By John Walubengo
Last week KICTANet dedicated and held one of its Thought Leadership Policy Discussion Series to the Finance Bill 2024, specifically regarding the digital tax aspects of it. There have been several analyses on the same, including one from KICTANet, Bowman among others.
What however, stood out for me was the proposal from the Kenya Revenue Authority to repeal the current Digital Service Tax (DST) and move Kenya to a more comprehensive approach called the Significant Economic Presence (SEP) Tax.
This shift marks an evolution in the way the government aims to capture revenue from digital services, reflecting global trends and local economic needs.
Let’s explore what the SEP Tax entails, along with its potential pros and cons, while considering its impact on everyday life in Kenya.
The Significant Economic Presence (SEP) Tax is designed to tax income generated by multinational companies that have a substantial economic presence in Kenya – even if they don’t have a physical presence in the country.
This approach broadens the tax base to include a wider range of digital activities and aligns with international tax practices, particularly those recommended by the Organization for Economic Co-operation and Development (OECD).
Specifically, the SEP tax will be payable by non-resident persons whose income from the provision of services is derived from or accrued in Kenya through a business carried out over a digital marketplace at the rate of thirty per cent (30%) of the deemed taxable profit. The deemed taxable profit would be calculated at twenty per cent (20%) of their gross turnover.
Advantages of the Significant Economic Presence Tax
Unlike the DST, which primarily targeted specific digital services, the SEP Tax casts a wider and broader tax net. This includes income from various digital activities such as online advertising, data usage, and sales of digital goods and services.
A broader tax base can lead to a significant increase in government revenue, which can be invested in public services, infrastructure, and social programs that benefit all Kenyans.
The SEP Tax would also align Kenya’s tax policy with international standards, particularly those set by the OECD. This alignment can enhance Kenya’s reputation as a business-friendly environment that adheres to global best practices. Such alignment is crucial for attracting foreign direct investment and ensuring that multinational companies view Kenya as a stable and predictable market.
By focusing on significant economic presence rather than physical presence, the SEP Tax ensures that non-resident, global tech companies, regardless of their business model, contribute their fair share of taxes.
This creates a more equitable tax system where both local and international businesses are taxed based on their economic activities within Kenya. This fairness can foster a more competitive business environment.
But the SEP is not without its disadvantages as discussed next.
Disadvantages of the Significant Economic Presence Tax
Implementing the SEP Tax is inherently complex. Determining what constitutes a “significant economic presence” involves detailed assessments of various digital activities and income streams.
This complexity can pose compliance challenges for businesses, especially small and medium-sized enterprises (SMEs) that may lack the resources to navigate the new regulations.
Similar to what happened previously with the old DST, the SEP Tax is likely to increase overall costs for digital consumers at a time when the government is trying to prop up a digital economy.
The taxed companies will pass on the additional tax burden to their consumers, resulting in higher prices for digital services, online subscriptions, and digital goods.
In conclusion, the transition from the Digital Service Tax to the Significant Economic Presence Tax represents Kenya’s effort to modernize its tax system and ensure it captures revenue from the growing digital economy.
While the SEP Tax promises broader revenue generation and alignment with global standards, it also brings complexities and potential challenges for both businesses and consumers. Balancing these pros and cons will be key to fostering a sustainable and equitable digital economy that benefits all Kenyans.
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John Walubengo is an ICT Lecturer and Consultant. @jwalu.
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