Kenya to fall into line with $250 billion OECD global tax reforms – unlocks US free trade deal
Kenya has approved in December its Tax Laws (Amendment) Bill 2024, including replacig its existing 2021 1.5% Digital Services Tax (DST) as it withdraws its objections to the Pillar 2 OECD reforms on a global 15% minimum tax. There are currently 178 digital service providers registered with the Kenyan Revenue Authority, remitting over Sh240 million per annum.
Instead, it has introduced a SEP Tax (Significant Economic Presence Tax) which would be charged at 30% on 20% of deemed gross profits from sales on a digital marketplace
Replacement of DST with Significant Economic Presence Tax
The law has replaced the Digital Services Tax (DST) with a new system called the Significant Economic Presence (SEP) tax.
Who Needs to Pay SEP Tax?
SEP tax applies to foreign companies or individuals (nonresidents) that earn income by providing services through digital platforms in Kenya. However, some groups are excluded:
- Nonresidents with a Permanent Establishment: If a nonresident operates through a permanent office or base in Kenya, they are exempt.
- Telecommunication Services: Certain types of telecommunication services and other specific listed services are excluded.
- Government-Owned Airline Services: Nonresidents providing digital services to an airline owned at least 45% by the Kenyan government are exempt.
- Small Businesses: Nonresidents with annual revenues below 5 million Kenya shillings (KES 5m) don’t need to pay this tax.
How the Tax is Calculated
- The taxable income is calculated as 10% of the total revenue (gross turnover) earned in Kenya.
- This taxable amount is then taxed at 30%.
- Businesses must pay the tax by the 20th of the month after the service is provided.
Implementation and Regulation
The Cabinet Secretary for the National Treasury has been given the authority to create rules and guidelines to help enforce and implement SEP tax.
What is Significant Economic Presence?
SEP is a way to tax businesses that engage significantly with a country’s economy through digital platforms, even if they don’t have a physical presence there. This idea was introduced by the Organization for Economic Cooperation and Development (OECD) to address tax issues caused by the digital economy.
Other Examples of SEP Taxes Around the World
- India: India introduced SEP rules in 2021, targeting foreign digital businesses earning revenue from Indian users. This applies even if the business has no physical presence in India.
- Indonesia: Nonresident digital businesses that generate significant revenue in Indonesia are subject to SEP tax, based on user engagement and income thresholds.
- Saudi Arabia: The country taxes digital service providers under SEP rules to ensure fair contribution from foreign businesses benefiting from the local market.
- Italy: Italy uses SEP principles to tax companies that provide digital services to Italian users without needing physical offices in the country.
- United Kingdom: Although not strictly SEP, the UK imposes a Digital Services Tax, which has similarities, taxing large tech firms earning from UK-based users.
These SEP taxes help governments collect revenue from digital companies that benefit from their economies but have no physical offices within their borders.
DST on digital services limited to non-residents
The last Kenyan Finance Act has limited the application of the 1.5% Digital Services Tax (DST) to non-resident digital marketplaces. DST came into effect on 1 January 2021. This is in addition to Kenyan VAT on digital services which was implemented for non-residents from 2020. Follow global Digital Service Tax implementations via our tracker.
What services are liable to Kenyan DST?
Income from the following services will be liable to DST:
- Download and streaming media, TV, films, music, podcasts etc
- Sale of user data
- Marketplace services
- Subscriptions to online news and journals
- Search engine services
- E-learning
- Any other services via a digital marketplace
How to calculate Kenyan DST
DST is levied at 1.5% of the gross invoice amount for the digital service. This shall be the payment received as consideration for services in the case of provision of digital services or the commission or fee paid to the digital marketplace provider for the use of the platform in the case of a digital marketplace.
This is exclusive of VAT.
Determining if Kenyan DST is due
Non-residents must monitor the following to determine if DST is due:
- The services is consumed by computer, mobile or tablet etc with Kenyan IP address
- Mobile phone country code
- Credit or debit card with Kenyan address
- Bill address of the customer
DST registration and compliance on iTax platform
Since there is no DST registration threshold, non-residents must register before supplying their first transaction. Non-residents may opt instead to appoint a Fiscal Representative and have them register and report the taxes. Otherwise, it is not required to appoint a local agent unless the Kenyan Commissioner requests so.
Whilst DST is due at the time of the transaction, practically it is reported and remitted via monthly returns. DST registration will be done online on the iTax platform. This is due by the 20th of the month following the month of the supply.
The fine for non-compliance is 5% of DST due for a missed filing or missed payment. Interest on late payments is also due at 1% per month.
Africa & Middle East Digital Services Taxes (DST)
| Country | Status | Rate | Annual sales threshold | Scope | |
| In-country income | Global income | ||||
| Israel | Proposed | 3%-5% | Digital interface; advertising; user data | ||
| Kenya | Jan 2021 | 1.5% | n/a | nil | Digital interfaces services, including most non-resident e-services |
| Nigeria | Jan 2022 | 6% | NGN 25m | Content; customer data; goods & services; and intermediary services | |
| Sierra Leone | Jan 2021 | 1.5% | Ad, web and data services | ||
| South Africa | Proposed | ||||
| Tanzania | Jan 2022 | 2% | Digital or electronic services | ||
| Tunisia | Jan 2020 | 3% | Apps; digital services (non-resident only) | ||
| Uganda | Jul 2023 | 5% | |||
| Zimbabwe | Jan 2020 | 5% | Digital and ecommerce | ||
