The Cabinet Secretary for National Treasury and Planning of Kenya in August 2020 released the draft Income Tax (Digital Service Tax) Regulations, 2020 (the “Regulations”) with the aim of implementing the digital service tax (“DST”) in Kenya. This comes after the enactment of the Finance Act 2020 by the National Assembly, which, inter alia, introduced the new digital services tax slated to take effect from 1st January 2021.

Kenya first contemplated introducing the tax in 2019 through the Finance Act, 2019 which among other things, amended the Income Tax Act to provide a definition of a “digital marketplace.” The Act defined a digital marketplace as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.

Further, the Act mandated the Cabinet Secretary of the National Treasury to come up with regulations to implement the tax, hence these Regulations.

These Regulations are intended to take effect from 1st January 2021.

Scope of Taxable Services

The digital services upon which the DST shall apply will include the following:

  • streaming and downloadable services of digital content such as movies, videos, music, applications, online games and e-books;
  • transmission of data collected about users which has been generated from such users’ activities on a digital marketplace, however monetized;
  • provision of a digital marketplace, website or other online applications that link buyers and sellers;
  • subscription-based media including news, magazines and journals;
  • electronic data management including website hosting, online data warehousing, file-sharing and cloud storage services;
  • supply of search-engine and automated helpdesk services including supply of customized search engine services;
  • tickets bought for live events, theatres, restaurants etcetra. purchased through the internet; and
  • online distance teaching via pre-recorded medium or eLearning, including online courses.

Additionally, the Regulations will apply to any other service provided or delivered through an online digital or electronic platform but excluding services that are subject to withholding tax as prescribed by the Income Tax Act.

However, there are a few exemptions to services that will not be subject to the Digital Services Act. One such example is the provision of services by a licensed financial service provider carrying out online services which facilitate payments, lending or trading of financial instruments, commodities or foreign exchange. This effectively excludes banks, saccos, micro-finance institutions, licensed payments service providers among other licensed financial services providers.

User Location

The Regulations propose that a person shall be subject to DST if the person provides or facilitates provision of a service to a user located in Kenya. This therefore means that the tax applies to both resident and non-resident income provided it is derived or accrues in Kenya from the provision of services through the digital marketplace and which services are utilized by a user who is located in Kenya.

In determining whether a user is located in Kenya or not, the Regulations set out the following parameters:

  • the user accesses the digital interface from a terminal (computer, tablet or mobile phone) located in Kenya;
  • payment for the digital services is made using a credit or debit facility provided by any financial institution or company in Kenya;
  • digital services are acquired using an internet protocol address registered in Kenya or an international mobile phone country code assigned to Kenya; and
  • the user has business, residential or billing address in Kenya.

However, it is worth noting that the Regulations do not specify whether the conditions above are cumulative (that is, all of them have to be met) or disjunctive (that is, at least one has to be met) for a user to be deemed to be located in Kenya.

Tax determining value

The Regulations provide that the tax shall be imposed on the ‘gross transaction value ‘of the service which shall either be:

  • payment received as consideration for the services provided by a digital service provider; or
  • commission or fee paid for the use of the platform provided by a digital market place provider.

It is however interesting to note that neither the Finance Act 2020 nor the Regulations provide a definition for gross transaction value.

Additionally, the distinction of the gross transaction value of services between those provided by digital service providers and digital market place providers, however noble, does not appreciate the fact that digital marketplace providers may also be digital service providers and vice versa. This oversight may potentially lead to non-regulation of some of the players within the digital marketplace.

The digital services tax will be charged at a rate of 1.5% of the gross transaction value. The gross transaction will however not be inclusive of Value Added Tax (VAT).

Tax Liability

The Regulations provide that payment of the tax shall be the liability of the digital service provider or any person that collects the payments for digital services and shall be due and payable at the time of the transfer of the payment for the service to the service provider. Non-residents may appoint tax representatives in Kenya who shall be responsible for remitting the digital service tax to the Kenya Revenue Authority.

Digital Services Tax Agents

Interestingly, the Financial Act, 2020 also amends the Tax Procedures Act, 2015 to provide for the appointment of digital service tax agents to deduct, collect and remit the tax. This seemingly shifts the burden of ensuring compliance from the Kenya Revenue Authority (KRA) to the tax agents. If this proposal is retained, it will be interesting to see whether it will work in ensuring effective implementation and collection of the tax.

Record-keeping & Returns

The Regulations propose that the responsibility of submitting returns lies with the digital service providers or their appointed tax representatives. The returns should contain the value of transactions and the tax itself. The tax should also be remitted by the 20th of the month following the end of the month the service was offered.

Additionally, the Regulations state that the responsibility of record-keeping lies upon a person or entity that is required to deduct, account and remit the digital service tax to the Commissioner of Domestic Taxes and keep those records of five (5) years from the reporting period.

Offences and Penalties

As for offences and penalties, the Regulations propose that persons who fail to comply with them may be barred from accessing the digital market place until all such obligations are met.

From an enforcement standpoint, it will be interesting to see how feasible and practical this penalty will be as restricting access to online spaces may prove a difficult if not impossible affair.


The Regulations set the scene for implementation of the Digital Services Act and if finalized and published this year, Kenya will see the tax operationalized starting 1st January 2021. For consumers, the net effect is that they might end up paying higher costs for digital services that were previously not subject to the tax. This is because businesses will most likely transfer the overhead costs brought on by the tax to the consumer by increasing the prices of products and services offered through digital means.

However, as we near the January 1st 2021 date, it will be interesting to see whether the Regulations will be enacted in their current form or they will take into consideration feedback given by different stakeholders.

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