21 May 2024 Kenya proposes tax changes under the Finance Bill, 2024
The Chairperson of Finance and National Planning Committee of the National Assembly tabled the Finance Bill 2024 (the Bill) on 13 May 2024. The Bill proposes various changes to the Income Tax Act (ITA), the VAT Act, 2013 (VAT Act), Excise Duty Act, Tax Procedures Act, 2015 (TPA), and the Miscellaneous Fees and Levies Act among other non-tax statutes. All the proposed changes will be effective 1 July 2024 unless stated otherwise. These measures are expected to impact differently on businesses, sectors as well as individuals. Thus, affected businesses, sectors and individuals should consult with their tax advisors on how these measures impact them. The Bill proposes to expand the coverage of digital content monetization works for income tax purposes to include:
This is meant to expand the range of services that may have not been explicitly captured in the ITA. The Bill proposes a definition of the term "donations" to mean "a benefit in money in any form, promissory note or a benefit in kind conferred on a person without any consideration." This clarifies that both cash and donations in kind are deductible for income tax purposes. The guidelines issued by the Kenya Revenue Authority (KRA) on deductibility of donations will, however, need to be aligned to capture this expanded definition. The Bill introduces a definition of the term "public entity" to mean a ministry, state department, state corporation, county government or agency of the national or county Government. Currently, the Income Tax Act (ITA) provides three definitions of the term "related person" in different provisions. The Bill proposes to delete the three definitions as currently provided for in the ITA and include one definition. The new proposed definition for a related person is stated as follows:
The Bill proposes to expand the definition of the term "royalty" by including, "any software, proprietary or off-the-shelf, whether in the form of licence, development, training, maintenance or support fees and includes the distribution of the software." This seems to have been triggered by the recent case law on treatment of "off-the-shelf software" and "distribution of software" for withholding tax purposes. The Bill seeks to introduce withholding tax on supply of goods to a public entity at a rate of 3% and 5% for resident persons and nonresident persons respectively. The Bill seeks to eliminate the minimum threshold of 24,000 Kenyan Shillings (KES 24,000) set on payment for management, professional, contractual or training services rendered by a resident person. This seems to imply that withholding tax applies to all such payments regardless of the amount paid to the supplier. The Bill proposes to remove a penalty of KES 2,000 per day for each day an export processing zone enterprise fails to submit a return or late submission of a return. The Bill proposes to reduce the carryforward period for foreign-exchange losses from five to three years from the year the foreign exchange loss is realized, for entities with gross interest paid or payable to a nonresident person that exceeds 30% of the person's earnings before interest, taxes, depreciation and amortization (EBITDA) in any year of income. This seeks to align the deferment period of realized foreign exchange losses with that of restricted interest expense. The provision will have adverse effect on taxpayers who will not have exhausted the foreign exchange losses carried forward over the three-year period.
This proviso does not, however, affect applicable bonds, notes or other similar securities that were/will be listed prior to the commencement of the proviso. Additionally, the Bill does not impose withholding tax on interest paid to nonresident persons. This proviso does not, however, affect applicable bonds, notes or other similar securities that were/will be listed prior to the commencement of the proviso. Any other income earned by that nonresident contractor, subcontractor, consultant or employee not directly related to the project shall however be subject to income tax. This Bill proposes to introduce motor vehicle tax at a rate of 2.5% of the value of the motor vehicle provided that the tax payable shall not be less than KES 5,000 but shall not exceed KES 100,000. The value of the motor vehicle shall be determined on the basis of the make, model, engine capacity in cubic centimeters and year of manufacture of the motor vehicle. The KRA is expected to issue guidelines for purposes of determining the value of a motor vehicle. An insurer of the motor vehicles shall collect and remit motor vehicle tax within five working days after issuing a motor vehicle insurance cover. An insurer that fails to comply shall be liable to pay a penalty equivalent to 50% of the uncollected tax and the actual amount of the uncollected tax. The Bill proposes to exclude an ambulance, a motor vehicle owned by the national government, county government, Kenya Defence Forces, National Police Service, National Intelligence Service or a person exempt from tax under Privileges and Immunities Act. The Bill proposes to repeal the provision that imposes a penalty of 20% on underpayment of installment tax. The Bill proposes an investment allowance on the acquisition of a spectrum licence by a telecommunications operator at the rate of 10% per annum in equal installments. Spectrum licenses that were purchased or acquired before 1 July 2024 will enjoy the investment allowance only on the unamortized portion over the remaining useful life of the spectrum license. The Bill seeks to provide a cutoff period within which the KRA may approve an application by a taxpayer on change of an accounting year end. Under the Act, the KRA is expected to respond within six months. The Bill proposes that if the six months period lapses without KRA's response, the application is deemed as allowed.
