Why SEP Is Winning the “Tax War” in Africa Over the OECD’s Pillar One

Africa’s approach to taxing the digital economy is undergoing a decisive shift. While the OECD’s Pillar One was designed as a global solution to address the tax challenges arising from digitalisation, many African countries are increasingly turning to Significant Economic Presence (SEP) as a more effective and workable alternative. From a policy, revenue, and compliance perspective, SEP is steadily outperforming Pillar One in Africa’s digital tax landscape.

The Core Problem: Taxing Value Without Physical Presence

Digital business models have fundamentally disrupted traditional international tax concepts. Platforms can generate substantial revenues from African users without any physical footprint, leaving market jurisdictions with limited taxing rights under conventional permanent establishment rules. African tax authorities have responded through a mix of digital service taxes (DSTs), expanded VAT on electronic services, and participation in global reform initiatives such as the OECD’s Inclusive Framework.

However, dissatisfaction with the pace, scope, and expected revenue impact of Pillar One has pushed many African policymakers to favour domestic solutions that deliver immediate and measurable results. SEP has emerged as the most compelling of these solutions.

Why Pillar One Falls Short for African Market Jurisdictions

Pillar One seeks to reallocate a portion of the residual profits of the world’s largest multinational enterprises to market jurisdictions. In practice, its relevance to Africa is limited for several reasons.

Pillar One applies only to a very narrow group of multinational enterprises, namely those with global revenues exceeding €20 billion and profitability above 10%. Many digital businesses operating extensively across African markets fall outside this threshold and would therefore remain untaxed under Pillar One.

The amount of profit reallocated to market jurisdictions is modest. Only 25% of residual profit is redistributed, which significantly limits the revenue upside for countries with large user bases but relatively low reported profits attributable to their markets.

Pillar One requires complex multilateral implementation, including treaty changes, coordinated dispute resolution mechanisms, and the removal of unilateral digital taxes. For many African tax administrations, this introduces administrative burdens without commensurate revenue gains.

Sectors crucial to many African economies, such as the extractive (natural resources) and regulated financial services industries, are largely excluded from the scope of Amount A, further limiting potential revenue gains for these nations.

The mandatory and binding nature of the proposed dispute resolution mechanisms also raises concerns for developing countries, which may not have the capacity to effectively participate in lengthy and complex international dispute resolution processes.

From an African perspective, Pillar One is often viewed as a delayed and diluted compromise, shaped largely by the interests of capital-exporting jurisdictions.

SEP as a Practical and Sovereign Alternative

Significant Economic Presence directly addresses the digital nexus problem by decoupling taxing rights from physical presence. Under SEP regimes, a non-resident enterprise can be deemed taxable where it derives substantial economic value from users or customers in a jurisdiction, even if it has no local establishment.

Crucially, SEP is implemented through domestic legislation, allowing countries to tailor thresholds, scope, and enforcement mechanisms to local conditions. This flexibility has proven attractive to African governments seeking to protect their tax bases without waiting for global consensus.

Unlike Pillar One, SEP does not require countries to relinquish unilateral taxing rights or dismantle existing digital tax measures. Instead, it integrates digital activity into mainstream corporate income tax systems, offering a structurally durable solution.

How SEP Is Playing Out Across African Jurisdictions

Africa’s experience with SEP is uneven but instructive.

Kenya currently offers the clearest example of SEP in practice. In 2024, Kenya replaced its Digital Service Tax with a Significant Economic Presence tax embedded within the corporate income tax framework. Non-resident digital service providers are deemed to have a taxable presence where users are located in Kenya, regardless of physical presence. Tax is applied through a deemed profit mechanism, resulting in an effective tax burden similar to the former DST, but with an important distinction: SEP now creates a corporate income tax nexus, not merely a turnover levy. 

Nigeria adopted SEP earlier and uses it as a profit-based nexus rule. Once specified revenue thresholds are exceeded, non-resident digital and technical service providers are subject to Nigerian corporate income tax. Nigeria’s model does not rely on a gross-based digital tax, but instead brings qualifying non-resident businesses directly into the income tax net. This approach increases technical complexity, particularly around profit attribution, but aligns digital taxation with established corporate tax principles.

Beyond Kenya and Nigeria, most African countries continue to rely on DSTs or withholding taxes. Jurisdictions such as Tanzania, Uganda, Zimbabwe, Tunisia, and Sierra Leone impose gross-based levies or withholding mechanisms on payments to non-resident digital service providers. These regimes are simpler to administer and generate immediate revenue, but they do not resolve the underlying nexus challenge and remain conceptually detached from income tax systems.

The contrast is telling. DSTs dominate where speed and administrative simplicity are prioritised, but SEP is emerging where policymakers seek long-term structural solutions that integrate digital activity into the corporate tax base.

Why SEP Is “Winning” Over Pillar One

From an African policy and compliance standpoint, SEP is winning the tax debate for the following key reasons.

• Broader coverage. SEP captures a much wider range of digital businesses than Pillar One, including firms that generate meaningful African revenues but fall below global revenue thresholds.

• Faster revenue realisation. SEP regimes can be enacted and enforced domestically, delivering tangible revenue outcomes without waiting for global ratification processes.

• Administrative control and sovereignty. African tax authorities retain full control over design, enforcement, and future adjustments, rather than relying on externally negotiated rules.

• Alignment with digital VAT regimes. SEP complements existing VAT on electronic services by addressing the income tax dimension of digital activity. Together, VAT and SEP form a more comprehensive response to digitalisation than Pillar One currently offers.

Implications for VAT and Digital Tax Compliance

The rise of SEP reinforces a critical message that digital tax compliance in Africa is no longer limited to VAT registration and collection. In SEP jurisdictions, non-resident digital businesses must now assess:

• Corporate income tax nexus risks

• Deemed profit or profit attribution methodologies

• Ongoing filing and payment obligations

• Interaction between SEP liabilities and digital VAT compliance

Even in non-SEP jurisdictions, DSTs and withholding taxes remain exposed to future reform. As administrative capacity improves and dissatisfaction with gross-based taxes grows, SEP-style rules are likely to expand across the continent.

Conclusion

While Pillar One represents an important global attempt to modernise international tax rules, its limited scope, slow implementation, and modest revenue outcomes have reduced its appeal in Africa. In contrast, Significant Economic Presence has emerged as a pragmatic, sovereign, and revenue-effective response to the challenges of digitalisation.

SEP is not merely an interim fix since it is increasingly shaping the future of digital taxation on the continent. As long as Pillar One remains constrained, SEP will continue to win Africa’s digital tax “war”.

Sources: Digital Policy Alert, OECD, EY