Executive summary

Parliament approved and the President signed into law on 11 December 2024 the Tax Laws (Amendment) Bill 2024, the Tax Procedures (Amendment) Bill, 2024, the Statutory Instruments (Amendment) Bill, 2024 and Kenya Revenue Authority (Amendment) Bill, 2024.

The Tax Laws (Amendment) Bill 2024 aimed to amend several key tax pieces of legislation including: the Income Tax Act (ITA), the Value Added Tax (VAT) Act, the Miscellaneous Fees and Levies Act (MFLA) and the Excise Duty Act (EDA).

The Acts became effective on 27 December 2024.

Detailed discussion

This Alert highlights the: (A) Tax Laws (Amendment) Act, 2024; (B) Tax Procedures (Amendment) Act, 2024; and (C) Statutory Instruments (Amendment) Act, 2024.

1. Tax Laws (Amendment) Act, 2024

The Tax Laws (Amendment) Act 2024 (the Act) introduced a wide range of changes that impact businesses and individuals.

1. Business Income Tax

Donations

The Act defines 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 and includes grants.

This clarifies that both cash and donations in kind are deductible for income tax purposes. The definition largely aligns with the Income Tax (Charitable organizations and donations exemption) Rules, 2024 that were issued by the Kenya Revenue Authority (KRA) on 18 June 2024.

Royalties

The Act has expanded the definition of the term "royalty" by including a proviso that encompasses "any software, proprietary or off-the-shelf, whether in the form of license, development, training, maintenance or support fees and includes the distribution of the software."

The expanded definition appears to have been triggered by a court decision ruling that distribution of software is not subject to withholding tax (WHT). Royalties are subject to WHT and thus the expanded definition brings into the ambit of WHT additional payments that were not previously subject to WHT.

Imposition of WHT on digital marketplace and platform owners

The Act provides 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, property or services, the amount thereof shall be deemed to be income that accrued in or was derived from Kenya.

A "platform" is defined to mean a digital platform or website that facilitates the exchange of a short-term engagement, freelance or provision of a service, between a service provider, who is an independent contractor or freelancer, and a client or customer.

The Act 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.

Notably, the Bill had included goods, but this was deleted by the Act.

Introduction of WHT on supply of goods to a public entity

The Act has introduced WHT on supply of goods to a public entity at a rate of 0.5% for resident persons and 5% for nonresident persons.

A public entity is defined to mean a ministry, state department, state corporation, county department or agency of the national or county Government.

Introduction of WHT on sale of scrap

The Act has introduced WHT on sale of scrap at the rate of 1.5% of the gross amount for both resident and nonresident persons.

Replacement of Digital Services Tax with Significant Economic Presence Tax

The Act has replaced Digital Services Tax (DST) with Significant Economic Presence (SEP) tax.

SEP tax will be payable by a nonresident person who earns income by providing services through a digital marketplace. However, the SEP tax excludes the following persons:

1. Nonresident persons who offer the services through a permanent establishment.
2. Income earned by non-resident persons from certain telecommunication services as well as certain specific listed services
3. Nonresident persons providing digital services to an airline in which the government of Kenya owns at least 45%
4. Nonresident persons with annual turnover of less than five million Kenya shillings (KES5m)

The taxable profit shall be deemed to be 10% of the gross turnover. The deemed taxable profit will be subject to income tax at the rate of 30%. The tax is payable by the 20th day of the month following provision of the service.

The Act grants the Cabinet Secretary in charge 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 was one of the earlier proposals by the Organization for Economic Cooperation and Development (OECD) to curb the tax challenges brought about by the digitization of the economy. SEP establishes a taxable nexus based on the level of economic engagement within a jurisdiction even in the absence of physical presence.

Introduction of minimum top-up tax

The Act has introduced a minimum top-up tax payable by a covered person if 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.

A 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 of net income or loss for the year of income after deducting the sum of the losses of a covered person as determined under 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. The Act also provides 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.

