Kenya Aligns with OECD Tax Reforms, Unlocking U.S. Free Trade Deal
In January 2025, Kenya took a major step toward modernizing its tax framework. It replaced the 1.5% Digital Services Tax (DST), introduced in 2021, with a more comprehensive Significant Economic Presence (SEP) Tax. This reform aligns Kenya with international tax practices, especially under the OECD’s Pillar 2 initiative, which introduces a 15% global minimum corporate tax rate.
The SEP Tax ensures that multinational digital companies contribute their fair share of taxes in Kenya—even if they operate without a physical presence. As a result, the government boosts domestic revenue and reinforces compliance with global tax standards. This alignment is especially critical as Kenya works to attract foreign investment and finalize key trade deals, including a potential free trade agreement with the United States.
Currently, 178 digital service providers have registered with the Kenya Revenue Authority (KRA), contributing over KSh240 million annually through digital taxation. The SEP Tax will likely widen the tax base by targeting large digital firms that earn significant revenue from Kenyan users.
Ultimately, this reform demonstrates Kenya’s commitment to a fast-evolving global economy. Moreover, it highlights the government’s resolve to create a fair and competitive digital market while protecting tax sovereignty in a digitalized world.
What Is the SEP Tax?
The Significant Economic Presence (SEP) Tax is a new policy that requires foreign digital companies to pay taxes on income earned from Kenyan users—even when they lack a physical office or branch in the country.
Previously, these firms paid a flat 1.5% DST on gross revenues. However, beginning in January 2025, the SEP Tax replaced the DST to align with OECD-backed tax reforms.
Now, qualifying foreign digital firms pay a 30% tax on 20% of their gross digital profits from Kenyan users—resulting in an effective 6% tax. This structure better reflects the true economic value derived from digital operations in Kenya, rather than merely taxing gross revenue.
Importantly, this shift enhances both transparency and equity in taxation. It also positions Kenya as a progressive digital economy that aligns with the OECD framework.
Who Must Pay SEP Tax?
Foreign digital service providers must pay SEP Tax unless they fall into one of the following exceptions:
- Companies with a physical office in Kenya
These already fall under the standard corporate tax regime. - Telecommunication service providers
Licensed telecom companies are exempt from SEP obligations. - Airlines with at least 45% government ownership
National carriers with major government stakes are not liable for SEP Tax. - Businesses earning less than KSh5 million annually
Small firms are exempt to ease the compliance burden.
How SEP Tax Is Calculated
The KRA assumes that 10% of a qualifying company’s global revenue originates from Kenya. That share is then taxed at 30%. Companies must submit monthly payments by the 20th of the following month.
Who Enforces SEP Tax?
The Cabinet Secretary for the National Treasury is responsible for setting enforcement rules. These rules help identify qualifying companies and ensure accurate collection and compliance.
SEP Tax Around the World
Kenya joins other countries implementing similar digital tax rules:
| Country | Tax Policy Summary |
|---|---|
| India | SEP tax applies to income from Indian users |
| Indonesia | Taxes digital firms without local offices |
| Saudi Arabia | Uses SEP model to tax global digital providers |
| Italy | Implements SEP-based digital platform taxation |
| United Kingdom | Employs a DST similar in function to SEP |
Clearly, these policies reflect a global trend: ensuring foreign digital firms pay taxes—even without a local office.
What Happens to the Digital Services Tax (DST)?
Kenya introduced DST in 2021 to tax non-resident providers at 1.5% of gross digital revenue. With SEP now in effect, DST applies only to:
- Non-resident digital marketplaces without a physical Kenyan presence.
Services Still Liable to DST
DST remains applicable to:
- Video and music streaming platforms
- Social media services
- Online marketplaces
- E-learning platforms
- Digital news subscriptions
- Search engines
- Sale of user data
How to Calculate DST
DST is charged at 1.5% of the gross invoice amount (excluding VAT). For marketplaces, it applies only to commissions or platform fees—not the total value of goods sold.
How to Determine DST Liability
Foreign digital firms must assess whether:
- Kenyan users access their services (via IP, mobile code, or payment data).
- Their digital services are consumed by Kenyan residents.
To comply, providers must register on Kenya’s iTax platform before offering services. Monthly reporting is mandatory. Penalties include:
- A 5% fine on unpaid tax
- 1% monthly interest on late payments
Why This Reform Matters for Kenya
By aligning with OECD tax reforms, Kenya:
- Embraces international best practices
- Attracts more foreign investment
- Strengthens its hand in trade talks, including those with the U.S.
Ultimately, this move signals Kenya’s readiness to build a fair, transparent, and future-oriented digital economy.
Disclaimer
This article is intended for informational purposes only and does not constitute legal, financial, or tax advice. While every effort has been made to ensure accuracy, tax laws and regulations may change over time. Readers should consult the Kenya Revenue Authority (KRA) or a qualified tax professional for the latest guidance and personalized advice regarding SEP tax or digital taxation in Kenya.
