Understanding Significant Economic Presence Tax: A Shift from Digital Service Tax in Kenya
Understanding Significant Economic Presence Tax: A Shift from Digital Service Tax in Kenya
Introduction
The Tax Laws (Amendment) Act, 2024 (“the Act”) was assented to on 11th December 2024 with the laws taking effect from 27th December 2024.The Act has introduced some fundamental changes to the tax framework including, but not limited to, the introduction of Significant Economic Presence Tax (SEP Tax) which has replaced Digital Service Tax (DST).
In this article we delve deeper into SEP and its application and how the same affects digital businesses in Kenya for SMEs and Large Multinationals (MNEs) alike.
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Background
Across the Globe, revenue authorities are facing increased challenges in taxing highly digitized businesses that operate in one jurisdiction while drawing income in another jurisdiction where they do not have significant physical presence. This state of affairs described technically: where a business accrues and derives income in a jurisdiction where they are non-resident via the internet. As economies embrace digitization anchored on technological advancements, it is prudent for tax statutes to subsequently evolve in order to keep up with emerging business trends to avoid becoming obsolete.To bridge this phenomenon, initiatives such as the Organization for Economic Cooperation and Development (OECD’s) – Base Erosion and Profit Shifting (BEPS) Action 1 (Amount A) and DST/SEP have been introduced at a global scale. These initiatives strive to address the dynamic challenges surrounding taxation of digital platforms, search engines, and online marketplaces, posing significant risks of tax leakage.
In Kenya, DST was enacted through the Finance Act 2020 at a rate of 1.5% and took effect 01 January 2021. It targeted companies conducting business over the internet or through digital marketplaces. In 2022, the government proposed increasing the DST rate from 1.5% to 3% in the Finance Bill 2022, but this proposal was ultimately dropped.
Kenya has now transitioned from DST to the newly enacted Significant Economic Presence (SEP) tax regime, which came into effect on December 27, 2024. Under the SEP regime, the tax rate is set at 3% of gross turnover. This transition appears to be part of the government's effort to broaden the digital tax net and address challenges previously encountered under DST.
With the enforcement of SEP, Kenya has become the second country in Africa to adopt this tax system, following Nigeria. When compared to other East African countries, such as Uganda and Tanzania, which impose DST rates of 5% and 2% respectively, Kenya now has the second-highest digital tax rate in the region.
What is Significant Economic Prence Tax: The Amendments
Below is an overview of the key differences between DST and the now applicable SEP:| Item | Digital Service Tax (DST) |
Significant Economic Presence Tax (SEP) |
| Tax rate | 1.5% on gross turnover, without taking onto account expenses or profits. | 10% of the gross turnover is considered taxable profit for SEP purposes. The tax rate is 30% of the taxable profit. Effectively the tax rate is 3% of gross turnover. |
| Due date | DST was payable monthly, on or before the 20th day of the month following the month in which the service was offered. | Similarly, SEP is payable monthly, on or before the 20th day of the month following the month in which the service was offered. |
| Revenue Threshold | No threshold. | SEP does not apply where the annual turnover is less than 5 million shillings. |
Significant Economic Presence Tax Exemptions
SEP tax shall not apply to the following:- non-resident persons who offer digital services through a permanent establishment in Kenya
- non-resident persons who carry on the business of transmitting messages by cables, radio, optical fiber, television, broadcasting, internet, satellite, or other similar methods of communication
- income subject to withholding tax
- non-resident persons providing digital services to an airline in which the Government of Kenya has at least forty-five per cent (45%) shareholding
- non-resident persons with an annual turnover of less than Kenya shillings five (5) million
Significant Economic Presence Tax Implications
- The tax burden for non-residents under the SEP tax will be significantly higher at the rate of 3% gross revenue as opposed to the DST which was applicable at the rate of 1.5% of the gross revenue.
- The DST regime did not have exemptions which have now been introduced under the SEP regime. For instance, the five million threshold cushions entities that do not carry out significant activities in the country.
Other developments in the digital space
Going forward owners/operators of digital marketplaces or platforms (both resident and non-resident) will need to withhold on payments for digital content monetization, property or services made/facilitated through their platform.“Platform” has been defined as a digital platform or website that facilitates the exchange of short-term engagement, freelance or provision of a service, between a service providers who is an independent contractor or freelancer, and a client or customer.
The WHT rate shall be 5% for residents and 20% for non-residents.