In recent years, the digital economy has grown exponentially, transforming how businesses operate and interact with consumers. This revolution has created new opportunities but has also posed challenges to tax authorities, including Kenya, as traditional tax frameworks struggle to keep pace with the evolving digital landscape. In 2020, Kenya introduced Digital Service Tax (DST) to address these challenges. DST has since been replaced by the Significant Economic Presence Tax (SEPT) which was introduced through the Tax Laws (Amendment) Act, 2024.

SEPT is a tax imposed on non-resident persons whose income from provision of services is derived from or accrues in Kenya through a business carried out over a digital marketplace. A non-resident person is considered to have a significant economic presence where the user of the service is located in Kenya. This tax does not apply to:

• non-resident persons who offer the services through a permanent establishment

• non-resident persons who carry on the business of transmitting messages by cables, radio, optical fibre, television, broadcasting, internet, satellite, or other similar methods of communication

• income subject to withholding tax › non-resident persons providing digital services to an airline in which the Government of Kenya has at least forty-five per cent shareholding, and

• non-resident persons with an annual turnover of less than Kenya Shillings Five Million.
  The taxable profit of a person liable to pay SEPT shall be deemed to be ten percent of gross turnover which translates to 3% of the gross turnover as opposed to DST which was chargeable at the rate of 1.5% of the gross transaction value.

SEPT, as introduced in Kenya has a broader scope than DST, covering a wider range of digital economic activities. Its introduction is expected to boost tax revenue from the digital economy. However, it may also increase operational costs for digital service providers, potentially leading to higher prices for consumers. Moreover, it could deter foreign investment if compliance is viewed as too complex or burdensome.

As a tax applicable to cross-border transactions involving non-resident entities, the issue of double taxation remains insufficiently addressed, given that existing Double Taxation Agreements (DTAs) between Kenya and other countries, do not explicitly cover this category of tax. This treaty gap presents legal and compliance uncertainties, which may require future clarification through legislative or policy adjustments.

SEPT marks a significant shift in Kenya’s tax policy. While it enhances revenue collection from the digital economy, its sustainability and impact on international trade remains uncertain. Proper implementation and alignment with global tax reforms will determine its long-term success. Continuous monitoring and stakeholder engagement will be crucial to address emerging challenges and ensure effective compliance.