The President assented to the Finance Act 2019 (the Finance Act) on 7 November 2019. This followed failure on the part of Parliament to raise the required quorum to vote on the President's recommendation to repeal the interest rate cap law.
A majority of the measures introduced under the Finance Act entered into force upon presidential assent whilst other measures will enter into force on 1 January 2020. These new tax measures have continued the government's recent policy of maximising tax revenue by increasing the applicable tax rates as well as expanding the tax base and compliance and enforcement mechanisms.
At the time of the publication of the Finance Bill 2019, a number of the measures proposed to be introduced were met with opposition from stakeholders and the general public, largely due to lack of clarity and the impact of the provisions on the ease of doing business in Kenya. A number of these measures have been dropped in the Finance Act including the proposed increase of the capital gains tax (CGT) rate from 5% to 12.5% and the proposed expansion of the scope of payments for services subject to withholding tax.
However, there are certain provisions in respect of which the mechanism for implementation is not clear, such as the taxation of income accruing through a digital marketplace, in respect of which, the effective date has been left in limbo pending the publication of regulations by the Cabinet Secretary for Treasury (the CS Treasury) (despite the provisions having entered into force upon assent to the Finance Act by the President). This and other such issues are analysed in detail below.
Retention of the CGT rate at 5% and introduction of CGT exemption on group restructurings
The proposal in the Finance Bill 2019 to increase the CGT rate from the current rate of 5% to 12.5% has been scrapped. The exemption from CGT on transfers of property where the transfer is (a) a legal or regulatory requirement, (b) a result of a directive or compulsory acquisition by the government, (c) a case of a group reorganisation and restructuring where there is no third party involved or (d) in the public interest and approved by the CS Treasury, has been retained.
This is a commendable measure and will create an enabling environment to carry out group reorganisations in a financially stable way. It also synchronises the position in Kenya with that of many global jurisdictions. However, it remains to be seen how the restructuring exemptions shall be implemented alongside the KRA's recent policy of reviewing all transactions where CGT exemptions have been claimed on iTax. It is not entirely clear whether an internal restructuring would extend to non-resident companies that are not third parties although the current drafting does not appear to preclude it. Effective 7 November 2019
Taxation of income accruing through a digital marketplace
The Finance Act provides that income accruing through a digital marketplace is subject to income tax and captures goods and services supplied in the digital marketplace as part of the taxable supplies for VAT purposes. A digital marketplace has been defined as 'a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means'.
Whilst the Finance Act indicates that this measure, entered into force on 7 November 2019, it also states that the CS Treasury shall make regulations to provide for the mechanisms of implementing this provision.
It is also not clear when these regulations shall be published by the CS Treasury. However, it would be preferable to stakeholders in this sector that the regulations clearly set out the income subject to tax, the applicable rates of tax to be applied (especially in the case of non-resident persons without a permanent establishment in Kenya) and the party responsible for accounting for the taxes. The regulations should also align with the broader government policy on the digital economy, international best practice (including measures proposed under the OECD Base Erosion Profit Shifting (BEPS) framework) and data confidentiality laws to ensure a smooth implementation. Effective 7 November 2019 or when the CS Treasury issues guidance.
Tax treatment of dividends distributed out of untaxed gains or profits
The Finance Act amends the Income Tax Act to clarify that any untaxed income classified as exempt under the Income Tax Act would not trigger corporate tax in the event that it is distributed to shareholders.
This measure removes previous ambiguity around the tax treatment of distributions by Kenyan companies to Kenyan parent/holding companies of income that had not been subject to tax in the hands of the Kenyan subsidiary distributing the income by reason of exemptions provided for in law.
It is unclear, however, if the amendment seeks to cover situations where no tax is paid, yet distributions are made as a result of investment deductions that have been granted. This was also a concern under the previous compensating tax regime which was replaced last year. Effective 7 November 2019
Tax incentives for the housing sector
The Finance Act provides the following tax incentives in respect of the National Housing Development Fund (the NHDF). The NHDF is a fund set up to receive contributions from employers and employees for the development of affordable housing in Kenya in line with the Government's Big Four agenda on housing.
