Kenya to maintain low digital service tax on tech giants despite OECD pressure

The Kenyan government has confirmed that it will be maintaining its 1.5% digital service tax on multinational tech giants, despite pressure from the Organisation for Economic Cooperation and Development (OECD) to join its global minimum tax initiative, as Nairobi continues its attempts to attract higher levels of tech-related investment.

Kenya’s digital service tax came into effect in January 2021, with the government opting for a low-tax regime in a push to encourage more tech giants such as Google, Amazon, and Microsoft to invest in the East African country.

Since then, Kenya has made strides towards becoming Africa’s leading technology hub, with Google announcing in 2022 that it would be opening its first African innovation hub in Nairobi.

However, the OECD has sought to prevent tech firms taking advantage of the loopholes created by low-tax jurisdictions. Major economies have alleged that tech firms can channel their profits through countries such as Kenya to avoid paying tax in higher-tax countries. The OECD believes that its minimum tax initiative will lead to an additional $125bn in multinational profits being taxed across OECD member countries.

Partly because of this global pressure, President William Ruto said last year that Kenya would be joining the OECD’s initiative, however the government has now backtracked on this.

Rotimi Ogunyemi, a technology attorney, tells African Business that the 1.5% tax results from a fear that “a stringent tax regime might discourage new global entrants or lead to the withdrawal of existing global service providers from the local market.”

Ogunyemi also notes that Kenya “must consider the challenges involved in balancing national interests with global tax coordination efforts” and says they deem “sovereignty in tax policy to be central.”

Jared Osoro, a Nairobi-based economist, believes that “tax regimes alone cannot provide sufficient incentives for international tech firms to invest in Kenya” and argues that the government should be looking much more widely at the business landscape.

“The ease of doing business is very important. We’ve had instances where, regardless of the prevailing tax regime, a number of international corporations have exited the market because of the bureaucratic regime and the cost of doing business being too high,” he says. “The government should be focusing on lowering the cost of doing business to attract foreign investors.”

Osoro also adds that, despite the low-tax policies currently being pursued by the Kenyan government, many multinational firms currently face a tricky macroeconomic environment in Kenya which can deter investment. A volatile Kenyan shilling is one factor he cites that can problematise foreign investment flows.

Despite these issues and the controversy over Kenya’s Digital Service Tax, both Ogunyemi and Osoro are optimistic that Kenya’s tech industry is on an upwards trend.

“I think there is an appetite for tech companies to invest in Kenya,” Osoro says. “Kenya has demonstrated that it can be a very quick adopter of new technology and there is a clear appetite in the market for new technological solutions. The technology industry will play a big role in the Kenyan economy going forward.”