The Bill seeks to amend the definition of digital marketplace for purposes of determining income which deemed to be accrued or derived from Kenya to mean:
The proposal aims to bring under the ambit of taxation services that were not expressly provided in the ITA. The Bill proposes to introduce a diminution allowance on the amount considered as representing the diminution in value of any implement, utensil or similar article employed in the production of gains or profits not being machinery or plant at the rate of 100% in that year of income. The Bill would provide that where a resident or a nonresident person who is the owner or operator of a digital marketplace or platform makes or facilitates payment in respect of digital content monetization, goods, property or services, the amount thereof shall be deemed to be income that accrued in or was derived from Kenya. It then imposes WHT on income deemed to have accrued in or derived from a digital marketplace made to resident and nonresident persons at the rate of 5% or 20% for resident persons and nonresident persons, respectively. The Bill proposes the replacement of Digital Services Tax (DST) with the Significant Economic Presence (SEP) tax. SEP tax will be payable by a nonresident person who earns income from the provision of services through a digital marketplace.
The taxable profit shall be deemed to be 20% of the gross turnover. The deemed taxable profit will be subject to income tax at the rate of 30%. The Bill grants the Cabinet Secretary of the National Treasury powers to make regulations to aid the implementation of SEP tax. SEP is a concept that extends the traditional tax nexus rules to include a taxable presence based on significant digital engagement with a country's economy. It establishes a corporate tax liability based on the level of economic engagement within a jurisdiction even in the absence of physical presence. The Bill seeks to repeal the definition of the following terms:"wife's employment income," "wife's professional income," "wife's professional income rate," "wife's self-employment income" and "wife's self-employment income rate." These definitions were rendered irrelevant following the repeal of Section 45 of the ITA by the Finance Act, 2023, which previously provided that a wife's income is assessable on her husband. The Finance Bill 2024 seeks to scrap the requirement that individual retirement funds, pension funds and provident funds must be registered with the Commissioner to be deemed as registered for tax purposes. The Bill now proposes that such schemes must be registered with the Retirement Benefits Authority (RBA). This is a welcome change, as it seeks to harmonize the registration requirements given that such schemes will only need to register with the specific body that is set up to specifically monitor the running of retirement benefit schemes in Kenya. The Bill seeks to amend allowable limit with respect to contributions made to registered pension funds, provident funds and individual retirement funds from KES 240,000 per annum (KES 20,000 per month) to KES 360,000 per annum (KES 30,000 per month) for both the employee and employer. This is a welcome change as it increases the tax-deductible amounts for both employees and employers and is likely to encourage a culture of saving. The Bill proposes to amend section 5(2)(a)(iii) of the ITA to revise the per-diem benefit for employees who travel outside of their ordinary workplace. The Bill proposes to change the tax-exempt portion of the per diem from the first KES 2,000 per day to no more than 5% of the monthly gross earnings of an employee. However, the bill carries a proviso that this shall only apply where an employer has a policy governing the payment and accounting measures for the per diem issued. The Bill proposes to increase from KES 36,000 to KES 48,000 the limit on non-cash benefits provided to employees. This cap applies to any non-cash benefit for which a prescribed treatment has not been outlined in the ITA. The Bill seeks to