The President of Kenya assented to the Tax Laws (Amendment) Bill 2024 on 11th December 2024. In accordance with Article 116 of the Constitution of Kenya, the Tax Laws (Amendment) Act was gazetted on 13th December 2024, and shall come into effect on 27th December 2024.
One of the key changes taking effect is the introduction of a Significant Economic Presence (SEP) tax payable by non-resident persons deriving income from business carried out in Kenya through a digital marketplace.
The SEP tax is set at 30% of a deemed taxable profit, calculated as 10% of the turnover. This translates to an effective tax rate of 3% on the gross turnover, payable by the 20th day of the following month.
The SEP tax will replace the current digital services tax (DST) which is applicable at the rate of 1.5% to a broad range of digital services, including downloadable digital content (e-books, apps, films), streaming services, data monetization involving Kenyan users, subscription-based media (news, magazines), and digital marketplaces. It also covers electronic data management services like cloud storage, ticketing, search engines, and online training.
SEP tax shall not apply to;
- Non-resident persons offering services through a Permanent Establishment (PE);
- Income earned by non-resident persons from specific telecommunication services and non-resident persons providing digital services to an airline in which the Government of Kenya has at least forty-five per cent shareholding; and
- a non-resident person with an annual turnover of less than KES 5 million.
The digitalisation of the global economy has fundamentally challenged traditional tax systems. The concept of SEP lies at the heart of this, as it seeks to redefine the nexus of taxation for multinational enterprises operating across multiple jurisdictions.
Historically, Article 5 of the OECD Model Tax Convention defines a PE as a fixed place of business, granting taxing rights to the jurisdiction where the income is generated. However, with the rise of digital business models, companies can establish SEP in a country without maintaining a physical presence thus necessitating a re-evaluation of traditional tax rules.
The OECD Base Erosion and Profit Shifting (BEPS) Action 1 Report identified this as a critical challenge to international taxation, particularly in allocating taxing rights for cross-border business activities. To address these challenges, various proposals have been made to redefine taxing rights. A notable proposal advocated for the adoption of the SEP concept, where the taxable presence in a country would be created when a non-resident enterprise demonstrates purposeful and sustained interaction with the economy of that country through technology and other automated means.
Building on the insights of Action 1, the OECD introduced Pillar One as part of a global framework to address these challenges, particularly focusing on reallocating taxing rights for digital multinationals, to ensure that taxes are paid in the jurisdictions where their users and customers are located. However, the inability to reach a global agreement on Pillar One has left countries grappling with how to fairly tax profits generated within their borders. In the absence of a unified approach, many countries have resorted to unilateral measures such as DST and SEP tax to secure tax revenues from the digital economy.
For example, a pioneer in digital taxation, India implemented the Equalization Levy in 2016, evolving into a broader SEP framework in 2022. The provisions apply a withholding tax on e-commerce operators and income tied to digital platforms. Nigeria's SEP regime, introduced in 2020, ensures that non-resident companies deriving significant income from digital services, such as streaming, data transmission, and intermediary platforms, contribute to its tax base. Companies earning more than NGN 25 million annually from these activities are subject to taxation. Colombia enacted SEP rules in 2024 to capture income from foreign companies interacting regularly with Colombian users. This approach allows businesses to choose between a 10% withholding tax or a 3% tax on gross income.
These examples highlight a global shift towards taxing digital services and ensuring equitable contributions from non-resident digital businesses.
In the Kenyan context, while the introduction of the SEP tax under domestic tax law represents an effort to address the taxation of the digital economy, taxpayers covered by double taxation agreements (DTAs) should not be affected . Kenyan DTAs generally adopt the traditional definition of a PE, which does not accommodate the SEP framework. Consequently, unless Kenya renegotiates its DTAs to incorporate SEP-related provisions, the existing PE provisions in these agreements will continue to govern the taxation of cross-border profits. However, SEP may apply in treaty cases where benefits are unavailable due to disqualification as a "resident" or a "person," or due to anti-abuse provisions under domestic law such as the Limitation of Benefits (LOB) clause contained under Section 41 of the Income Tax Act, CAP 470.
With the SEP tax taking effect on 27th December 2024, it is expected that the Cabinet Secretary will soon issue detailed regulations to provide clear guidance on its implementation.
Ultimately, Kenya's SEP tax underscores its commitment to aligning with global tax reforms and ensuring equitable contributions from digital multinationals operating within its jurisdiction.
The opinion expressed in this article is solely personal and does not represent the views of any organization or association to which the authors belong.