Trade and Investment

HIGHLIGHTS

In 2025, the following are likely to be the major trends and developments in the Trade and Investment sector in Kenya:

• Increased e-commerce activities fuelled by funding from the Kenya Digital Economy Acceleration Project which aims to put in place supporting infrastructure such as highspeed internet.
• Higher taxation of non-resident digital service providers following the introduction of the Significant Economic Presence (SEP) Tax.
• With the implementation of the Minimum Top up Tax, the effectiveness of traditional tax incentives such as tax holidays in attracting MNE investments in Kenya will be reduced. This will shift investors’ focus to other non-tax factors demonstrating the productive capacity of Kenya’s economy such as governance, geography or infrastructure.
• Expiry of the African Growth and Opportunity Act (AGOA) in September 2025. The Act provides for duty-free and quota-free access to the US Market. The looming expiration of AGOA is a cause for uncertainty especially for Kenya’s textile and apparel industry which is heavily reliant on opportunities afforded by the Act.
• Increased operational efficiency and legal certainty in the establishment and the set-up of Special Economic Zones following the enactment of the Business Laws (Amendment) Act 2024 which introduced several reforms
  to the SEZ Act.

1. Kenya Digital Economy Acceleration Project In 2024, the Kenya Digital Economy Acceleration Project (KDEAP), a $390 million World Bank program started operations. The project aims to support the development of the digital economy, a key pillar in Kenya’s economic growth. The project is to be carried out in three phases:
   (a) Digital Infrastructure and Services-aimed at increasing high-speed internet for individuals, industry, and government, to support the growth of the digital economy and strengthen Kenya’s role as regional digital leader.
   (b) Digital Government and Services- focused on investing in foundational digital services, platforms, architectures, and policies needed to transform government communications and internal operations
   (c) Digital Skills and Markets-aimed at equipping young Kenyans with digital skills and strengthen their abilities to access and compete in domestic and regional markets through skills development.

Key Implications

• Funding from KDEAP will in 2025 accelerate e-commerce in Kenya through the establishment of supporting infrastructure such as high-speed internet. The project will also boost cross-border digital services and position Kenya as a regional digital hub.

2) Changes in the Tax Laws (Amendments) Act 2024 affecting Digital Trade

On 11 December 2024, the Tax Laws (Amendment) (TLA) Act was enacted, bringing into play substantial changes to Kenyan tax laws in response to challenges arising from increased digitalization and globalization of the global economy. This will impact digital trade in Kenya in 2025.

A. Repeal of digital service tax (DST) and introduction of Significant Economic Presence (SEP) Tax

The TLA Act repealed the provision in the Income Tax Act on Digital Service Tax (DST)and introduced a new tax to be known as the Significant Economic Presence (SEP) Tax. The SEP tax is applicable to non-resident persons who offer services to users in Kenya through a digital marketplace. It is chargeable at the rate of 30% of the deemed taxable profit which is calculated at the rate of 10% of the gross turnover. This translates to an effective tax rate of 3% of the gross turnover which is higher than DST which was charged at the rate of 1.5% of the gross turnover.

SEP Tax is payable by service providers on or before the 20th day of the month following the end of the month in which the service was offered. Worth noting however is that SEP tax is not applicable to:

• non-resident persons offering services through a permanent establishment,
• non-resident persons carrying on the business of transmitting messages by cable, radio, optical fibre, television broadcasting, internet, satellite, or other similar methods of communication
• income subject to withholding tax;
• non-resident persons providing digital services to an airline in which the Government of Kenya has at least forty-five per cent (45%) shareholding
• non-resident persons with an annual turnover of less than KES 5 million

Key Implications

• The SEP tax substantially increases the tax burden of non-residents providing digital services to users in Kenya as it is two times higher than the DST.

B. Minimum Top-up tax for Multinationals

The TLA Act also introduced a minimum top-up tax for multinational companies where the effective tax rate of such companies is less than 15% in a given year of income. Entities targeted by the tax are those that are resident or have a permanent establishment in Kenya and are a member of a multinational group that has an annual turnover of 750 million euros or more in the consolidated financial statements of the ultimate parent entity in at least two of the four years of income immediately preceding the tested year of income.

The amount of payable = (15% of net income/loss-effective tax rate) * excess profit for the year of income
Certain entities are however exempt from this tax including
public entities not engaged in business, pension funds, non-operating investment holding companies, sovereign wealth
funds among others.

