KRA's approach to taxing the digital economy

Kenya's Digital Service Tax (DST), implemented on January 1, 2021, aims to fairly tax the rapidly expanding digital economy. Inspired by global initiatives, the Kenya Revenue Authority (KRA) targets to generate KES 15 billion in revenue by the fiscal year 2025 through DST, VAT, and digital asset taxation. The KRA has taken significant measures to streamline taxation in the digital space, including the establishment of a public ITax database, the replacement of the DSTV system with a Significant Economic Presence model, and the enhancement of compliance among online content creators. The journey to tax the digital economy in Kenya began in 2019, with the objective of not only taxing digital services but also capturing the impact of digitalization. Initially, the tax applied to anyone providing digital marketplace services, along with the introduction of VAT on digital services. In 2020, amid the COVID-19 pandemic, specific legislation on digital service tax was enacted, requiring all digital marketplace service providers to pay the tax. Notably, multinational digital entities that were previously not subject to direct taxation in Kenya are now required to comply with the new regulations. This move aligns Kenya with other jurisdictions worldwide, such as EU countries and India, that have already implemented digital taxes. In an interview with CNBC Africa, Nickson Omondi, Project Manager of the Digital Economy at the Kenya Revenue Authority, highlighted the revenue targets set by the KRA for the current financial year. Omondi stated that the KRA aims to collect $15 billion in revenue by the end of June 2025, a substantial increase from the initial collection of less than $1 billion in 2021. The KRA has registered approximately 372 non-resident taxpayers who are subject to DST and VAT payments. To track these taxpayers and ensure compliance, the KRA utilizes a variety of tools, including banking data, publicly available databases, the ITax system, and international information exchange. Additionally, the KRA is set to introduce a digital asset tax on cryptocurrency starting in 2023 to further expand its revenue streams from the digital economy. The forthcoming legislation on digital content monetization will mandate platforms facilitating content creation to deduct withholding tax on behalf of content creators, ensuring tax compliance in the digital space. The KRA's transition to a Significant Economic Presence model will align its tax regime with global best practices. The KRA's proactive approach to digital taxation underscores its commitment to capturing revenue from the digital economy while promoting tax compliance among both residents and non-residents. By leveraging various tools and engaging with international stakeholders, the KRA aims to enhance the efficiency and effectiveness of its tax collection efforts in the digital realm.