increase the exempt value of meal benefit from KES 48,000 to KES 60,000 per employee. The meal should be provided in a canteen or cafeteria operated or established by the employer or provided by a third party who is a registered taxpayer. The Bill proposes that any amounts granted to a public officer as a reimbursement of expenses incurred in the course of official duties shall not be considered as income subject to tax. Further, it provides that the reimbursement will not be taxable notwithstanding the ownership or control of any assets purchased. The Bill seeks to designate the following employee contributions as deductible in determining their taxable employment income:
The Bill proposes to increase the allowable deduction for mortgage interest from specified financial institutions from KES 300,000 to KES 360,000. The Bill seeks to repeal the exemption from income tax of monthly pension granted to a person who is 65 years of age or more. In its place the bill seeks to exempt pension benefits received from a registered pension fund, registered provident fund, registered individual retirement fund or National Social Security Fund by a person who:
The Bill also lengthens from 15 years to 20 years the period that a taxpayer must wait after joining the fund to make a withdrawal made from a registered pension fund, registered provident fund, registered individual retirement fund or National Social Security Fund exceeding the tax-free amount. Standard individual income tax will be imposed on withdrawals that fail to meet these requirements. The Bill proposes that employees working remotely outside Kenya for an employer in Kenya should have a KRA PIN. By implication, the burden is on employers to ensure that employees they engage have active PINs even they are working remotely. The Bill proposes to amend the TPA to the effect that in calculating the period for submitting a tax return and the payment of a tax shall not include Saturdays, Sundays or public holidays. Currently, PAYE is due by the ninth day of the subsequent month. This proposal implies that the PAYE compliance due dates ought to be calculated based on the working days only. This change is likely to lead to greater uncertainty in tax administration as the tax due date may fall on different dates each month. The Bill proposes the introduction of a minimum top up tax payable by a covered person where the combined effective tax rate (ETR) in respect of that person for a year of income is less than 15%. The combined ETR for a covered person shall be the sum of all the adjusted covered taxes divided by the sum of all net income or loss for the year of income, multiplied by 100. The amount of tax payable shall be the difference between 15% of the net income or loss for the year of income for the covered person and the combined ETR for the year of income, multiplied by the excess profit of the covered persons. Adjusted covered taxes in this regard refers to taxes recorded in the financial accounts of a constituent entity for the income, profits or share of the income or profits of a constituent entity where the constituent entity owns an interest and includes taxes on distributed profits, deemed profit distributions subject to such adjustments as maybe prescribed. Covered person means a resident person or a person with a permanent establishment in Kenya who is a member of a multinational group and the group has a consolidated annual turnover of €750m 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. Net income or loss means the sum net income or loss for the year of income after deducting the sum of the losses of a covered person as determined under a recognized accounting standards in Kenya. Excess profit means the net income or loss of a covered person for the year of income less 10% of the employee costs and 8% of the net book value of tangible assets. Provided that the employee cost and book value of tangible assets maybe adjusted as prescribed in the Regulations to be issued with respect to the minimum top-up tax.
