The Kenya Revenue Authority (KRA) has released draft regulations outlining the scope and compliance framework for the Significant Economic Presence Tax (SEPT), offering clarity on how foreign digital businesses will be taxed. Under the proposed rules, a final tax of 3% on gross turnover will apply, calculated through a deemed-profit model. Specifically, taxable profit is set at 10% of revenue derived from Kenyan users, with a 30% tax rate applied to that amount, excluding value-added tax (VAT). This structure ensures a predictable effective rate for nonresident providers.
The definition of taxable services is broad, covering digital offerings delivered via the internet or electronic networks, including artificial intelligence, data monetization, and digital assets. The regulations expand the range of activities subject to SEPT beyond traditional digital services to include emerging digital business models.
Nonresident entities serving Kenyan users are required to either register under a simplified system or appoint a local tax representative. Monthly returns and payments must be submitted by the 20th day of the following month. Entities previously registered under the now-replaced Digital Services Tax (DST) regime are automatically considered compliant under SEPT.
Determining user location is central to the tax’s application. A user is considered to be in Kenya if any one of four indicators applies, such as IP address, billing address, payment method, or SIM card origin. These criteria help establish significant economic presence without requiring a physical presence in the country.
The KRA is empowered to issue written directives requiring third parties—including banks, agents, or customers—to withhold and remit tax on behalf of foreign providers. This enforcement mechanism strengthens compliance oversight.
Overpaid taxes can be carried forward as credit. If a foreign business exits the Kenyan market, refunds may be issued to a local bank account, including those held by related parties, provided proper indemnification is given to the revenue authority.
The draft rules aim to eliminate ambiguity in tax obligations for cross-border digital transactions. Affected companies should update their tracking systems to capture user location data and ensure accurate reporting. With clear deadlines and regulatory expectations, firms must finalize their compliance approach—either through direct registration or by designating a local representative—before the rules take effect.
— news from EY
— News Original —
Kenya Revenue Authority publishes draft regulations on Significant Economic Presence Tax scope and compliance
The draft Regulations introduce crucial details on the tax mechanism, notably establishing a definitive 3% effective tax rate on gross turnover through a deemed-profit computation. They also expand the scope of services (including artificial intelligence (AI), data monetization and digital assets).
Nonresident service providers are now required to either follow a simplified registration or appoint a local tax representative, with monthly filing and payment due by the 20th day of the subsequent month. Affected taxpayers should immediately review their systems to ensure compliance with the new geographic and turnover tracking requirements.
The draft Regulations made under the authority of the Cabinet Secretary for the National Treasury provide the essential administrative framework for the SEPT regime. The tax will be a final tax on the nonresident provider in Kenya.
The Regulations broadly define “service” as a digital service or any service delivered or subscribed over the internet or an electronic network, including through a digital marketplace. The list of services subject to SEPT is extensive, covering traditional digital offerings as well as modern business models such as the following:
A nonresident person is deemed to have a significant economic presence if the user of the service is in Kenya. The regulations establish clear, multi-faceted criteria for determining user location. Specifically, a user shall be deemed to be in Kenya if any of these four conditions is met:
The Regulations clarify the method of computing the tax, which establishes a definitive effective tax rate on gross turnover. The tax is calculated as a percentage on the assumed/deemed profit derived from Kenya.
The taxable profit is deemed to be 10% of the gross turnover, and the tax rate is 30% of the deemed taxable profit. This mechanism results in an effective tax rate of 3% of the gross turnover excluding value-added tax (VAT) on the service.
A nonresident person without a permanent establishment in Kenya who provides a service to a user in Kenya must apply for registration under the simplified tax registration framework. Alternatively, a nonresident person who elects not to register must appoint a tax representative. Persons previously registered under the former DST regime are automatically deemed registered under the SEPT Regulations.
A person liable to pay the SEPT, or its appointed tax representative, must submit a return and remit the tax due on or before the 20th day of the month following the end of the month in which the service was offered by the nonresident person.
A person who fails to comply with the provisions of these Regulations will be liable for the penalties and interest prescribed under the Tax Procedures Act.
The KRA is granted broad powers to issue a notice in writing requiring any person, including financial institutions, customers, agents or related parties, to deduct and remit the tax on behalf of the nonresident taxpayer.
Overpayments will be retained as credit against the subsequent tax period. If a nonresident person ceases business in Kenya, a refund may be made into a bank account in a Kenyan bank. Transfers to a related party ‘s account in Kenya are allowed, but only upon written notification and the indemnification of the KRA against any loss.
The draft Regulations clear uncertainty surrounding the SEPT mechanism and provide definitive compliance requirements. Nonresident digital service providers should implement systems to track and segment their turnover based on the specific user-location criteria (IP address, payment method, etc.).
The monthly compliance timelines and the KRA ‘s third-party enforcement powers necessitate that affected nonresidents finalize their compliance strategy and register through a simplified registration or the appointment of a tax representative.