After aid havoc, could Trump spook Kenya’s tax modernisation bid?

Ever since assuming office, the President Donald Trump administration has been unwinding aid flows from the US at a dizzying pace and jangling nerves with panic across the world, especially within the Global South.

The donor funding status quo is upended, programmes are screeching to an abrupt halt and this has precipitated significant uncertainty as many begin to wrap their minds around what the road ahead could potentially look like.

The significance of this development notwithstanding, I believe there is one important issue which is being obscured by the aid flows conversation. Have we pondered what Trump’s Executive Order No 1 (America First Trade Policy) could mean for the recently adopted Significant Economic Presence Tax?

Paragraph J of Executive Order No 1 reads as follows – “The Secretary of the Treasury, in consultation with the Secretary of Commerce and the United States Trade Representative, shall investigate whether any foreign country subjects United State citizens or corporations to discriminatory or extraterritorial taxes pursuant to Section 891 of title 26, United States Code.”

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The Tax Laws (Amendment) Act 2024 repealed Digital Services Tax which had been in place since 2021, replacing it with Significant Economic Presence Tax as Kenya stepped up measures aimed at widening the tax net’s reach on the rapidly growing digital economy.

Effective December 27, 2024, Digital Services Tax at 1.5 percent of the gross transaction value ceased applying and paved the way for Significant Economic Presence Tax which provides that 10.0 percent of gross turnover is deemed taxable profit at a rate of 30.0 percent.

The idea behind Significant Economic Presence Tax is to ensure that multinational entities that enjoy substantial economic presence in Kenya, even if they don’t have physical presence in the country, pay their fair share of tax.

Significant Economic Presence Tax was introduced by the Organisation for Economic Cooperation and Development as part of the measures aimed at modernising the global tax framework to keep pace with the rapidly growing digital economy.

Significant Economic Presence Tax has gained traction globally and can be found in Indonesia and Nigeria where it was introduced in 2020; India where it was introduced in 2021; Colombia where it was introduced in early 2024 and now in Kenya.

The big question that now emerges is whether the newly adopted Significant Economic Presence Tax will be deemed to be “discriminatory to US citizens and corporations” and “extraterritorial” in line with Paragraph J of Executive Order No 1 by President Trump.

Will the Trump administration view the attempt to have US domiciled multinationals on the digital economy pay their fair share of tax to Kenyan authorities as an unfair trade practise and rope Kenya into his escalating tariff salvos?

By the same token, will the recently adopted Minimum Top Up Tax at 15.0 percent be deemed to be “discriminatory to US citizens and corporations” and “extraterritorial” in line with Paragraph J of Executive Order No.1 by President Trump.

Minimum Tax as provided in the Tax Laws (Amendment) Act 2024 is part of Kenya’s efforts to align with the global practise of ensuring that multinationals pay a minimum level of tax in each jurisdiction.

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One key challenge that I see could raised around Kenya’s adoption of Significant Economic Presence Tax and Minimum Top Up Tax is that compliance with the new provisions, especially with the complexity around Minimum Top Up Tax, will adversely impact multinationals’ operational costs.

The Treasury has not made public what it targets to collect from Significant Economic Presence Tax but we know that in 2023/24 alone, the proceeds from the Digital Services Tax stood at Sh10.81 billion.

The writer is a business journalist and host of NTV’s Business Redefined Show. Email: [email protected]