Introduction
The Finance Bill, 2024 (“the Bill”) was published by the National Assembly on 9th May 2024 detailing the Government of Kenya’s proposed tax measures for the 2024-2025 financial year.
The Bill proposes to introduce a number of changes to Income Tax, Value Added Tax (VAT) and Excise Duty amendments as well as changes to the administration of taxes in Kenya. We summarise in this alert the key changes proposed under the Bill.
The Bill is set to undergo public participation and, following the conclusion of the law-making process, the proposals in the Bill are due to come into force on 1st July 2024 save for certain amendments earmarked for implementation on 1st September 2024 and 1st January 2025.
1. INCOME TAX
The Bill proposes to amend the Income Tax Act, Chapter 470, Laws of Kenya (“ITA”) as follows:
a. Taxing the Digital Economy
1. Replacement of the Digital Service Tax (“DST”) with a new Significant Economic Presence Tax (“SEPT”)
Effective 1st January 2025, the Bill proposes to repeal the existing DST provisions in the ITA and introduce a new provision on SEPT.
DST was introduced in 2020 and is payable by non-resident persons who accrued income in Kenya from the provision of services supplied through a business carried out over the internet or through a digital marketplace. The DST rate is 1.5% of the gross transaction value.
It is now proposed to be replaced by a similar SEPT payable by non-residents who accrue income in Kenya from the provision of services supplied through a business carried out over a digital marketplace.
The definition of a digital marketplace is proposed to be amended to outline the following services i.e., an online or electronic platform which enables a person to sell or provide goods, property or services, including, ride-hailing services, food delivery services, freelance services, professional services, rental services, task-based services and any other service that is not exempt from tax under the ITA.
A key proposed change is that the SEPT rate shall be 30% applicable on the non-resident’s deemed taxable profit. The deemed taxable profit is proposed to be 20% of gross turnover, resulting in an effective tax rate of 6% of turnover in comparison to DST currently at 1.5%. It will be payable monthly by the 20th day of the end of the month with affected non-resident persons required to file a return at the time of payment. Similar, to DST, SEPT will not apply in cases where the income is otherwise subject to withholding tax.
SEPT is largely similar to the existing DST provisions save for the significant increase in the tax rate. The four-fold increase in this tax applicable on the digital economy is likely to hamper growth in the digital economy and negatively affect Kenya’s competitiveness. The amendment to the definition of ‘digital marketplace’ further serves to reduce ambiguity and specifically target industry players in the gig-economy.
11. New Withholding Tax on Income Earned from Digital Marketplaces or Platforms
The Bill proposes to amend section 10 of the ITA to deem payments made or facilitated by resident and non-resident owners or operators of digital marketplaces or platforms in respect of digital content monetisation, goods, property or services to be income accrued in or derived from Kenya.
It is proposed that with effect from 1st January 2025, such payments will attract withholding tax at the rate of 5% for resident persons and 20% for non-residents.
As a result, non-resident owners of platforms will be required to register for tax purposes in Kenya. A simplified registration regime is available under the existing Income Tax (Digital Services Tax) Regulations which, in our view, is proposed to be expanded to non-resident platform owners who are subject to the digital asset tax.
This proposal represents a further widening of the tax bracket to bring to tax more players in the digital economy. It may however have the unintended consequence of making digital marketplaces and platforms uncompetitive. In particular, non-resident platforms are likely to pass on the additional tax costs to their customers, increase the cost of the goods and services supplied via a digital marketplaces and platforms.
Additionally, the proposal as drafted potentially encompasses non-resident to non-resident transactions that may have no nexus with Kenya and would need to be clarified.
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