Digital services tax practices and financial performance of Multinational technology firms in Kenya

Abstract

This study examines the effect of Digital Services Tax (DST) practices on the financial performance of multinational technology firms operating in Kenya. The introduction of digital tax [N5.1]regimes aims to capture revenue from cross-border digital activities; however, mounting tax burdens from DST, SEP, withholding taxes, and VAT have raised concerns about profitability and competitiveness among these firms. Despite policy advancements, there is limited empirical evidence quantifying how these tax practices affect firm-level financial performance, creating a knowledge gap for policymakers and industry stakeholders. With Kenya’s digital economy rapidly expanding and contributing significantly to the nation’s GDP, the government introduced DST in 2021 to capture tax revenue from non-resident digital service providers. The study investigates how DST, alongside the transition to the Significant Economic Presence (SEP) tax regime, impacts firms’ profitability, revenue growth, and overall financial outcomes. Using a mixed-methods approach combining financial data analysis and qualitative insights, the research evaluates key tax practices. The findings aim to provide evidence on the financial challenges and opportunities presented by these digital tax frameworks, thereby informing policymakers, tax authorities, and industry stakeholders on optimizing tax policy to support sustainable growth and competitiveness in Kenya’s technology sector. The findings reveal that DST practices significantly affect financial performance, with the regression model showing a strong relationship (p < 0.01). The SEP tax further increases firms’ tax liabilities, influencing net profitability and competitive positioning (p < 0.05). The scope and classification of digital assets also significantly correlate with tax liabilities and financial outcomes (p < 0.05), illustrating compliance complexities tied to asset recognition. Additionally, DST withholding practices impose liquidity pressures while promoting improved tax discipline (p < 0.05). These results provide critical evidence on the financial challenges and opportunities presented by Kenya’s evolving digital tax frameworks, thereby informing policymakers, tax authorities, and industry stakeholders on optimizing tax policy to support sustainable growth and competitiveness in Kenya’s technology sector.