In a recent turn of events, the National Treasury has reintroduced the Significant Economic Presence (SEP) Tax, which had been part of the rescinded Finance Bill, 2024. In an explainer on proposed tax reforms published in local dailies, the government detailed plans to amend the Income Tax Act to repeal the Digital Services Tax (DST) in favour of implementing SEP Tax.

SEP Tax is designed to tax income generated by multinational companies that have a substantial economic presence in Kenya – even if they don’t have a physical presence in the country. It establishes tax liability on foreigners based on the level of economic activity within a jurisdiction from providing services in Kenya through digital marketplaces.

The National Treasury proposes a profit-based tax that will apply to 30% of the taxable profit (defined as 10% of the gross turnover). This means the effective tax rate will be 3% of the gross turnover.

While the bill does not specify what amounts to significant economic presence, it authorises the Cabinet Secretary for Treasury and National Planning to establish regulations defining this criterion. Additionally, SEP Tax is proposed to be paid monthly, on or before the 20th day of the month following the provision of services.

However, the following categories are exempted from SEP Tax.

1. Foreigners providing services through a permanent establishment.
2. Individuals whose income is subject to withholding tax or derived from telecommunications activities.
3. Foreigners providing digital services to an airline in which the Government of Kenya holds at least a 45% shareholding.

SEP Tax will replace DST, which was introduced by the Finance Act, 2020, and became effective in January 2021. DST targeted 1.5% of the gross transaction value and was also collected on or before the 20th day of the month following the provision of the digital service. It applied to Kenyans and foreign providers of digital services or operators of digital marketplaces.

Why SEP Tax over DST? 

This shift reflects the proactive stance of the Kenyan government in modernising its tax framework to align with the evolving digital economy. While the proposal is new to Kenya, it aligns with global taxation trends and international best practices, particularly those recommended by the Organisation for Economic Co-operation and Development (OECD). 

The implementation of SEP Tax is expected to attract foreign direct investment and reinforce Kenya’s position as a stable and attractive economy for multinational companies.

SEP Tax in other countries

Internationally, many countries have adopted similar measures to address the taxation of digital services and significant economic presence. The European (EU)  has led initiatives with its proposal for taxation of significant Digital Presence (SDP), aiming to tax digital revenues of major tech companies based on user participation in member states. France, for example, has implemented a 3% tax on revenues generated from digital services within its borders.

The United Kingdom (UK) introduced a 2% digital services tax on the revenues of a group’s businesses that provide a social media service, search engine, or online marketplace to UK users. These businesses are liable to Digital Services Tax when the group’s worldwide revenues from these digital activities are more than £500 million and more than £25 million of these revenues are derived from UK users.

India incorporated the SEP concept into its Income Tax Act in 2018. Non-resident entities that meet specific revenue or user base thresholds within the country are subject to tax, even without physical presence. This measure targets global tech companies benefiting from the Indian market.

After enacting its Finance Act, 2019, Nigeria introduced the Companies Income Tax (Significant Economic Presence) Order 2020 (the SEP Order), which details the conditions that create a taxable presence for Non-Resident Companies (NRCs) providing digital, technical, management, consultancy or professional services in Nigeria.

Conclusion

The shift from a Digital Service Tax to a Significant Economic Presence Tax positions Kenya to better capture revenue from the digital economy while fostering an investment-friendly environment. By aligning with international practices, Kenya will build a transparent tax system that supports economic growth and ensures that multinational digital enterprises contribute equitably to the country’s tax base.