The Bill proposes to introduce an advance pricing agreement (APA) regime for taxpayers engaging in related party transactions. The proposed APA regime will allow taxpayers and tax authorities to agree on the pricing to be applied to related party transactions covered under the agreement for a maximum of five years. The Bill seeks to provide certainty on the applicable capital gains tax (CGT) rate for firms that are certified by the Nairobi International Financial Centre Authority (NIFCA). The Bill proposes a 5% capital gains tax rate subject to both of the following conditions:
The proposal reduces the minimum investment threshold, which was previously stipulated as KES 5b, and provides a specific CGT rate which is lower than the prevailing CGT rate. The Bill proposes to amend Section 12 of the VAT Act by inserting the following new subsection after subsection (4): "The time of supply for exported goods shall be the time when the registered person is in possession of the required export confirmation documents." Suppliers (exporters of goods) will be expected to have all the prerequisite export documentation before declaring the supply in the VAT return. The Bill proposes to delete Section 17(5)(c) of the VAT Act to remove the right of taxpayers to offset any other tax payable against the Withholding VAT (WHVAT) credits. This implies that WHVAT credits will be payable directly to the taxpayer without a provision to offset against other taxes, as the provision on application for refunds of excess WHVAT still exists in law. The Bill proposes to delete Section 17(5)(d) of the VAT Act and in effect removing the requirement for VAT refund applications be applied within 24 months from the date the tax became due and payable. The Bill proposes to delete Section 17(5)(e), which entitles manufacturers making taxable supplies to official aid funded projects (exempt) to apply for a VAT refund for excess input over output tax. This implies that manufacturers making taxable supplies to official aid funded projects will only be able to offset any excess input tax against subsequent VAT liabilities with no option to apply for a refund. The Bill proposes to delete Section 17(7), which provides that where the taxpayer makes 90% of taxable supplies, the entire input tax is deductible but where the taxable supplies are 10% or less of the total supplies no input tax is deductible. Eliminating manufacturers' deduction for input tax for on taxable supplies made to official aid funded projects The Bill proposes deletion of Section 17(8) of the VAT Act, which entitles manufacturers making taxable supplies to official aid funded projects to make a deduction for input tax with respect to these supplies. This implies that manufacturers making taxable supplies to official aid funded projects will not be able to claim input tax.
The removal of exemptions implies that consumers of the above supplies are likely to incur additional costs in respect of VAT. Companies that were only providing these services and therefore not registered for VAT may now be required to register and account for VAT in Kenya.
Specialized equipment for the development and generation of solar and wind energy, including photovoltaic modules, direct current charge controllers, direct current inverters and deep cycle batteries that use or store solar power, upon recommendation to the Commissioner by the Cabinet Secretary responsible for matters relating to energy until completion of the projects under development. The Bill seeks to amend Paragraph 144, Part I of the First Schedule to the VAT Act, 2013 to include the definition of an "original equipment manufacturer" to mean "a manufacturer of parts and subassemblies who owns the intellectual property rights in the parts or sub-assemblies." The Bill seeks to remove exemptions on taxable goods/input/raw materials from companies operating under Special Operating Framework (SOFA) with government from 01 July 2017. The Bill further seeks bring into the ambit of VAT insurance services other than insurance and reinsurance premium. The Bill proposes to amend the VAT status of the following goods/services from Taxable (16%) to Exempt:
The exemption of the above supplies implies that the suppliers will not be entitled to a claim of input tax. Also, these suppliers will need to consider VAT deregistration as persons dealing wholly in exempt supplies are not required to register for VAT. The Bill proposes to amend the VAT status of the following products from zero-rated (0%) to standard rated (16%):
Changing from zero-rated status to standard rated will mean that these supplies may be more expensive due to the additional VAT cost. The Bill proposes the repeal of the relief for excise duty paid on raw materials used in manufacturing other excisable goods. This implies the excise duty paid on raw materials becomes an extra cost to ultimately increase the ex-factory selling price of the excisable product. The Bill expands the scope of excisable services to include services offered in Kenya by nonresident persons through a digital platform. Services offered through a digital platform are currently charged VAT at 16% and Digital Services Tax at 1.5%. The Bill proposes the extension of the timeframe for licensed manufacturers of alcoholic beverages to pay excise duty from 24 hours to 5 working days upon removal of goods from the stockroom. This will reduce on the administrative burden of daily management of tax payments. The Bill proposes a new excise duty structure for motorcycles, with a rate of 10% of the value or KES. 12,952.83 per unit, whichever is higher. The Bill proposes exemption from excise duty for several products, including eggs, onions, potatoes, and cement clinker if they originate from EAC partner states and meet the EAC rules of origin. The Bill proposes excise duty on all plastic products of tariffs 3923.30.00 and 3923.90.90 whether locally produced or imported into Kenya. The Bill proposes 25% excise duty on various vegetable oils, including common products like palm, sunflower, and cottonseed oil (HS codes 1511, 1512, 1515, and 1517). The excise duty shall apply to both refined and unrefined (crude) products. Additionally, manufacturers may no longer offset the tax on raw materials after the repeal of Sec 14, further increasing costs.
