In December 2024, the Kenyan government introduced the Significant Economic Presence Tax (SEPT) through the Tax Laws (Amendment) Act. This move represents a major shift in Kenya’s approach to taxing digital businesses without a physical presence in the country but generating substantial revenue from local consumers.
SEPT replaces the Digital Service Tax (DST), offering a more comprehensive and sustainable approach to taxing digital businesses. Unlike DST, which focused primarily on specific services like online advertising and streaming, SEPT broadens the scope to cover a wider range of digital economic activities, creating a fairer and more effective tax regime.
While the introduction of SEPT is likely to bring several benefits, it could also present challenges for Kenyan startups and small and medium-sized enterprises (SMEs).
Leveling the Playing Field for Local Businesses
One of the key advantages of SEPT is that it levels the playing field for local businesses. Foreign companies have been able to generate significant revenue from Kenyan consumers without paying taxes in Kenya, giving them a distinct advantage over local businesses that had to comply with domestic tax laws. SEPT ensures that these foreign competitors contribute to Kenya’s tax base, eliminating this unfair tax advantage and creating a more equitable business environment.
This reform could spur innovation and growth, as a result, local startups will have greater opportunities to expand their offerings and develop services tailored to the unique needs of the Kenyan market.
Potential for Reinvestment in Local Initiatives
The taxes collected from foreign companies operating in Kenya could generate additional revenue for the government. This revenue could be reinvested into key initiatives that support local startups and SMEs. For example, the government could allocate funds to improve internet infrastructure, enhance digital literacy programs, or provide grants and subsidies to boost local innovation.
As foreign companies contribute more to the local tax base, Kenya has the potential to strengthen its digital economy, giving local entrepreneurs better access to digital tools and a more supportive environment for growth. This could lead to a more robust tech ecosystem that benefits local businesses.
Challenges for Kenyan Startups
The introduction of SEPT may present challenges for local startups that rely on foreign digital platforms. Many Kenyan businesses use services like Facebook Ads, Google Ads, or Amazon Web Services (AWS) to market products or support their operations. Foreign companies may raise their fees to offset the additional tax burden, potentially increasing the costs for local businesses. These price increases could be passed on to customers, leading to higher prices for goods and services in the short term.
Additionally, some foreign digital companies may reconsider their investment in Kenya if they view the new tax as too high, potentially reducing their presence in the country, or discontinuing their services. Local startups that depend on these global platforms for tools, services, or customer reach could be negatively impacted if these companies scale back their operations in Kenya.
Balancing the Impact of SEPT
a) Short-Term Challenges
In the short term, Kenyan startups may face increased administrative costs as foreign providers adjust to the new tax. The rise in fees could strain on local businesses already navigating a competitive market. However, the adaptability of startups will depend largely on government support initiatives such as tax incentives, and their capacity to pivot business models effectively.
b) Long-Term Benefits
Over time, SEPT has the potential to create a more competitive environment for local businesses, driving innovation, fostering growth, and supporting Kenya’s broader economic development. With the right policies and support systems in place, local entrepreneurs will have a greater chance to succeed in a marketplace where global players are subject to the same tax obligations.
The introduction of SEPT marks a significant step in the development of Kenya’s digital economy. While challenges may arise in the short term, the long-term potential for creating a more dynamic, competitive business environment is considerable. If the government can successfully balance the needs of local startups with the broader goal of ensuring fair taxation, SEPT could provide local businesses with a more level playing field, ultimately strengthening Kenya’s position in the global digital market.
This material is intended solely for informational purposes and should not be relied upon without seeking specific professional advice on the matter. Should you have any questions regarding this topic, please feel free to contact our team at info@ke.andersen.com or +254 20 5100263.
Contributors & Contact Persons
Irene Masecko
Tax Associate
irene.masecko@ke.andersen.com
Marco Manyenze
Associate Director
marco.manyenze@ke.andersen.com