From DST to SEP: Kenya's Shift in Digital Economy Taxation

From DST to SEP: Kenya’s Shift in Digital Economy Taxation

1. Introduction

The global digital economy has brought tremendous opportunities—but also significant challenges for tax authorities in capturing value from non-resident firms that operate across borders without a physical footprint. In response, many countries have introduced measures to tax digital activities more effectively. One such case is Kenya, which is making a marked transition from the relatively modest **Digital Services Tax (DST) to a more comprehensive framework known as the **Significant Economic Presence Tax (SEP Tax or SEPT).

This article traces that transition: the background, what the old regime covered, how the new one differs, and the implications for businesses, especially digital/non-resident ones.

2. Background: Why change was needed

When the DST was introduced, it sought to capture revenue from non-resident firms providing digital services into Kenya even without a “brick-and-mortar” presence. But over time it became clear that the DST regime had limitations:

It taxed gross turnover at a fixed (low) rate and did not align with profit or value-creation in the jurisdiction.
Its scope was relatively narrow (e.g., digital marketplace services) and had de-minimis thresholds, meaning many smaller players escaped taxation.
As business models and technologies evolved (cloud services, AI, platform-based rides/freelance services) the DST regime risked being under-inclusive and thus revenue-inefficient.

Kenya’s tax authorities, specifically the Kenya Revenue Authority (KRA) and the Ministry of Finance, increasingly saw that relying on a simple gross turnover tax on digital services would not fully capture the economic reality of non-resident firms benefiting from Kenya’s user-base, infrastructure and market. (PKFEA)

Additionally, the global environment was evolving: discussions under the Organisation for Economic Co‑operation and Development (OECD) around “significant economic presence” (nexus) and digital tax frameworks encouraged countries like Kenya to revise their approach. (Mondaq)

Hence, the Tax Laws (Amendment) Act, 2024 and subsequent regulatory changes set in motion the repeal of DST and the adoption of SEP tax. (Digital Policy Alert)

3. The old regime: Digital Services Tax (DST)

The DST was introduced under the Finance Act 2020 and came into effect in January 2021. (Digital Policy Alert) Key features included:

It applied to non-resident persons (without a permanent establishment in Kenya) who provided services over the internet or an electronic network, including via digital marketplaces. (PKFEA)
The tax rate was 1.5% of the gross transaction value (gross turnover) at the point where payment is made. (EAGC)
Registration and payment were required monthly: the tax return and payment had to be submitted by the 20th day of the month following the provision of the service. (Network of Tax Organisations)
There was a threshold: for example, non-residents with annual turnover under KES 5 million were exempt. (Cliffe Dekker Hofmeyr)
It was regarded as a “simplified” regime for digital services—covering the digital marketplace, content streaming, etc. (Vellum Kenya)

Despite being simple, DST was criticised for:

Being very low (1.5%) and hence yielding limited revenue given scale.
Taxing gross turnover irrespective of underlying profit or cost structure.
Having narrow coverage and thus missing many digital services that do not strictly meet “digital marketplace” definitions.
Leaving room for avoidance by non-resident firms that structure themselves differently or operate beyond the digital marketplace model.

Thus, the need for reform.

4. The new regime: Significant Economic Presence Tax (SEP)

In response to the above, Kenya introduced the SEP tax. The transition is set out in the Tax Laws (Amendment) Act 2024 and associated regulations—most recently the Draft Income Tax (Significant Economic Presence Tax) Regulations, 2025. (Deloitte Brazil)

4.1 Key features of SEP

Some of the main features are:

SEP applies to non-resident persons whose income from the provision of services is derived from or accrues in Kenya through a business carried out over the internet or an electronic network (not just via a “digital marketplace”). (EY)
A person is deemed to have significant economic presence in Kenya where the user of the service is located in Kenya. For nexus determination, indicators such as the user’s IP address, SIM code, billing address or payment channel may suffice. (Deloitte Brazil)
Taxable profit is deemed to be a percentage of gross turnover: for example, the regulations propose deeming 10% of gross turnover as taxable profit. Then the tax rate is 30% of that deemed profit—effectively ~3% of gross turnover. (Deloitte Brazil)
Registration, filing and payment deadline: Returns and payments are due on or before the 20th day of the month following the month in which the service was offered. (Vellum Kenya)
The scope of services is broad: e.g., digital content/streaming, cloud computing, software, data monetisation, ride-hailing, online travel/accommodation marketplaces, AI services, online education, etc. (Cliffe Dekker Hofmeyr)
Some exemptions remain: non-residents operating through a permanent establishment in Kenya; certain telecommunication services (transmission of messages by cable, radio, etc.); digital services to an airline with ≥45% government shareholding. (KPMG Assets)
In the Finance Act 2025 the scope was expanded further: the turnover threshold (KES 5 m) was removed, meaning all qualifying non-residents are liable regardless of size. (PwC Tax Summaries)
A “minimum top-up tax” was introduced, aligning with the OECD’s Pillar Two framework: for in-scope multinational groups the effective tax rate must be at least 15%. (PKFEA)

4.2 Transition timeline & implementation

The DST regime became effective January 2021. (Digital Policy Alert)
On 27 December 2024, the DST provisions (Finance Act 2020) were repealed and replaced by SEP under the Tax Laws (Amendment) Act, 2024. (Digital Policy Alert)
Draft SEP regulations were published in 2025 (October) for public consultation, fine-tuning the implementation. (Cliffe Dekker Hofmeyr)

