The Government of Kenya has proposed multiple amendments to the Finance Bill for 2023. The proposals aim to expand the tax base for the government, which has been having revenue issues that have forced it to at some point, delay the salaries of its employees. One of the proposals in the Bill is the taxation of payments made to digital creators.
Content creation has grown over the years, and creators earn a living through sponsored content, digital campaigns, or ad revenue from platforms such as YouTube, Tiktok and Facebook. Under the current taxation regime defined by the Income Tax Act (ITA), certain digital payments made are subject to withholding tax, while others may not fall under the provisions of the ITA. Payments made by taxpayers to digital content creators will be subject to a 15% withholding tax rate, according to the new proposed legislation.
At the same time, the definition of digital content monetization has been expanded to include various types of content and services. For instance, digital content monetization now means offering payment for entertainment, social, literal, artistic, educational or any other material electronically through any medium or channel. This includes various forms such as advertisement on websites, social media platforms or similar networks by partnering with brands including endorsements from sellers of such brands.
Sponsorship also falls under this definition, where a brand owner pays a content creator for content creation and promotion. The amendment also proposes affiliate marketing to remit the new tax, where a content creator earns a commission whenever the audience of the creator clicks on the product displayed.
The government further wants to tax subscription services where the audience pays a periodic fee to access the content and support content creators. The bill also mentions creators who use membership programs for exclusive content, crowdfunding for raising funds for specific goals, and licensing content such as photographs or music to other businesses or individuals for use in their own projects should pay tax.
The tax proposal mentions merchandise sales where physical goods and services are sold featuring a logo, brand, or catchphrase to the audience of the content creator. The proposed withholding tax rate of 15% for payments made to digital content creators is significantly higher than the usual rate of 5% for professional services. This could lead to an effective tax rate of over 30% for creators and may generate ongoing income tax credits since the withholding tax rate assumes a profit margin of 50%.
The provision covers not only services but also goods and could potentially affect minors who are content creators. The responsibility for tax registration of minors or their guardians is unclear currently. The bill has also clarified about digital assets that will also be taxed. They are assets that exist in digital form and can be exchanged electronically, such as cryptocurrencies, non-fungible tokens (NFTs), and other types of tokens that provide a digital representation of value. This was not explained explicitly when the first draft of the bill was shared.
Those who own a platform or assist in transferring digital assets will need to deduct a Digital Asset Tax (DAT) of 3% from the gross fair market value received or expected to be received at the point of transfer or exchange. The deduction must be remitted within 24 hours.
If approved by President William Ruto, these new taxes will beceome effective from September 1.
