Act, 2022, which broadened the scope of VAT to include Business-to-Business (B2B) digital service transactions by non-residents.

Subsequently, the VAT (Digital Marketplace Supply) Regulations, 2020, were revoked and replaced by the comprehensive Value Added Tax (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023, effective March 15, 2023. These 2023 Regulations clarify that all taxable electronic, internet, and digital marketplace supplies made in Kenya are subject to VAT at the standard rate of 16%. A critical aspect for non-resident providers is the absence of a VAT registration threshold; they are required to register for VAT upon their first sale to a Kenyan customer. Registration can be done through a simplified framework on the KRA's iTax system, or by appointing a tax representative.

In parallel to VAT, Kenya introduced the Digital Service Tax (DST) through the Finance Act, 2020, which became effective on January 1, 2021, under Section 12E of the Income Tax Act, Cap 470. The Income Tax (Digital Service Tax) Regulations, 2020, provide the detailed framework for its implementation. DST is levied at a rate of 1.5% on the gross transaction value, exclusive of VAT, and is primarily applicable to non-resident digital service providers without a permanent establishment in Kenya, for whom it constitutes a final tax. The scope of services subject to DST is broad, encompassing streaming, downloadable content, e-learning, cloud hosting, and digital marketplaces, among others. Both VAT and DST returns are due monthly, by the 20th day of the following month.

The KRA's public notice of September 22, 2023, serves as a clear indication of the tax authority's resolve to fully implement and enforce the digital tax regime. The 30-day compliance window, which effectively closed on October 22, 2023, highlights the urgency with which non-resident digital service providers must address their tax obligations. The notice explicitly states that failure to comply will lead to enforcement measures, including seeking intervention from other relevant government authorities and the appointment of tax agents. This latter measure is particularly significant, as a tax agent would be empowered to collect and remit taxes on behalf of the non-compliant provider, potentially leading to significant operational and reputational challenges for affected businesses.

The expansion of VAT to B2B transactions for non-resident digital service providers, as introduced by the Finance Act, 2022, and clarified by the VAT (Electronic, Internet, and Digital Marketplace Supply) Regulations, 2023, marks a departure from the traditional reverse charge mechanism often seen in other jurisdictions. This places the onus on the non-resident supplier to register and account for VAT, regardless of the recipient's tax registration status. This approach aligns Kenya with a few other countries that have extended the scope of VAT to B2B digital services, necessitating careful consideration by global digital service providers.

Furthermore, the interplay between DST and other taxes, particularly withholding tax, requires careful analysis. The Income Tax (Digital Service Tax) Regulations, 2020, specify that DST shall not apply to income that has already been subjected to withholding tax. This provision aims to prevent double taxation on the same income stream. However, determining whether a service falls under DST or withholding tax can be complex, especially for hybrid services or those with evolving business models. Practitioners must meticulously classify income streams to ensure correct tax application and avoid potential disputes with the KRA.

The KRA's simplified registration framework for non-resident digital service providers through the iTax system is a welcome measure aimed at easing compliance. However, the administrative burden, particularly for smaller providers with numerous low-value transactions, remains a concern. The absence of a turnover threshold for VAT registration for non-residents means that even minimal engagement with the Kenyan market triggers registration obligations. This contrasts with many jurisdictions that implement thresholds to balance compliance costs with revenue collection. The KRA's proactive engagement, including contacting businesses to explain changes, suggests a willingness to facilitate compliance, but the ultimate responsibility rests with the service providers.

While the current framework is robust, future developments, such as the proposed shift from DST to a Significant Economic Presence (SEP) tax, as indicated in some discussions, could further reshape the digital tax landscape in Kenya. Such a transition would likely align Kenya more closely with international efforts to address the taxation challenges of the digitalized economy, potentially introducing new criteria for taxability and compliance. Practitioners should remain vigilant for any legislative or regulatory updates that could impact their clients' obligations.

The Kenya Revenue Authority's public notice of September 22, 2023, serves as a critical reminder for all non-resident digital service providers to ensure full compliance with Kenya's VAT and DST regimes. The stringent enforcement measures outlined by the KRA, including the appointment of tax agents, underscore the imperative for immediate action by any non-compliant entity. Legal practitioners must advise their clients to promptly review their operations, ascertain their tax obligations under the VAT Act, 2013, and the Income Tax Act, Cap 470, and register through the iTax system if they have not already done so.

Moving forward, non-resident digital service providers and their legal advisors should maintain a proactive approach to tax compliance in Kenya. This includes staying abreast of any further amendments to the tax laws and regulations, particularly regarding the evolving global discussions on the taxation of the digital economy. Ensuring accurate classification of digital services, timely registration, and diligent filing and remittance of taxes are paramount to mitigate risks of penalties, enforcement actions, and reputational damage in this increasingly scrutinized sector.