5. Comparative overview: DST vs SEP

Feature	DST (old)	SEP (new)
Tax base	Gross turnover (1.5% of gross) (EAGC)	Deemed taxable profit (10% of turnover) × 30% tax → ~3% of gross turnover in many cases (Deloitte Brazil)
Nexus / trigger	Services over digital marketplace; non-resident without PE; above threshold in some cases (PKFEA)	Services over internet or electronic network; user located in Kenya; non-resident; no de-minimis threshold in updated regime (KPMG)
Coverage of services	Digital marketplace-based services mostly (Vellum Kenya)	Broad range: digital content, cloud, AI, ride-hail, online education, platforms, etc. (Cliffe Dekker Hofmeyr)
Compliance deadlines	Return/payment by 20th day of month following service month (PKFEA)	Same deadline: 20th day following month in which service was offered. (Vellum Kenya)
Threshold/exemption	e.g., turnover < KES 5m exempt in some cases (PKFEA)	In updated regime threshold removed (so no exemption based on size) (KPMG)
Tax approach	Gross turnover tax (simple)	Deemed profit/profit-based approach (more sophisticated)
Alignment with global norms	More ad-hoc	Aligned with nexus/“significant presence” concept and OECD Pillar Two (minimum top-up tax) (KPMG Assets)

Thus, the SEP regime represents a significant step up from DST: broader scope, refined nexus, higher effective tax burden in many cases, and stronger alignment with international digital economy tax practices.

6. Implications for stakeholders

6.1 For non-resident digital service providers

Firms that provide services from abroad but to Kenyan users (e.g., apps, streaming, ride-hailing platforms, online freelancing platforms) now face increased tax obligations under SEP.
They need to review their operations: Are users in Kenya? Do they have economic presence per the new nexus tests? If yes, registration, monthly filing and payment obligations apply.
Compliance burdens may increase: keeping track of gross turnover from Kenyan users, monitoring substantial economic presence tests, ensuring tax representative appointment (if required) etc.
Pricing strategies might have to consider the tax impact (some industry participants anticipated fare/hike implications). (Kenyan Wall Street)
For smaller players, the removal of the de-minimis threshold means even modest turnover into Kenya could trigger SEP tax responsibility. Firms need to assess their exposure.

6.2 For the Kenyan economy & tax authority

The shift promises improved tax revenue capture from digital-economy operations. Given the growth in platform-based business models and cross-border services, the SEP regime is more future-proof.
The regime also sends a signal of Kenya’s tax-sovereignty: that absence of physical presence no longer means absence of tax liability if significant economic presence exists.
From a policy lens, it aligns Kenya with global trends and helps guard against base erosion and profit-shifting (BEPS) through digital channels.
On the flip side, administrative and compliance burdens increase—for both tax authority (KRA) and taxpayers. Regulatory clarity, guidance and capacity will be crucial to smooth implementation.
There is the risk that increased tax burdens could affect Kenya’s attractiveness for certain digital service providers or investment, though that risk must be balanced against fairness and revenue-needs.

6.3 For local businesses & market impact

Local Kenyan users who consume foreign digital services may indirectly face higher costs if providers adjust prices to incorporate tax. Some ride-hailing and delivery platforms expressed concern. (Kenyan Wall Street)
Domestic digital platforms with non-resident service providers (or marketplaces) may need to consider withholding/agency obligations: under the draft regulations the KRA may require third parties (banks/marketplaces) to deduct and remit SEP tax. (KPMG)
Clear communication and transitional arrangements will be important to avoid disruption in supply chains, platform operations and end-user services.

7. Key issues & considerations

Definition of “user located in Kenya” / nexus triggers: While the draft regulations propose certain indicators (IP address, SIM code, billing address, payment channel) as evidence of user location, firms must carefully assess their user-base and data. (Deloitte Brazil)
Deemed profit vs actual profit: The SEP regime uses a simplified approach (deeming 10 % of turnover as taxable profit) rather than requiring detailed cost/expense breakdowns. While administratively simpler, this may disadvantage low-margin digital services. (Cliffe Dekker Hofmeyr)
Regulatory clarity and compliance readiness: The draft regulations (2025) provide lists of services caught, documentation rules (e.g., record-keeping for five years) and enforcement mechanisms (penalties, agency notices) but finalisation and guidance remain crucial. (Cliffe Dekker Hofmeyr)
Interaction with other taxes: The SEP tax is a “final tax” once paid (in many cases) but firms must ensure coordination with other taxes (corporate income tax, withholding taxes, VAT) and evaluate any double taxation risks. (Cliffe Dekker Hofmeyr)
Transitional and grandfathering issues: Firms operating under the DST regime must migrate to the SEP regime smoothly. The deeming clause in regulations indicates persons registered under DST may be deemed registered under SEP. (Deloitte Brazil)
Impact on business models: Entities offering cross-border digital services should reassess pricing, market-entry decisions, user segmentation (Kenyan-user vs non-Kenyan user) and tax modelling in light of increased burden.
Policy balance – revenue vs investment: While the tax authority aims to capture more revenue, care must be taken that the regime does not unduly discourage investment, innovation or digital entrepreneurship in Kenya.

8. Conclusion

Kenya’s move from the Digital Services Tax to the Significant Economic Presence Tax represents a significant evolution in how the country’s tax system adapts to the realities of the digital age. By moving beyond a simple turnover tax on digital marketplace services to a broader, profit-based framework capturing non-resident firms with significant user-based presence in Kenya, the government is positioning itself to capture more value from the digital economy while aligning with global tax norms.

For non-resident digital service providers, the message is clear: user-location matters, and Kenya is prepared to tax economic activity even without traditional physical presence. For Kenyan policy-makers and domestic stakeholders, the challenge will be to implement the regime efficiently, ensure fairness and avoid unintended consequences for innovation or market access.

As the draft regulations are finalised and compliance cycles begin, businesses should act now to evaluate their exposure, adapt their operations and engage with Kenyan tax authorities to ensure a smooth transition. The digital economy will not wait, and neither should readiness.