This Suggested Approach to Drafting SEP Legislation aims to address the shortcomings of existing tax nexus rules by introducing the concept of a significant economic presence. This concept is premised on revenue derived by an MNE from predefined in-scope transactions and materiality thresholds, to ensure that the economic presence is truly ‘significant’.

RF Report

The African Tax Administration Forum (ATAF) has published its Suggested Approach to Drafting Significant Economic Presence Legislation, which was made publicly available on 1 November 2025.

Suggested Approach to Drafting Significant Economic Presence Legislation

Introduction

The need to address the tax challenges arising from the digitalisation of the economy continues to be critical, especially among developing countries. ATAF has explored these challenges in-depth in various publications, including the ‘ATAF Suggested Approach to Drafting Digital Services Tax Legislation’ and the ‘ATAF Policy Brief on Taxing Digital Firms in Africa’. We now advance the work on addressing these challenges through this Suggested Approach to Drafting Significant Economic Presence (SEP) Legislation.

Multinational enterprises (MNEs) that provide digital services carry on business in African countries with no or very limited physical presence in those countries. Under the current international tax rules, taxing rights are only allocated to a country where a non-resident enterprise creates sufficient physical presence (referred to as a tax nexus). As a result, the risk of tax base erosion and negative spillovers—including loss of revenue and an un-level playing field—persists and is significant.

This Suggested Approach to Drafting SEP Legislation aims to address the shortcomings of existing tax nexus rules by introducing the concept of a significant economic presence. This concept is premised on revenue derived by an MNE from predefined in-scope transactions and materiality thresholds, to ensure that the economic presence is truly ‘significant’.

SEP legislation serves as an alternative to a Digital Services Tax (DST). Generally, both SEP legislation and DST aim to tax non-residents that provide digitally enabled services and activities to customers and users in a country without having a physical presence (i.e., economic activity that is market-based). While both SEP legislation and DST share design features—such as relying on revenue levels to establish nexus, having similar scope of targeted digital services, and using similar rules to determine the location of users—there are key differences:

  • DST imposes tax on gross revenue, whereas SEP charges tax on the profit or deemed profit of a non-resident.
  • SEP is usually designed as an income tax provision, falling within the scope of Double Taxation Agreements (DTAs). DST may be designed within or outside the scope of income tax law, and therefore may not be subject to DTAs.

ATAF members may wish to consider SEP instead of DST because of the position taken with respect to DSTs in the Pillar 1 Amount A Multilateral Convention (MLC) text.

The Amount A MLC text, released in October 2023 (though not yet agreed by the Inclusive Framework), states that: “upon adoption and ratification of the Amount A MLC, a country must repeal any DSTs and relevant similar measures.” The MLC further defines a ‘DST and relevant similar measure’ under Article 39 as legislation meeting three cumulative conditions:

  1. The legislation is market-based.
  2. It is ring-fenced to non-resident persons only.
  3. It is not subject to existing tax treaties.

This Suggested Approach embodies SEP legislation as part of income tax law. In light of the Amount A MLC text, this means that a country can impose an income tax on a non-resident based on market-based criteria, the law is ring-fenced to non-residents, and it is subject to existing tax treaties in force in that country. Therefore, under Article 39 of the Amount A MLC, this SEP legislation is not within the scope of a ‘DST and relevant similar measure’.

This approach is suitable for countries that prefer to align their tax measures with the outcomes of the Amount A MLC provisions. If a country signs and ratifies the Amount A MLC, it will be required to “switch off” its SEP rules for MNEs in scope of Amount A from the date Amount A comes into effect in that country.

The key provisions of this Suggested Approach include:

  • The taxable person that the legislation seeks to bring into the tax net.
  • What it means to have a SEP in a country, including the use of materiality thresholds in defining a SEP.
  • The digital services revenue in scope of a SEP.
  • The rules for attributing revenues to a SEP.
  • The mode of determining the taxable profits of a SEP using a deemed profits amount based on those attributed revenues.

The registration and filing requirements of taxable persons under a SEP.
All of the above design elements have been drafted in the rules below and further explained in the Explanatory Notes.