Key Implications

• The Minimum Top-Up Tax represents Kenya’s alignment with OECD’s Pillar Two framework (Global Anti-Base Erosion Rules) designed to prevent large multinational companies from shifting profits to low-tax jurisdictions and instead ensuring that they pay a minimum level of tax in the jurisdictions where they operate.
• The Minimum Top-Up Tax will reduce the effectiveness of traditional tax incentives such as tax holidays in attracting large multinational companies to Kenya. This will shift the focus to other factors demonstrating the productive capacity of Kenya’s economy. If Kenya is unable to compete with other countries on the basis of non-tax factors such as governance, geography or infrastructure, investment activity in the country may be dampened.

3) AGOA Set to Expire In 2025: What Next For US-Kenya Trade Relations?

The United States of America (US) is a top destination for Kenyan exports. This has been made possible by the preferential trade benefits enjoyed by Kenya under the African Growth and Opportunity Act (AGOA) such as duty-free access to the US market for certain goods. It is estimated that around 60% of Kenya’s exports to the US is attributable to AGOA with textiles and apparels accounting for majority of the exported goods.

AGOA is set to expire in September 2025. There were proposals presented before the US Congress to extend it, for instance the AGOA Extension and Enhancement Act, 2024 which proposed extension by 12 years to September 2037. As of January 2025, the US Congress is yet to approve any extension. Suffice to say, the expiration of AGOA will have detrimental far-reaching implications to Kenya’s economy. So, what does the future look like for trade relations between these two countries?

Key Implications

• Trade talks between Kenya and the US is likely to take center stage in the coming days. As shown by past events, these negotiations are significantly driven by the trade policy and preference of the US administration of the day. Under President Biden, the US negotiated for high standard commitments under a US – Kenya Strategic Trade and Investment Partnership launched on 14th July 2022, which is a framework that does not have definitive market access terms and fails to deal with tariff barriers to trade. This was a departure from the approach adopted under President Trump’s first term which negotiated for the conclusion of a bilateral Free Trade Agreement addressing both tariff and non- tariff barriers to trade. The revival of negotiations of a Free Trade Agreement between Kenya and US though still unclear is quite probable.
• The US is increasingly prioritizing social issues such as anti-corruption, forced labour, inclusivity and other human rights violations. These issues are bound to feature prominently in future trade negotiations with
  Kenya. It is likely that this will trigger a number of regulatory reforms in the country, such as changes in the public procurement process to seal corruption loopholes, to ensure compliance.
• Export Processing Zones (EPZs) greatly benefits from AGOA especially those in the textiles and apparel sector which enjoy duty free access to the US Market. Among the beneficiaries of AGOA, Kenya is the second largest exporter of textile products to the U.S. The looming expiration of AGOA is causing uncertainty. US apparel buyers and fashion companies are reluctant to commit to long term investments in the country such as building textile manufacturing facilities and are looking to other countries for sourcing. This is likely to drastically affect the level of Kenya’s exports and have widespread ripple effects in an industry which is responsible for employment of a significant number of Kenyans.

4) Reforms under the Business Laws (Amendment) Act 2024 affecting SEZs

The Business Laws (Amendment) Act 2024 introduced several reforms to the Special Economic Zones Act. These include:

a) Allowing public entities to be eligible for licensing as SEZ developers or operators. Previously application for SEZ developer/operator licence was a reserve of companies incorporated in Kenya. This is a welcomed move as it
allows state agencies, corporations and ministries to set up special economic zones.
b) Providing certainty of the period of enjoyment of tax benefits granted to SEZ enterprises/operators. This period is capped at ten years from the date of issuance
of the licence.
c) Introduction of SEZ business service permits for firms wanting to provide services to SEZ developers/operators and enterprises.
d) Expansion of the Special Economic Zones Authority’s mandate to include: determination of the investment threshold and value; establishment of a ‘one-stop shop’ for SEZ enterprises to apply for their permits.
e) Clarification that goods sold and remain within an SEZ still enjoy the benefits conferred under the SEZ Act.
f) Permitting the lease, sub-lease or sale of land or buildings to in SEZs to SEZ business service permit holders?

Key Implications

• The reforms are welcome as they have the potential of increasing operational efficiency (i.e. through the establishment of a one stop shop for permits) and provide legal certainty on a number of issues (such as the treatment of goods traded between SEZ enterprises). This is likely to spur investments. Nonetheless, there is still much to do to unlock the benefits promised by SEZs. This includes development of infrastructure within and outside the SEZ. Another issue is political interference in the management of the SEZs. Last year, senior officials of Kiambu County government were accused of extortion and hindering development plans by Tatu City Management.

Disclaimer:

The information provided in this article is intended for informational purposes only and should not be construed as legal advice. Don’t hesitate to get in touch with us at info@koassociates.co.ke for any queries or legal advice.