Kenya's Digital Tax Framework

The introduction of digital tax in Kenya is rooted in the Finance Act of 2020, which was signed into law by President Uhuru Kenyatta. The Finance Act, along with subsequent amendments, outlined the framework for taxing digital services and products. Notably, this digital tax is applied to income derived from the provision of services through a digital marketplace.

According to Section 3 of the Finance Act of 2020, the digital service tax applies to the "value of a service that is provided through a digital marketplace." This broad definition encompasses a wide range of online transactions, affecting businesses and individuals engaged in various digital services.

Impact on Online Workers and Freelancers

Online workers and freelancers, who often operate independently through digital platforms, have found themselves directly impacted by the implementation of digital tax in Kenya. The implications for this group can be analyzed through several key aspects:

1. Tax Compliance and Reporting Burden:

The digital tax introduces a new layer of complexity for freelancers and online workers, requiring them to navigate tax compliance and reporting obligations. This includes understanding the taxable value of their services and ensuring accurate reporting to meet legal requirements. The Finance Act of 2020, in Section 5B, specifies that "every person who makes a taxable supply of services shall, within the time and manner prescribed, submit to the Commissioner a return of the tax." This places an additional administrative burden on freelancers, who may not have the resources of larger corporations to handle such compliance intricacies.

2. Impact on Income:

For freelancers who rely on income generated from online services, the imposition of digital tax can lead to a reduction in net earnings. Clients may bear the burden of the tax, impacting the pricing dynamics of services and potentially leading to a decrease in demand. The Finance Act of 2020, under Section 10, outlines that "the digital service tax shall be payable by the person liable to the tax in the currency of Kenya at the rate of 1.5% of the gross transaction value." This clear stipulation highlights the direct impact on the income of freelancers and online workers.

3. International Freelancers:

Kenya's digital tax has implications not only for domestic freelancers but also for those providing services across borders. The application of the digital service tax to cross-border transactions adds a layer of complexity for international freelancers, who may now need to navigate tax regulations in multiple jurisdictions. Section 9 of the Finance Act addresses the taxation of non-resident persons, stating that "a digital marketplace shall be deemed to have a permanent establishment in Kenya for the duration of that service." This provision expands the scope of taxation to include certain non-resident service providers, affecting the global freelance community.

4. Platform Responsibility:

Many freelancers and online workers operate through third-party digital platforms. The Finance Act of 2020, in Section 5A, places the responsibility for the collection and remittance of digital service tax on the digital marketplace. This introduces a new layer of interaction between freelancers and the platforms through which they operate. While the platform assumes the responsibility for tax collection, freelancers may still be indirectly affected, as changes in pricing and platform policies can influence their earning potential.