- exemption from thin capitalisation and deemed interest provisions for companies implementing a project under the affordable housing scheme upon recommendation of the Cabinet Secretary responsible for Housing (the CS Housing); Effective 1 January 2020
- exemption from income tax on the income of the NHDF. The proposal to levy a charge on employers and employees is the subject of a court case and is yet to come into force; Effective 1 January 2020
- exemption from income tax on amounts withdrawn from the NHDF to purchase a house by a contributor who is a first-time home-owner; Effective 1 January 2020
- VAT exemption on goods imported or purchased locally for direct and exclusive use in construction of houses under an affordable housing scheme approved by the CS Treasury on the recommendation of the CS Housing; Effective 7 November 2019
- reduction of Import Declaration Fees (IDF) and retention of Railway Development Levy (RDL) at 1.5% in respect of goods required for the construction of houses under an affordable housing scheme approved by the CS Treasury on the recommendation of the CS Housing; and Effective 7 November 2019
- stamp duty exemption on the transfer of a house constructed under an affordable housing scheme from the developer to the National Housing Corporation. Effective 7 November 2019
The above measures will ensure that the income earned by the fund (designed to support the President's Big Four Agenda item on affordable housing) is not consumed by taxes but goes to the affordable housing schemes. Given that it is anticipated that the private sector will be financing these projects, this is seen as an incentive for them to proceed with projects.
Repeal of interest rate caps
The Finance Act has removed the caps on interest charged on loans. However, agreements or arrangements to borrow or lend entered into or varied whilst the interest rate capping laws were in force shall remain in force at the same terms (including with respect to interest rates) for the duration of the agreement or arrangements, except with respect to downward variation of the applicable interest rates.
This is aimed at encouraging the banks to provide credit to small and medium Enterprises (SMEs). The interest rate caps saw a significant reduction in lending to the private sector and in particular the small and medium size enterprises. At the same time, the government's propensity to borrow in the domestic market as tax revenues did not meet targets meant a further squeeze for the private sector. This lack of available credit has had a marked impact on the underlying economy in Kenya. The removal of interest rate caps is going to help, but it may put pressure on government domestic borrowing as financial institutions start offering credit to businesses. It remains to be seen what, if any, effect there will be on the credit market. Effective 7 November 2019
Tax amnesty for companies which intend to list on the growth segment of a securities exchange in Kenya
Companies which intend to list on the growth segment of any securities exchange in Kenya will receive an amnesty in respect of penalties and interest on taxes where the company makes a full disclosure of its income and assets for the two years preceding the listing, provided that the company pays principal tax in full.
The amnesty does not apply to persons who (a) have been assessed in respect of the tax or any matter relating to the tax disclosed, or (b) are under audit or investigation in respect of undisclosed income or any matter relating to undisclosed income, or (c) subsequently delist before the expiry of five years from the day of listing. Effective 7 November 2019
Further incentives for REITs and interest income from securities used to raise funds for infrastructure, projects and assets and social services
With a view of boosting the uptake of investment in REITs in the market, the Finance Act exempts an investee company of a REIT registered by the Commissioner of Domestic Taxes (the Commissioner) from income tax; except for the payment of withholding tax on interest income and dividends as a resident person to the extent that its unit holders or shareholders are not exempt persons. Effective 7 November 2019
The Finance Act also exempts from income tax interest income accruing from listed bonds, notes or other similar securities used to raise funds for infrastructure, projects and assets defined under Green Bond Standards and Guidelines, and other social services. Effective 1 January 2020
Incentives for environmentally friendly businesses
In order to complement the law banning plastic bags in Kenya and reinforce the move toward environmentally conscious fiscal frameworks and business practice, the Finance Act provides that companies operating a plastics recycling plant will be subject to15% corporate tax for the first five years of operation. Effective 1 January 2020
Plant and machinery for a plastics recycling plant are also exempt from VAT, although exemption was already available for plant and machinery included in Chapters 84 and 85 of the common external Tariff, making this amendment somewhat superfluous. Effective 7 November 2019
Tax exemptions for youth in technology training
The Finance Act further exempts income accrued in, derived from or received in Kenya in respect of an individual who is registered under the Ajira Digital Programme (Ajira) for three years from 1 January 2020 from tax, subject to that individual paying a registration fee of KES 10,000 per annum and the CS Treasury and Cabinet Secretary for ICT publishing regulations for the implementation of this measure.
