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Understanding Digital Taxes in Kenya: A shift from Digital Services Tax (DST) to Significant Economic Presence Tax (SEPT)

Understanding Digital Taxes in Kenya: A shift from Digital Services Tax (DST) to Significant Economic Presence Tax (SEPT) -Ndakala Advisory

Introduction   

On 11th December, the President assented into Law the Tax Law Amendment Bill 2024 into Tax Law Amendment Act and the provisions in the Act became effective on 27th December 2024. Following the passage of the Tax Laws, significant changes were introduced aimed at attaining the government tax collection goal. Among the changes introduced is the Significant Economic Presence Tax (SEPT), a move by the government to capture revenue from digital services.  Read below to get insights into the required digital taxes in Kenya.

 What is SEPT ?

The Significant Economic Presence Tax (SEPT) is a digital service tax that applies to non-resident individuals or entities earning income from services provided or accruing in Kenya on a digital marketplace 

 Is SEPT meant to replace DST ?

Yes, Tax Law Amendment Act 2024 has replaced the Digital Service Tax (DST) with Significant Economic Presence Tax (SEPT).  While Digital Service Tax (DST) was a tax levied on income earned through a digital marketplace, SEPT is broader digital service tax which will cover a wider range of digital activities such as online advertising, data usage and sale of digital goods and services.

Notably, SEPT regime introduced exemptions of persons not liable to comply with payment of the tax, something the DST regime did not have. 

 Who is meant to pay SEPT ?

SEPT is payable by a non- resident individual or company whose income from the provision of services is derived from or accrued in Kenya through a business carried out through a digital marketplace.

SEPT is designed to tax revenue generated by non-resident companies that have substantial economic presence in Kenya even if they do not have a physical presence in the country.  

 What is the rate of paying SEPT, due date and the penalties for non-compliance ?

The effective rate of paying SEPT is 3% (10% of the gross turnover multiplied by 30% of the deemed profit) which would increase the tax burden on income generated through digital marketplaces, as opposed to the 1.5% of DST.

SEPT is due to KRA on or before the 20th of the following month in which the service was rendered. Late filing of SEPT will impose a penalty of 5% of the tax due or Kes.20,000, whichever is higher. In the case of late filing, a penalty of 5% on the tax due, plus an interest of 1% of the tax due on the unpaid taxes. 

What is the effect/significance of introducing SEPT ?

Unlike DST, SEPT is targeting a wider range of services offered through a digital marketplace.  A broader tax base means that the Government will be able to increase revenue collected.

By focusing on the significant presence and not the physical presence of a company, SEPT will ensure that global companies with a significant economic presence in Kenya will also contribute to paying taxes thus enabling development of the Kenyan economy.

In addition, SEPT will align Kenyan tax policy with international standards especially the Organization for Economic Cooperation and Development (OECD) regulations. 

Exemptions to SEPT 

SEPT applies to non-resident companies however; the following shall be exempt from the significant economic presence tax; 

  • A non-resident person who offers the services through a permanent establishment – these are considered as residents. 
  • A non-resident company providing digital service in Kenya and the government of Kenya has 45% of the shareholding. 
  • Incomes subjected to withholding tax (under section 10 of the Income Tax); 
  • A non-resident person who carries on the business of transmitting messages by cables, radio, optical fiber, television, broadcasting, internet, satellite, or other similar methods of communication. 
  • A non- resident person with an annual turnover of less than Kenya shillings five million. 

The current Market players who will be hit hard by SEPT  

The implementation of Kenya’s Significant Economic Presence Tax (SEPT) is poised to impact various non-resident digital service providers operating within the country. Key industries impacted include social media platforms, video streaming services, digital content sales, e-commerce, and online delivery services, among others. 

Typically, these companies are likely to transfer the tax burden to consumers, ultimately resulting in higher costs for Kenyans. 

Conclusion

While tax laws are dynamic and keep on changing, digital service taxes are an interesting niche to be explored. We shall keep you updated on such changes and more when they occur.  

Read Also: Highlights of The Finance Bill

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