Kenya’s Digital Services Tax

KEY READING FOR THE WEEK

The focus of this week’s newsletter is the Kenyan Digital Service Tax (DST). Formally introduced in 2020, it was set at a rate of 1.5% of gross transaction value on digital platforms for both residents and non-residents. In 2021, the DST was amended to exclude residents so that only non-residents firms (i.e., firms without a physical presence in Kenya) were required to pay the DST. The DST is charged on all electronic services, such as mobile applications, eBooks, software, films and music. It excludes communication services (text messages, phone calls, etc.) and it excludes digital advertising. This means that over 98% of Facebook and 90% of Google’s revenues are excluded from the DST.

Why is digital advertising excluded? Because digital advertising is already subject to withholding tax (WHT) of 20% and the revenues from the WHT are considerably greater than the DST of 1.5% of revenues. The way the WHT works is that a firm purchasing advertising space on Facebook would be subject to WHT because Facebook is a non-resident company. The WHT is withheld by the Kenyan firm and remitted to the KRA every month. For Facebook, the WHT is a final tax because there is no double taxation agreement between Kenya and Ireland, where Facebook’s headquarters are located for Europe, Middle East and Africa. This means that over 98% of Facebook and 90% of Google’s revenues are excluded from the DST.

KRA is expecting to raise Ksh5 Billion (USD 44.2 million) in the first half of 2021 by bringing up to 1,000 companies and individuals into the DST net. Is that a likely outcome? This is a difficult question to answer because KRA has not released any of its calculations for the DST. We have to design a proxy for digital services subject to the DST. Since the DST is only applicable to non-resident firms, one really good proxy would be the import of digital services into Kenya. This would capture all digital services sold in Kenya. The Table below shows the value of Kenya’s imports of digital services between 2010 and 2019. Based on digital imports, revenues from the DST would be USD22 million, about a quarter of the USD88 million (annualized) that the KRA is claiming. So far, there are reports that only 89 companies have registered for the DST (out of the projected 1,000) and anecdotal reports that the amount KRA has received for the DST is very low. Countries that have imposed digital taxes, such as Uganda’s OTT tax, have also wildly over-estimated the revenues from the tax and underestimated the impact of the tax on usage. One lesson that needs to be repeated is the value of publicly releasing the cost/benefit of any new tax on the digital sector.

	Exports USD million	Imports USD million	Net USD million	Share of global exports	Estimated DST revenues USD million
2010	552.2	662.7	-110.5	0.000295	9.94
2011	647.3	699.6	-52.4	0.000302	10.49
2012	914.3	766.7	147.7	0.000413	11.5
2013	1009.1	821.1	188	0.000425	12.32
2014	1144.9	938.3	206.6	0.000441	14.07
2015	1006.7	963.2	43.5	0.0004	14.45
2016	967.1	945.7	21.5	0.000372	14.19
2017	1219.1	1062.1	157	0.000433	15.93
2018	1566.9	1517.9	49	0.000503	22.77
2019	1412	1479.2	-67.2	0.000438	22.19
Source: UNCTAD 2021

Other weekly news from around Africa

• Vodacom: Vodacom South Africa has bought a majority stake in Vodafone Egypt from parent company, Vodafone. In another deal, Vodacom is buying into a fibre partnership in South Africa that would include Dark Fibre Africa and Vumatel.
• Zambia: A fourth mobile operator called Beelline is expected to launch some time in 2022.
• Central Africa: Free roaming is now official in central Africa, for Cameroon, Central African Republic, Congo, Equatorial Guinea, Chad and Gabon.
• South Africa: ICASA has finally accepted that it made a mistake in trying to remove the temporary allocation of high demand spectrum from operators. ICASA is now inviting applications for temporary spectrum licenses that will run until the final auction of spectrum (so far proposed for March 2022).