Ajira is an initiative by the Ministry of Public Service, Youth and Gender Affairs, together with other ministries, which aims to introduce young people to online digital work, thus assisting the youth to earn an income and develop skills in demand in the market. Effective 1 January 2020
Withholding tax on reinsurance premiums
The Finance Act introduces withholding tax at the rate of 5% on re-insurance premiums paid to non-resident insurers without a permanent establishment in Kenya, but excludes payments for aircraft reinsurance. While insurance premiums paid to non-resident insurers are already subject to withholding tax, there was some confusion as to whether this covered reinsurance premiums paid to non-resident insurers. The proposal is aimed at providing clarity on this matter.
This amendment may have the effect of increasing reinsurance premiums payable. Effective 7 November 2019
Scrapping of the proposed expansion of the scope of payments for services subject to withholding tax
The proposal in the Finance Bill 2019 to expand the categories of payments subject to withholding tax by introducing withholding tax on security services, cleaning and fumigation services, catering services offered outside hotel premises, transportation of goods (excluding air transport services), sales promotion, and marketing and advertising services has been scrapped. Whilst this is a welcome move, taxpayers will hope that the scrapping of these proposed measures will also be followed by an alignment with KRA internal policy; in the past, the KRA has sought to subject payment of the above services to withholding tax under the existing provisions of the Income Tax Act. It is likely that KRA will pursue this course which may well result in more arguments going forward.
VAT on imported services
The Finance Act alters the definition of imported services by deleting the words 'a person who is registered' and replacing it with 'any person'. The VAT Act, when first enacted, did contain a similar provision which was subsequently abolished and now reintroduced. The effect of the amendment is that any person shall be liable to pay import VAT on the importation of taxable services to Kenya whether or not they are registered for VAT. In the past, only registered persons who make exempt supplies are required to account for and pay import VAT.
However, the amendment is ambiguous as it is unclear whether it is also intended to capture persons whose taxable supplies fall below the VAT registration threshold of KES 5,000,000. This will generally increase the cost to business. It also does not address the issue of whether an individual would need to account for the tax, which in practice is likely to be difficult to enforce and indeed is not currently. Effective 7 November 2019
Presumptive tax and reintroduction of turnover tax
The Finance Act reintroduces turnover tax, which was repealed last year and replaced with a presumptive tax. The measure imposes turnover tax as the primary method of taxation for businesses with a turnover of KES 5,000,000 or less at the rate of 3% of the gross receipts of a business. However, the Finance Act does not do away with presumptive tax entirely; business owners will still be required to pay presumptive tax at 15% of the amount payable for a business permit or trading licence. The presumptive tax payable will be offset against the turnover tax payable.
As an alternative to business owners eligible for turnover tax, the proposal includes an option to elect out of the turnover tax regime, in which event, the taxpayer will be taxed under the other relevant provisions of the Income Tax Act. This would basically imply taxation on a net taxable income basis.
This provision will, however, not apply to rental income, management or professional or training fees, incorporated companies or to businesses with such a turnover which are subject to a final withholding tax.
It remains to be seen whether the reintroduction of turnover tax running contemporaneously with presumptive tax will lead to the collection of more taxes and, consequently, an expansion of the tax base. Effective 1 January 2020
Adjustments to excise duty rates on motor vehicles
Excise duty on importation of motor vehicles has been adjusted as follows:
Proposed rate of excise duty
Motor vehicles of tariff heading 87.02, 87.03 and 87.04 excluding –
i) Locally assembled motor vehicles;
ii) School buses for use by public schools;
iii) Motor vehicles of tariff no. 8703.24.90 and 8703.33.90; and
iv) Imported motor vehicles of cylinder capacity exceeding 1500 cc.
Imported motor vehicles exceeding 1500cc of tariff heading 87.02, 87.03 and 87.04
Motor vehicle of tariff no. 8703.24.90 and 8703.33.90
100% electric powered motor vehicles of tariff no. 8702.40.11, 8702.40.19, 8702.40.21, 8702.40.22, 8702.40.29 , 8702.40.91, 8702.40.99 and 8703.80.00
This will increase the cost of importing vehicles into Kenya, especially vehicles whose engine capacity exceeds 1500 cc. Further, the increase in duty is meant to discourage the importation of used vehicles in favour of locally manufactured vehicles. Companies that assemble vehicles locally already benefit from a reduced corporation tax rate of 15%.
