Kenya Aligns with OECD’s $250 Billion Global Tax Reforms, Unlocking US Free Trade Deal
In January 2025, Kenya approved its Tax Laws (Amendment) Bill, replacing the 1.5% Digital Services Tax (DST) established in 2021, in alignment with the OECD’s global 15% minimum tax under Pillar 2. This shift is set to enhance Kenya’s compliance with global tax standards, facilitating potential trade agreements, including a free trade deal with the US. Currently, 178 digital service providers are registered with the Kenya Revenue Authority, contributing over Sh240 million annually.
The new tax, called the Significant Economic Presence (SEP) Tax, will apply to digital sales. It is set at 30% on 20% of the deemed gross profits generated by digital marketplace sales.
Replacing DST with SEP Tax
The new SEP tax replaces the DST, with a focus on foreign companies earning income through digital services in Kenya.
Who is Affected by SEP Tax?
The SEP tax targets foreign individuals or companies that provide digital services in Kenya, but excludes certain groups:
- Nonresidents with Permanent Establishment: If a foreign company operates through a permanent office in Kenya, it’s exempt.
- Telecommunication Services: These services are excluded.
- Government-Owned Airline Services: Exempt if the airline is 45% government-owned.
- Small Businesses: Nonresidents with annual revenues under KES 5 million are exempt.
How SEP Tax is Calculated
The taxable income is calculated as 10% of the total
revenue earned in Kenya, then taxed at 30%.
Taxes are due by the 20th of the month after the
transaction occurs.
Implementation and Enforcement
The Cabinet Secretary for National Treasury has
been granted authority to develop the rules and
guidelines for enforcing the SEP tax.
Understanding SEP Tax
SEP tax targets companies with significant economic activity in a country, even if they lack a physical presence, a concept developed by the OECD to address digital economy challenges.
Global SEP Tax Examples
- India: Introduced SEP rules in 2021 for foreign digital companies earning revenue from Indian users.
- Indonesia: Nonresident digital businesses generating significant revenue are taxed.
- Saudi Arabia: Imposes SEP tax to ensure foreign companies contribute fairly.
- Italy: Applies SEP principles to tax companies offering digital services to Italian users.
- United Kingdom: Though not SEP, the UK’s Digital Services Tax mirrors SEP by taxing large tech firms earning from UK users.
These global examples show how SEP taxes ensure that foreign digital businesses pay their fair share of taxes despite not having a physical presence.
DST Limited to Non-Residents
The 1.5% DST, which came into effect on January 1, 2021, now only applies to non-resident digital marketplaces. It complements Kenya’s VAT on digital services, which was implemented in 2020 for non-residents.
Digital Services Liable to DST
Services subject to DST include:
- Streaming media, TV, music, podcasts
- Sale of user data
- Marketplace services
- Online news subscriptions
- Search engine services
- E-learning
- Any other digital services
How to Calculate DST
DST is levied at 1.5% of the gross invoice amount for digital services, exclusive of VAT. For digital marketplaces, it applies to the commission or fee received.
Determining DST Liability
Non-residents should monitor if their service is consumed via devices with Kenyan IP addresses, mobile codes, or local payment details. Registration for DST is mandatory before providing services, and businesses must report monthly via Kenya’s iTax platform. Non-compliance results in a 5% penalty for missed filings or payments, with interest charged at 1% per month.
By aligning with OECD tax standards, Kenya enhances its global tax position while enabling future economic partnerships.