The Bill introduces excise duty on coal at 5% of the value or KES. 27,000 per metric ton, whichever is higher. The Bill proposes excise duty on advertising fees for alcoholic beverages, betting, gaming, lotteries, and prize competitions on the internet and social media platforms. Currently, this only applies fees for advertising alcoholic beverages, betting, gaming, lotteries, and prize competitions on traditional channels like television, radio, print, and billboards. Goods acquired for official use by the National Intelligence Service are now exempt from excise duty. This brings them in line with the Kenya Defence Forces and National Police Service.
The Bill proposes to increase the rate of IDF from 2.5% to 3% of the customs value of imported goods, payable by the importer at the time of entering the goods for home use. This comes barely one year after the rate was reduced from 3.5% to 2.5%. The increase is expected to raise the cost of imports. Sub sections (6) and (7) of Section 7 of the Act require that 10% of the IDF fees collected be paid into a Fund, with the monies in this Fund being used for the payment of Kenya's contributions to the African Union and any other international organization to which Kenya has a financial obligation. The Finance Bill, 2024 proposes that sub-section (7) read, 10% of monies in the Fund under subsection (6) shall be used for the payment of Kenya's contributions to the African Union and any other international organization to which Kenya has a financial obligation, while 20% will be used for revenue enforcement initiatives and programmes.
The Bill proposes to introduce the eco levy on select locally manufactured and imported goods (Section 7B). The select goods are specified in the proposed Fourth Schedule. This is the introduction of yet another levy after the Finance Act, 2023 introduced the export and investment promotion levy (Section 7B). For locally manufactured goods, the eco levy is payable to the Commissioner by the manufacturer at the time the goods are removed from the excise stock room. However, majority of the goods subject to the levy are not excisable and hence there might be challenges in implementation. For imported goods, the levy is payable by the importer at the time the goods are entered for home use. According to the Bill, the purpose of the levy is to ensure that manufacturers and importers of the specified goods pay for the negative environmental impacts of the goods. The modalities of implementation and administration of the levy will be something to watch for especially for locally manufactured goods. The Bill anticipates that implementation could be challenging and proposes that the Cabinet Secretary may make regulations for the better implementation of the eco levy. The Bill is silent on where the funds collected from the levy shall be deposited. This is unlike funds collected under the export and investment promotion levy, which the Finance Act, 2023 required be paid into a fund established and managed in accordance with the Public Finance Management Act, 2012. It is not yet clear whether the monies collected will be utilized in remedying the stated negative environmental impacts, or how. The levy chiefly targets technology products, including smartphones, telecommunication and internet equipment, personal computing devices, automatic data processing machines and units such as servers, cameras and radio and television broadcast apparatus. The levy will likely result in a rise in the cost of these products and is could negatively affect the government's digital transformation agenda. With all batteries being subject to the levy, the Bill will impact the nascent electric mobility industry, which is highly dependent on lithium-ion batteries. The Bill's proposals would also lead to an increase in the costs to produce diapers, rubber tires and plastic packaging materials. The Bill's proposal that the levy take effect on 01 July 2024 could place a significant implementation and compliance burden on local manufacturers, given that there is no existing implementation framework for the levy. While the Bill proposes that the Cabinet Secretary publish Regulations for the effective implementation, it would also be helpful if the effective date of the levy were pushed to a future date to allow for the setting up of modalities on implementation and compliance. The Bill proposes to introduce the Fourth Schedule, listing the various goods subject to the eco levy and the corresponding rates. The Bill has two proposed rates for items of tariff 8472.90.00 (KES 98 and KES 225 per unit). The correct rate will ultimately need to be confirmend (i.e., when the bill presumably becomes law).