In order to encourage the uptake of environmentally friendly cars, the excise duty on 100% electric powered cars has been reduced to 10%. Effective 7 November 2019
Other measures introduced under the Finance Act 2019
- Income Tax on the income of non-resident ship owners – The Finance Act amends the Income Tax Act to provide that all income of a non-resident shipping line (including income from demurrage ) shall be taxed under section 9 of the Income Tax Act (Shipping Tax which applies at the rate of 2.5%). Effective 7 November 2019
- Specialized equipment for the development and generation of solar and wind energy – The Finance Act alters the exemption provided for specialised equipment for the development and generation of solar and wind energy. The exemption will only be granted where the Cabinet Secretary in charge of Energy recommends the equipment for exemption. Effective 7 November 2019
- Variation of IDF rates on the importation of goods – IDF on finished goods has been increased from 2% to 3.5% and has been reduced from 2% to 1.5% on raw materials and intermediate goods imported by approved manufacturers. This is seen as a bid to encourage manufacturing in Kenya which is one of the Big Four Agenda. Effective 7 November 2019
- Increase of RDL on the importation of finished goods – RDL for finished products has been increased from 1.5% to 2% and RDL on raw materials and intermediate goods imported by approved manufacturers has been retained at 1.5%. This is seen as a bid to encourage manufacturing in Kenya. Effective 7 November 2019
- Reduction of the withholding VAT rate – the withholding VAT rate has been reduced from 6% to 2% of an amount subject to VAT, provided that withholding VAT shall not apply to the taxable value of zero-rated supplies. This is a welcome move as the withholding VAT regime has had a major impact on cash flows for business. The rationale behind this regime continues to be elusive given that, if the intention was to widen the tax net, it should not have been applied to taxpayers who are registered for VAT and by definition in the tax net. Effective 7 November 2019
- Tractors – The Finance Act qualifies the exemption of tractors in paragraph 47 of the First Schedule to the VAT Act by adding the words 'other than road tractors for semitrailers'. The purpose of the amendment is to clarify that the tractors which qualify for VAT exemption exclude road tractors to avoid confusion over the word 'tractor' as it is defined in the EAC Common External Tariff to include road tractors. Effective 7 November 2019
- New VAT exemptions – The
Finance Act introduces VAT exemptions on the following:
- locally manufactured motherboards and inputs for the manufacture of motherboards approved by the Cabinet Secretary responsible for information communication technology;
- musical instruments and other musical equipment, imported or purchased locally, for exclusive use by educational institutions, upon recommendation by the Cabinet Secretary responsible for Education; and
- the supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than 10% in weight. These items were previously zero rated. The overall effect of exempting items from VAT is that they become more expensive as the input VAT incurred in making these taxable supplies is not recoverable and thus passed on to the consumer. As such, it is questionable if the exemption of these items will benefit the end users. The amendments in respect of basic food products seems to counter the Big Four Agenda item on food security. Effective 7 November 2019
- New Zero-rated items for VAT purposes – The Finance Act has zero-rated the supply of agricultural pest control products as well as the supply of propane. Effective 7 November 2019
- Introduction of excise duty on gambling – The Finance Act has introduced excise duty on amounts staked by gamblers for the purposes of the Betting, Lotteries and Gaming Act. The excise duty shall be 20% of the amount staked (which is an increase from the 10% proposed in the Finance Bill 2019). Effective 7 November 2019
- Official aid-funded projects – The Finance Act has inserted definitions of 'concessional loan' in the Excise Duty Act, the VAT Act and the Miscellaneous Fees and Levies Act and 'official aid-funded project' in the Excise Duty Act in order to clarify the meaning of the word concession for the purposes of an official aid-funded project. A concessional loan has been defined as 'a loan with at least 25% percent grant element' whilst an official aid-funded project has been defined as a 'project funded by means of grant or concessional loan in accordance with an agreement between the Government and any foreign government agency, institution, foundation, organisation or any other aid funded agency'. Goods and services purchased under official aid-funded projects are exempt from VAT and excise duty. Goods and services purchased under official aid-funded projects are exempt from Import Declaration Fees (IDF) and the Railway Development Levy (RDL). Effective 7 November 2019
- General penalty – The Finance Act introduces a general penalty for offences in the Excise Duty Act for which no penalty is provided. This will take the form of a fine not exceeding KES 2,000,000 or imprisonment for a term not exceeding two years, or both. Effective 7 November 2019
