The Finance Act, 2023 (“the Act”) was assented to by the President of the Republic of Kenya on 26th June 2023 and came into force on 1st July 2023 save for certain amendments earmarked for implementation on 1st September 2023 and 1st January 2024 respectively.
The Act makes a number of changes to Kenya’s Income Tax, Value Added Tax (“VAT”) and Excise Duty regime as well as changes to the administration of taxes in Kenya to implement the Government of Kenya’s budgetary and fiscal measures for the 2023-2024 financial year.
We summarise in this Alert the key changes that are now in force and those set to come into force under the Act.
- INCOME TAX
The Act has amended the Income Tax Act (Cap. 470) Laws of Kenya (“ITA”) as follows:
a. Taxing the Digital Economy
- Digital asset tax
With effect from 1st September 2023, a digital asset tax is now applicable on income from the transfer or exchange of digital assets, defined as anything of value that is not tangible such as cryptocurrencies, Non-Fungible Tokens (“NFTs”), token codes, and any digital representation of value that can be exchanged, stored or transferred electronically.
The digital asset tax rate is 3% of the transfer or exchange value of the digital asset. It is required to be deducted from the recipient of the income by the owner of any platform facilitating the exchange of digital assets and remitted to the Kenya Revenue Authority (“the KRA”) within five working days of the deduction.
As a result, non-resident owners of platforms will be required to register for tax in Kenya. A simplified registration regime is available under the existing Income Tax (Digital Services Tax) Regulation which, in our view, is proposed to be expanded to non-resident platform owners who are subject to the digital asset tax.
This new tax represents an opportunity for the KRA to expand its tax base into the digital economy. There however remains uncertainty on whether the digital asset tax paid is to be expressly recognised as a tax credit in computing and paying their income tax liability under the ITA given that income earned from digital assets is likely to be subject to annual income tax at 30% (for companies) or at the graduated scale of between 10% and 35% (for individuals).
ii. Taxing creatives: withholding tax on digital content
Effective 1st July 2023, withholding tax is now applicable on payments made by resident persons to both resident and non-resident digital content creators which are deemed to be income accrued in or derived from Kenya. The resident withholding tax rate will be 5% whereas the payments made to non-resident digital content creators will attract withholding tax at 20%.
The amount deducted must be remitted to the KRA within five working days of deducting the withholding tax and making payment for the monetised digital content.
What constitutes digital content monetisation under the Act is any entertainment, social, literal, artistic, educational, or any other material electronically offered for payment through any medium or channel. This includes advertisements, social media promotions, brand endorsements, affiliate marketing, subscriptions for online content, licensing digital content, and commissions earned by creatives from crowdfunding.
This new withholding tax has widened the tax base to include income earned by Kenya’s growing digital creative economy. However, the revised remittance timelines are likely to introduce a punitive compliance burden on ordinary Kenyans when making numerous low-value payments or subscriptions for the consumption of digital content from content creators.
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This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Lilian Renee Omondi, Partner, ([email protected]), Elly Obegi, Senior Associate, ([email protected]) and William Ochieng, Associate, ([email protected]) or your usual contact at our firm, for legal advice.