The Finance Act, 2023 introduced the Export and Investment Promotion Levy (EIPL) on select goods imported into the country for home use. These included cement clinker, semi-finished products of iron and steel, kraft paper and paper board, and sacks and bags. The stated purpose of the levy was to provide funds to boost manufacturing, increase exports, create jobs, save on foreign exchange and promote investments. The Finance Bill, 2024 proposes to delete the entire Third Schedule as introduced by the Finance Act, 2023, and in its place introduce a new schedule of items that will be subject to export and investment promotion levy. The proposal would see more imported items added to the scope of the levy, key among them being milk and cream, spirits, motorcycles, sanitary ware, leather products, footwear and furniture. The inclusion of motorcycle ambulances of tariff 8711.20.10 (50-250cc engine category) among goods subject to the levy is a bit unusual, given that motorcycle ambulances of other engine categories have been excluded from the levy. Notably, imported leather products and footwear will attract a high levy at a rate of 20% of the customs value. The rate for cement clinker will reduce from 17.5% to 10% while the rate for kraft liner and kraft paper will drop from 10% to 3% of customs value. However, the proposals delete some items that were previously subject to the levy, notably sacks and bags, semi-finished products of iron and non-alloy steel, and bars and rods of iron and non-alloy steel. Despite the expanded scope of products subject to the levy, the Bill contains no proposals regarding exemption from the levy.
The Bill proposed the lifting of the restriction of sale of affordable housing units without the consent of the Affordable Housing Board. The Bill proposes to amend section 51(2) of the Data Protection Act to exempt processing of personal data from the provisions of the DPA where disclosure of information is necessary for assessment, enforcement or collection of any tax or duty under a written tax law. The Bill proposes to incorporate the powers granted to KRA under the TPA, on enforcement and collection of tax, to the Industrial Training Act. The Bill proposes to expand the functions of the Public Accounting Standards Board to include prescribing a framework for implementation of accrual accounting in Government. The Bill proposes to shift the mandate to collect fees and charges imposed under the Civil Aviation Act from the KRA to the Civil Aviation Authority, following the transfer of this function to the latter. If the Bill is passed, the Civil Aviation Authority will be responsible for collecting the fees and levies under the Act. The Bill proposes to align the content of a valid electronic tax invoice with provisions of the Tax Procedures (Electronic Tax Invoice) Regulations, 2024. The Bill proposes to reintroduce repealed section 37, which empowered the KRA, with prior approval of the Cabinet Secretary, to refrain from assessing or recovering unpaid tax due to difficulties in or inability to collect the tax. The Bill proposes to introduce a one-year validity period for agency notices issued by the KRA, in respect of unpaid taxes to a person who owes, holds or may subsequently owe money to or hold money for a taxpayer. The Bill proposes to amend section 47 (1)(a) of the TPA to provide that applications for tax refunds resulting from overpaid tax should be made within five years for income tax and six months for all other taxes. Currently, only applications for refunds relating to VAT are limited to six months, while all other tax refunds should be sought within five years. The Bill proposes to amend section 51(4A) to provide that where the KRA requests additional information from a taxpayer during the objection stage, and the taxpayer fails to provide the information, the objection shall automatically be disallowed. The Bill also proposes to amend section 51(11) to extend from 60 days to 90 days the timeframe for the KRA to consider objections filed by taxpayers. The Bill proposes to give the KRA authority to issue notices to request any person to integrate their electronic tax systems with the KRA data management and reporting system (eTIMS) for purposes of transmitting electronic documents (electronic invoices). The Bill proposes to exclude weekends and public holidays when computing the due dates for submitting tax returns, applications, notices and documents, where the deadline is provided for in days (e.g., 60 days or 120 days). Currently, each day is counted including nonworking days, and where the due date falls on a weekend or public holiday, the due date is the previous working day. There is a proposal to introduce a penalty of KES 20,000 per month for EPZ enterprises that fail to submit tax returns as required under the Income Tax Act.
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