- Increase in excise duty rates for cigarettes, wines and spirits – The purpose of this proposed amendment is to boost excise revenues, which the Cabinet Secretary for Treasury noted have deteriorated over time, reducing from 3% of government revenues in 2003/04 to 2% in 2017/18. It is, of course, possible that the reduction arises from lower consumption as disposable income drops. Effective 7 November 2019
- Adjustment day for excise duty – The Finance Act amends the adjustment day for excise duty from 1 July to 1 October. The adjustment day is the day that the excise duty rates are adjusted for inflation, which happens annually. The purpose of the proposed amendment is to align the adjustment day with the day the Finance Act generally comes into force. Effective 7 November 2019
- Clarification on applicability of excise duty on fees charged by insurance companies – The Finance Act has amended the Excise Duty Act to clarify that "fees or commissions earned in respect of a loan or any share of profit or an insurance premium or premium based or related commissions specified in the Insurance Act or regulations made thereunder" are exempt from excise duty. There has been much controversy in this area and the change is welcome. Effective 7 November 2019
- Power of Commissioner to exempt certain person from the requirement to have PINs – the Commissioner now has the power to exempt certain persons or class of persons from the requirement to have a PIN. Effective 7 November 2019
- Recovery of taxes for failure to deduct or withhold – The Commissioner is now empowered to assess withholding tax on a person who has an obligation to withhold or deduct tax but has neglected to do so. Effective 7 November 2019
- Issuance of the Departure Prohibition Order to tax representatives – The Commissioner may now issue a Departure Prohibition Order to tax representatives. Previously, an order could only be applied to the taxpayer. Effective 7 November 2019
- Issuance of an objection decision – The Commissioner is now required to make an objection decision within 60 days from the date of receipt of the notice of objection or 'any further information the Commissioner may require from the taxpayer', failure to which the objection shall be allowed. The law previously allowed the Commissioner 60 days from submission of the objection in which to make his decision. The amendment can effectively extend this time if further documentation is requested. Effective 7 November 2019
- Reduction of the severity of late submission penalties – Taxpayers are now allowed to pay late submission penalties computed on amounts due less the amounts already paid and withholding tax credits. Effective 7 November 2019
- Reduced severity of the tax shortfall penalties – The tax shortfall penalty has been limited to instances where the taxpayer intentionally makes a false statement. Effective 7 November 2019
- Transactions that require PIN certificates – a PIN is now required for registering and renewing membership with a professional body and other licensing agencies as well as registering mobile cellular pay bill and till numbers with telecommunication operators. Effective 7 November 2019
- Refund of anti-adulteration levy – The levy shall be refunded upon application by an importer of illuminating kerosene who is a licensed or registered manufacturer and subsequently uses illuminating kerosene to manufacture paint, resin or shoe polish. Effective 7 November 2019
- The Privileges and Immunities Act: Goods and services imported or locally purchased by privileged organisations for their official use are exempt from taxes. Effective 7 November 2019
- The Capital Markets Act: Financial penalties imposed by the Capital Markets Authority (CMA) are now considered as civil debts, with the CMA mandated to recover them in line with provisions for the recovery of decretal sums. The amendment is intended to enhance the enforcement and recovery of financial penalties imposed by the CMA. Effective 7 November 2019
- The Retirements Benefits Act: The benefits and other accrued income of members of retirement benefits schemes who cannot be traced and that were rendered redundant with the enactment of the Unclaimed Financial Assets Act, 2011 have been activated. The amendment also provides a one-year time limit in which approved issuers shall transfer scheme funds in guaranteed funds to protect the interests of members by reducing the exposure to low returns over an extended transfer period. Effective 7 November 2019
- The Employment Act: The Finance Act introduces the definition of "basic salary' to guide employers on the base amount for computing the levy payable to the NHDF. The amendment also deletes the definition of 'employee's earnings', which is not used in the Employment Act. Effective 7 November 2019
- The Accountants Act: The Finance Act removes the requirement for students to register with the Institute of Certified Public Accountants of Kenya (ICPAK) before qualifying as accountants. Effective 7 November 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.