KICTANet Thought Leadership Series: Policy Discussion on Digital Taxation in Kenya

KICTANet Thought Leadership Series.
Policy Discussion on Digital Taxation in Kenya.
Date: 29 May 2024,  0800 – 1400 hours
Place:  Nairobi, by Invitation

Introduction

The Kenya ICT Action Network (KICTANet), in partnership with Meta Platforms Inc, is pleased to convene a thought-leadership roundtable discussion titled “Policy Discussion on Digital Taxation in Kenya“.

Background and Context

In an increasingly digitized world, the taxation landscape is undergoing significant transformation, posing both challenges and opportunities for policymakers and stakeholders. The digitization of Kenya’s economy has ushered in a transformative era of taxation, marked by the introduction of digital taxation through the Finance Act 2020 . The tax rate is set at 1.5% of the gross transaction value. In the financial year ending in 2023, the Kenya Revenue Authority (KRA) collected KES 5.328 billion (approximately $37.5 million), which marked a 207.9% growth compared to the previous financial year. Kenya’s digital services market revenue. Kenya’s digital services market revenue was projected to reach US$4.4 billion in 2022, up from $1.9 billion in 2017. This indicates a substantial increase and suggests that the digital service tax could continue to be a significant revenue stream for the government. 

This monumental shift reflects the proactive stance of the Kenyan government in modernizing its tax framework  to align with the dynamic contours of the digital landscape. However, this transition has not been without its challenges. The introduction of digital service tax (DST) brought with it a wave of anticipation mingled with apprehension, as stakeholders grappled with concerns surrounding compliance, tax base erosion, and enforcement in the face of the borderless nature of digital transactions.

Yet, within these challenges lie remarkable opportunities for Kenya’s fiscal future. The digital service tax presents a strategic avenue for mobilizing additional revenue from the burgeoning digital transactions within the country, thereby diversifying revenue streams and reducing dependency on traditional sectors. Moreover, the integration of technological advancements in tax collection promises to revolutionize efficiency and reduce compliance costs, benefiting both taxpayers and tax authorities alike. Statistical insights underscore the critical importance of digital transactions in Kenya’s economy, with mobile commerce transactions valued at over KES six trillion in 2018, underscoring the imperative for effective digital taxation measures in the modern era. Additionally, the substantial contribution of the ICT sector to tax revenue highlights the pivotal role of adapting tax policies to the evolving dynamics of the digital economy. As Kenya introduced digital service tax, reactions from service providers varied significantly, providing valuable insights into the nuanced dynamics of digital taxation. Digital Service Tax (DST) is payable on income derived or accrued in Kenya from services offered through a digital marketplace.

While some services experienced no increase in costs, others reduced costs to stimulate user adoption. This scenario underscores the delicate balance that developing countries must strike in implementing digital taxes—generating revenue without impeding business growth or excluding local users from the global economy. In implementing the digital service tax  at a rate of 1.5% of the gross transaction value, Kenya endeavors to strike a delicate balance between fostering the growth of the digital economy and ensuring equitable taxation practices. This strategic move reflects a broader global trend in digital taxation, wherein countries grapple with the complexities of taxing digital transactions effectively. 

The taxation of the digital economy is a complex and evolving issue that has garnered significant attention globally, with various trends and policy frameworks shaping the landscape. Many countries are implementing Digital Services Taxes (DSTs) to tax revenue generated by digital companies within their borders, while the OECD’s  Base Erosion and Profit Shifting (BEPS) project proposes a two-pillar solution to address digital taxation challenges, focusing on reallocation of taxing rights and introducing a global minimum tax. Additionally, some countries have introduced unilateral measures to tax the digital economy due to slow progress on international consensus. Meanwhile, the OECD/G20 Inclusive Framework on BEPS aims to reform international tax regimes and tackle digital taxation challenges, with nearly 140 countries endorsing it. National legislation is also being updated to accommodate the digital economy. Research by Research ICT Solutions has quantified the impact of new ICT taxes on various aspects like GDP growth, tax revenue, employment, and mobile operator revenues. The rapid growth of the digital economy and its unique characteristics pose challenges in allocating taxing rights, necessitating these policy changes to ensure fair taxation. However, the implementation of new tax rules and resolution of potential disputes remain critical areas to monitor in the future.

KICTANet has actively engaged in advocating for budget priorities in the ICT sector. KICTANet submissions were made to the Institute of Economic Affairs to be presented to the treasury and parliament, highlighting key budget priorities in the ICT Sector including digital taxation. This proactive engagement underscores KICTANet’s commitment to shaping policy discourse and driving positive change in the ICT sector.

 Objectives:

The objective of the roundtable series is to provide a platform for informed dialogue and engagement on the concerns and opportunities of digital taxation in Kenya. Specifically, the roundtable aims to achieve the following:

  1. Facilitate Discussions and Engagement: By bringing together policymakers, key stakeholders and experts from the ICT sector, the roundtable seeks to facilitate nuanced discussions and engagement on concerns and opportunities on digital taxation and the policy options relevant to Kenya’s context.
  2. Identify Priority Policy Actions: Through collaborative engagement, participants will identify priority policy actions and potential solutions to address the challenges of digital taxation effectively.

Expected Outcomes:

As a result of the roundtable discussions, the following outcomes are anticipated:

  1. Enhanced Understanding and Engagement: Stakeholders will gain a deeper understanding of the complexities surrounding digital taxation and will be better equipped to engage in informed policy discourse and decision-making processes.
  2. Identification of Priority Policy Actions: Participants will identify priority policy actions and potential solutions to promote an enabling environment for digital taxation in Kenya.
  3. Development of a Policy Brief: A comprehensive policy brief outlining key policy issues and proposed recommendations will be produced, serving as a valuable resource for stakeholders and policymakers moving forward. The policy brief will include market trends, laws, regulations, discussions, and frameworks.

Output

The roundtable shall result in a policy brief outlining the key policy issues and proposed recommendations to various stakeholders moving forward.

Format of the Event

This thought-provoking leadership series shall be in the form of a half-day roundtable meeting with a keynote speech followed by expert presentations, panel discussions, and plenary sessions among the stakeholders present.

Attendees

The participants will include relevant local actors drawn from the government, including relevant agencies and departments, the private sector, the technical community, academia, media, development partners, civil society, and other non-governmental actors.

About the Organizers

The Kenya ICT Action Network (KICTANet) is a policy think tank that acts as a multi-stakeholder ICT policy and regulation platform. KICTANet’s guiding philosophy encourages synergies for ICT policy-related activities and initiatives. The network provides mechanisms and a framework for continuing cooperation and collaboration in ICT matters among industry technical community, academia, media, development partners, and Government.

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