From Digital Service Tax to significant Economic Tax

Understanding the Significant Economic Presence Tax

The Kenya Revenue Authority has recently updated its Itax Portal to include the Significant Economic Presence Tax (away from the previous Digital Service Tax) as part of the tax obligations for affected Taxpayers. This follows the enactment of the Tax Laws Amendment Act, 2024, (TLA) which introduced the Significant Economic Presence Tax (SEP Tax). As per the Act, the SEP Tax shall be payable by a non-resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over a digital marketplace.

The introduction of the SEP Tax was meant to curb the challenges associated with taxing the digital space more specifically the issue of the nexus between business income and the various physical places contributing to the production of the said income as highlighted by the BEPS Action Plan 1 of the OECD Guidelines.

For better understanding, we respond to some of the key queries regarding SEP Tax.

What is SEP Tax?
SEP Tax is tax 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 is a concept that extends the traditional tax nexus rules to include a taxable presence based on significant digital engagement with a country’s economy.

The introduction of SEP Tax is meant to ensure that the non-resident entities with not physical presence in an economy are still being taxed where there exists significant economic presence by the non-resident in an economy.

How is the Significant Economic Presence (SEP) determined?

According to the OECD Guidelines, a “significant economic presence” is determined by assessing whether a company has a purposeful and sustained interaction with a country through digital technology, which can include factors like a large user base within that jurisdiction, substantial data generation from local users, targeted marketing activities, billing in local currency, and the maintenance of a local language website, effectively creating a taxable presence even without a physical presence in the country; this is particularly relevant for digital businesses operating across borders.

For the Kenyan context, the TLA Act, has stipulated that a non-resident person shall be considered to have significant economic presence where the user of the service is located in Kenya.

Who is responsible for paying the SEP Tax in Kenya?
As per the TLA, the SEP Tax shall be payable by a non resident person whose income from the provision of services is derived from or accrues in Kenya through a business carried out over a digital marketplace.

What is the effective date of SEP Tax?
27th December 2024

What happens with the Digital Service Tax (DST) previously charged?

With the amendments introduced by the TLA Act, the same had the implication of deleting the initial provisions of the Digital Service Tax (DST). This meant that the provisions imposing the DST were no longer in force commencing 27th December 2024 when the TLA came into force.

With the deletion of the DST provisions under the Income Tax Act, the same was replaced with the introduction of the SEP Tax. As such, for purposes of taxation of the digital space, currently the applicable tax is SEP Tax.

Computation and rate of the SEP Tax?

Based on the provisions of the TLA, the taxable profit of a person liable to pay the tax shall be 10% of the gross turnover.

Further, the rate of tax in respect of SEP Tax charged shall be 30% of the deemed taxable profit, that is, 3% of the gross turnover.

Note: Under the DST regime, the applicable rate was 1.5%. However, with the deletion of DST provisions and subsequent introduction of the SEP Tax, the applicable rate now is 3% which is higher from what was there previously. This means more burden for the Taxpayers providing services on the digital marketplace.

Timeline for filing return and payment of SEP Tax
SEP Tax is on a monthly basis and that same shall be filed on or before the 20th day of the month following the end of the month in which the service was offered.

There are many overseas companies operating in the digital market place in Kenya, but do not have physical offices locally. How will they account for SEP Tax?

Similar to what was happening under the DTS regime, a non-resident overseas company who provides digital services in Kenya may register under the simplified tax registration framework via the iTax portal. Upon successful registration on iTax, the digital service provider will be able to file the tax return and make payment for the SEP Tax due within the stipulated timelines.

Further, there is the option of a non-resident appointing a tax representative where they choose not to register through the simplified registration framework. The tax representative shall be responsible for performing any tax obligations required, including the submission of returns and the payment of taxes.

Note however, that based on the TLA, the same stipulated that the Cabinet Secretary may make Regulations for the better implementation of the SEP Tax. We shall have a better outlook in terms of implementation once the Regulations are released.

Exemptions to the application of SEP Tax

As per the TLA Act, the same has exempted the following from the charge of SEP Tax: –

(a) a non-resident person who offers the services through a permanent establishment;

(b) a non-resident in the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal (VSAT), internet, satellite or by any other similar method of communications;

(d) to a non-resident person providing digital services to an airline in which the government of Kenya has at least 45% shareholding; or

(e) to a non-resident person with an annual turnover of less than Kshs. 5million.