Tax administrations in the region are considering adoption of a uniform significance economic presence (SEP) tax that will subject foreign tech companies with operations locally to a levy on their services.

Commissioners-general of tax authorities from all eight countries in the East African Community, after a meeting in Nairobi this week, resolved to step up efforts to tax the digital economy through the SEP tax.

The proposed tax will either supplement or replace the digital services tax, which is already implemented in some of jurisdictions in the region, and is meant to expand the tax bracket and support revenue collection in the countries.“The Commissioners-General urged that the revenue administrations continue to implement the digital service tax and consider the adaption of the significant economic presence taxation framework based on each country’s progress in taxation of the digital economy,” the tax authority leaders said in a dispatch after their meeting in Nairobi.

A SEP tax is typically charged on multinational corporations that generate substantial income from a country without having a physical presence there. It targets companies that operate in the digital space, such as ride-hailing, video-streaming, delivery, e-book and electronic content sellers, e-commerce, and social media platforms, among others.

Although the rate at which the uniform SEP tax will be charged is not yet decided, its implementation is expected to significantly raise the cost of accessing these services to East Africans.

Kenya is the only country in the region that is at advanced stages of implementing an SEP, which is set to replace the digital services tax, which has been in effect since June 2023.

Nairobi’s SEP, which is currently under consideration by the legislature in the Tax Procedures (Amendment) Bill of 2024, will be charged at six percent, which, the Ministry of National Treasury said, “aligns with international best practice.”If the proposed law is passed by parliament, the tax will extend beyond just e-book sellers and e-content vendors, to also include freelance service providers, online professional service providers, among others.

SEP will replace the digital services tax (DST) in Kenya, which is currently levied on online sellers such as Netflix, Spotify, YouTube, Amazon, among others, at a rate of 1.5 percent.

In the region, Tanzania is the only other country that charges a DST on payments in the digital marketplace. The two percent tax was rolled out in July 2022 and is charged on non-resident companies offering electronic services to Tanzanian consumers.

Uganda is yet to implement either a DST or an SEP, but it had an Over-the-Top tax, which was levied on social media usage since 2018, but was later shelved in 2021 after it failed to raise the desired taxes.

Other countries in the region are yet to expand taxation into the digital space, and such sectors as e-commerce, freelancing, ride-hailing, food delivery and online content vending, among others remain outside the tax bracket.

The East African revenue authorities commissioners-general recognised that the digital realm is growing and taking much of their economies, necessitating “appropriate taxation frameworks to support revenue collection in these emerging sectors,” they said in a dispatch after their Nairobi meeting this week.

Both the digital services tax and significant economic presence tax remain unpopular in Africa. Currently, Kenya is the only African country close to putting in place an SEP and might be the first should the lawmakers pass the proposed changes.

Other than Kenya and Tanzania, DST is charged at a rate of between 1.5 and six percent in Nigeria, Tunisia, Zimbabwe, and Sierra Leone. Uganda, Ghana and Senegal are currently working on proposal for a DST as well.

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