The Kenyan government recently released the Finance Bill 2023, which includes several proposed changes to the country's tax laws. In this blog post, we will review some of the most significant changes that affect the tech ecosystem in Kenya.
Taxation of Digital Content Monetization
The Finance Bill 2023 proposes to tax income from digital content monetization by requiring taxpayers to withhold 15% of payments made to digital content creators as tax. This applies to different forms of digital content services including social, educational, artistic and literary material through various media and channels. The services to be taxed include brand sponsorships, digital subscription services, affiliate marketing, licensing of photography and music. Currently, the term “digital content monetization” is not defined in the Income Tax Act but the proposed amendment introduces a definition of the term.
The proposed 15% withholding tax rate is higher than the usual 5% for professional services and no justification is provided as to why digital content monetization will be subjected to a higher rate of withholding tax. This provision may also affect minors who are content creators, and it is unclear whether they or their guardians need to register for taxes.
Introduction of Digital Asset Tax
Another change in the 2023 budget will be Digital Asset Tax (DAT) charged at a rate of 3% of the gross fair market value of digital assets exchanged or transferred. The Bill defines a digital asset as
anything of value that is not tangible and cryptocurrencies, token code, number held in digital form and generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration that can be transferred, stored or exchanged electronically; and
a non-fungible token or any other token of similar nature, by whatever name called.
The person or platform facilitating the exchange must deduct and remit the tax within 24 hours, and non-resident platform owners can register under a simplified tax regime. This tax is meant to collect taxes on the adoption and trading of cryptocurrencies in Kenya, but it may be viewed as unfair since it taxes the gross fair market value even if the digital assets in question lose their value. The requirement to deduct and remit DAT within 24 hours may be challenging for operators, especially non-resident ones, increasing the risk of non-compliance. Furthermore, this tax may only apply to Kenyan residents, which is different from the Income Tax Act that taxes income based on whether it is accrued or derived from Kenya, making it difficult for non-resident operators to distinguish between Kenya residents and other traders. The proposal may also have a counterproductive effect and force traders of cryptocurrencies and other digital assets to move from trading sites to trading directly with buyers in a bid to avoid paying the tax.
Intellectual Property Income
The Finance Bill 2023 introduces a raft of changes that will have a significant effect in the intellectual property landscape in the country. The first such change is the introduction of withholding tax exemption that will be applicable to royalties paid to non-resident persons or interest paid to resident person or a non-resident person. The potential effect of this proposal is that it will incentivize investments in vaccine manufacture that relies heavily on intellectual property – most notably patents- that will now be exempt from payment of withholding taxes on royalties.
The Bill has also introduced restriction on intellectual property income which is chargeable to tax under a preferential tax regime. There is also a proposed formula that is set to be used to determine qualifying intellectual property income which will be subjected to a preferential tax rate. This formula is
I - income receiving tax benefits;
Q - research and development expenditures made by the taxpayer, excluding acquisition costs and related party outsourcing costs;
T - research and development expenditures made by the taxpayer, including acquisition costs and related party outsourcing costs; and
P - intellectual property income including royalties, capital gains and any other income from the sale of an intellectual property asset including embedded intellectual property income calculated under transfer pricing principles.
This proposal would further cement Kenya’s position as a technology and research hub as it allows taxpayers to benefit as long as they incurred qualifying R&D expenditures which gives rise to the IP income. The preferential tax rate is expected to encourage investment in intellectual property development. However, the lack of a clear definition of what qualifies as intellectual property and the rate of tax to be applied could lead to ambiguity and confusion in implementation and requires further clarity before the bill is passed.
Excise Duty Reduction for Telephone and Internet Data Services
The Bill has proposed a reduction in excise duty charged on telephone and internet data services from 20% to 15%. This move is aimed at making communication services more affordable to Kenyans and boosting the country's digital economy. With the increased adoption of technology in Kenya, the reduction in excise duty will encourage more people to use the internet and communicate more efficiently, leading to increased productivity and economic growth. This is expected to increase the demand for these services and support the government's agenda of digitizing the economy by increasing connectivity and access to information.
Excise Duty on Money Transfer Services
There is a proposed reduction of excise duty on fees charged for money transfer services by banks, money transfer agencies, and other financial service providers from 20% to 15% is another significant change in the Kenyan Finance Bill 2023. This change is expected to lower the cost of sending money across the country and encourage more people to use formal channels to transfer money. This is a positive development, especially for low-income earners who depend on remittances to meet their daily needs. In the same vein however, the Bill proposes to raise the excise duty on fees charged for money transfer services by cellular phone providers or payment service providers licensed under the National Payment System Act from 12% to 15%. Transfer fees for transactions conducted through Mpesa, Airtel Money, TKash and the likes are expected to go up. Although this has probably been done in a bid to harmonize the excise duty for money transfer across various platforms, it is likely to lead to a decrease in the transactions conducted.
Introduction of Excise Duty on Digital Lenders
The Kenyan Finance Bill 2023 has also proposed the introduction of excise duty on any amount charged in respect of lending by digital lenders at twenty percent. This move is aimed at regulating digital lenders and reducing their high interest rates, which have been a major concern among Kenyans. With the introduction of excise duty, digital lenders will be forced to lower their interest rates, making loans more affordable to Kenyans.
Conclusion: Our Take
While certain provisions show potential benefits, there is a need for further clarity, fairness, and consideration of the practical implications for the tech ecosystem. Balancing taxation measures with the growth and innovation of the sector is crucial to ensure a thriving and inclusive digital economy in Kenya. For example;
The 15% withholding tax rate on digital content monetization lacks justification and may unfairly impact content creators, including minors. Clear guidelines and exemptions or a harmonization of this tax to align with what is paid by other professionals/consultants are needed for fairness and compliance ease.
The 3% tax on the gross fair market value of digital assets may hinder cryptocurrency trading and growth. A balanced approach, considering market volatility and compliance ease, is necessary. The government may need to reconsider taxing gains or losses as opposed to the gross value of the asset.
While the exemption of withholding taxes on royalties for non-residents encourages IP investment, clarity is needed on qualifying intellectual property income and the applicable tax rate to avoid confusion.
The proposed reduction in excise duty from 20% to 15% on communication services is positive, making them more affordable and supporting digitization for increased productivity and economic growth.
Careful consideration should be given to minimize potential transaction decreases due to proposed changes in fees charged by cellular phone providers or payment service providers for money transfer services.
The introduction of excise duty on digital lenders aims to regulate the industry and lower interest rates, addressing concerns about high rates in the digital lending space.
By carefully balancing taxation measures with growth and innovation, Kenya can create an environment conducive to a thriving and inclusive digital economy because taxation should help both the government and the citizens but too much taxation or over taxation will hinder more businesses and stifle innovation in the tech ecosystem.