The Kenya Revenue Authority (KRA) issued comprehensive regulations to facilitate the transition from the Digital Service Tax (DST) to the Significant Economic Presence Tax (SEPT). This follows the Tax Laws (Amendment) Act of December 2024. The new regulations replace the Income Tax (Digital Service Tax) Regulations of 2020, fulfilling the requirement of the Finance Act 2025 to establish SEPT’s regulatory framework within six months. Kenya is the second African country to implement SEPT, following Nigeria’s adoption in 2020. The transition signals Kenya’s intention to tax all digital services consumed by Kenyan users, regardless of the provider’s location or business structure. However, this aggressive expansion raises questions about striking a balance between revenue generation and the sustainability of the digital ecosystem. The sections below highlight key provisions in the regulations with significant implications for digital services. 

Key Changes in the Regulations 

User-Based Tax Threshold 

According to the regulations, a non-resident entity is considered to have a significant economic presence in Kenya if its services are used by a citizen. This applies regardless of revenue volume or the number of users. Any non-resident entity providing digital services to Kenyan users, even if it involves a single transaction, now faces tax obligations at a rate of 3% of its gross revenue. The Finance Act of 2025 removed the KSh 5 million annual turnover threshold that was initially set when SEPT was introduced in December 2024. Eliminating this threshold creates challenges for small digital service providers. Compliance costs may exceed their actual tax liability. Additionally, the administrative burdens related to registration, tax calculation, and filing requirements may be disproportionately costly for providers with minimal Kenyan revenue. This could pose a significant barrier to market entry for innovative services.  

Removal of Financial and Government Services Exemptions 

The regulations eliminate key exemptions that previously shielded online financial service providers. Licensed financial institutions or those authorised by the Central Bank of Kenya (CBK) were previously exempt from DST taxation. The new SEPT regime has scrapped this exemption. This effectively brings non-resident digital financial service providers into the tax net. These businesses are now required to register for tax in Kenya, compute deemed profits, and file returns. On the positive side, this provision levels the playing field for local fintechs and banks.

Local institutions have long borne the tax burden while foreign competitors have operated with exemptions. However, the provision risks increasing transaction costs for consumers and small and medium enterprises (SMEs). Some foreign companies may pass additional costs onto Kenyan users, while others may scale back or withdraw their services. Although government revenues may rise, Kenya’s attractiveness as a destination for foreign fintech investment could decline if the tax is seen as burdensome. Additionally, online services offered by government institutions were previously exempt from DST; however, under the new regulations, this exemption has been removed. This introduces new compliance scenarios for government technology procurement and service delivery, potentially increasing costs for digital infrastructure development and e-government services from non-resident companies. Consequently, reliance on domestic technology providers is likely to increase. However, this also raises concerns about Kenya’s capacity to supply advanced digital solutions. 

Enhanced Collection Powers

The regulations grant KRA expanded powers to compel any person, including banks, fintechs, and payment intermediaries, to deduct and remit tax on behalf of non-resident businesses. This significantly widens KRA’s reach. It strengthens its ability to capture revenue from foreign digital service providers without physical presence in Kenya. The enhanced collection powers reduce opportunities for under-reporting by non-resident businesses while giving the government greater control over tax collections from the digital economy. Expanded powers create new compliance requirements and system costs for financial institutions and intermediaries. These costs are likely to be transferred to users in the form of higher transaction fees. This would make digital services more expensive and, consequently, less accessible. Financial institutions will be required to invest in new systems and processes to comply with tax collection obligations.  

Restrictive Refund Processes 

The regulations prescribe a refund process that requires claimants to maintain a bank account in Kenya. This is an additional compliance step for non-resident businesses that do not preserve local banking relationships. The requirement introduces operational complexity and potential cash flow challenges. This involves costs associated with establishing and maintaining local banking relationships. These businesses must navigate Kenyan banking regulations, compliance requirements, and ongoing account maintenance obligations solely for the purpose of tax refunds. Businesses also run the risk of double taxation, as these refunds could be subject to taxes. This could be perceived as an additional barrier to market entry and ongoing operations for international digital service providers, potentially contributing to the service provider exodus already observed in the Kenyan market. 

The Geopolitical Context 

Kenya’s SEPT implementation takes place amidst rising international tensions over digital taxation. President Donald Trump has announced plans to impose significant new tariffs on all countries that do not eliminate digital taxes and related regulations. Trump specifically stated that digital services taxes are all designed to harm or discriminate against American technology. Recent events show that the United States’ tech giants in Kenya are working to remove this tax, indicating it is already on the US radar. Kenya might find itself caught in Trump’s broader digital tax retaliation campaign. The geopolitical implications go beyond tax policy, potentially impacting bilateral economic relations, technology transfer, and diplomatic cooperation between Kenya and the United States.

Way Forward 

A comprehensive taxation approach could generate significant government revenue and create a level playing field for local fintechs competing against previously exempt foreign providers. However, it also presents the risk of increasing the overall cost of accessing and delivering digital services. This may slow innovation, hinder consumer adoption, challenge financial inclusion efforts, and diminish Kenya’s appeal as a destination for global digital investors. Early evidence suggests that some international platforms may withdraw services due to compliance challenges, as observed in past digital tax implementations. Nevertheless, these regulations offer opportunities for domestic technology providers and align Kenya more closely with global tax standards. Businesses should actively participate in the ongoing consultation process before the October 7 deadline, engage with stakeholders to influence these regulations, and prepare for longer-term compliance requirements.