Minimum top-up tax shall not be payable by the following persons or entities:

• A public entity that is not engaged in business
• A person whose income is exempt from tax under the provisions of the First Schedule to the ITA
• A pension fund and the assets of that pension fund
• A real estate investment vehicle that is an ultimate parent entity
• A non-operating investment holding company
• An investment fund that is an ultimate parent entity
• A sovereign wealth fund
• An intergovernmental or supranational organization, including a wholly owned agency or organ of the intergovernmental or supranational organization

The introduction of minimum top-up tax aligns with the proposal that was in the rejected Finance Bill, 2024.

Investment allowance

The Act has reduced the qualifying investment value required to qualify for accelerated investment allowance of 100% or 150% from KES 2b to KES 1b.

The accelerated investment allowance of 150% is applicable if a person has met the cumulative investment value in the preceding three years outside of Nairobi County and Mombasa County. This is applicable where a person has met the cumulative investment value in the three years succeeding 1 January 2022.

Income tax exemptions

The Act has repealed tax exemption on the income of a registered family trust. Although the Bill had proposed to also repeal the exemption on the principal sum of a registered family trust, the Act has retained the exemption on the principal sum of a registered family trust.

The Bill had also proposed to repeal the exemption on capital gains relating to the transfer of title of immovable property to a family trust. The exemption has, however, been retained following public participation.

The Act provides that a nonresident contractor, subcontractor, consultant or employee involved in a project financed through a 100% grant under an agreement between the Government of Kenya and a development partner shall be exempt from income tax to the extent provided in the agreement. Any other income earned by the nonresident contractor, subcontractor, consultant or employee not directly related to the project shall, however, be subject to income tax.

Clean up on the rates of tax

The Act has repealed s34 of the ITA, which partially duplicated the Third Schedule to the ITA. All rates of tax will be provided in the Third Schedule to the ITA other than those relating to aspects of oil, gas and mining sector as stipulated in the Ninth Schedule to the ITA.

Preferential capital gains tax rate

The Act has provided certainty on the applicable capital gains tax (CGT) rate for firms that are certified by the Nairobi International Financial Centre Authority (NIFCA).

The Act has introduced a reduced CGT rate of 5% subject to the following conditions:

1. A firm has invested at least KES 3b in at least one entity incorporated or registered in Kenya within a period of two years.
2. The transfer of the investment is to be made after five years of the date of investment.

The amendment reduces the minimum investment threshold, which was previously stipulated as KES 5b, and provides a specific CGT rate that is lower than the prevailing CGT rate of 15%.

Export-processing zones

The Act has deleted from the ITA the provision relating to the imposition of a penalty of KES 2k per day for each day an export-processing zone (EPZ) enterprise fails to submit a return or late submission of a return.

The imposition of a revised penalty has been introduced through the Tax Procedures (Amendment) Act, 2024 at KES 20k per month or part thereof.

2. Personal Income Tax

Eliminating "wife's employment income" definitions

The Act provides for the deletion of 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 ITA Section 45 by the Finance Act, 2023. Previously, the law had provided that a wife's income was assessable on the husband.

Deleting requirement for registration of retirement schemes with the KRA

The Act scrapped the requirement that individual retirement funds, pension funds and provident funds must be registered with the KRA to be deemed as registered for income tax purposes. The Act 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 body established specifically to monitor the running of retirement benefit schemes in Kenya.

Deductions in respect of contributions to pension funds and individual retirement funds

The Act amended the allowable limit with respect to contributions made to registered pension funds, provident funds and individual retirement funds from KES 240k per annum (p.a.). (KES 20k per month (p.m.) to KES 360k p.a. (KES 30k p.m.) for both the employee and employer.

This is a welcome change as it increases the tax-deductible contributions for both employees and employers.

Non-cash benefits

The Act increased the limit of exempt non-cash benefits provided to employees from KES 36k to KES 60k p.a. This cap applies to any non-cash benefit for which a prescribed treatment has not been outlined in the ITA.

Meals

The Act increased the exempt value of meal benefit from KES 48k to KES 60k p.a. 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.

Tax exemption on reimbursements to public officers

The Act provides that any amount paid or granted to a public officer pursuant to any written law or statutory instrument, with effect from 27 July 2022, to reimburse an expenditure incurred for the purpose of performing official duties shall not be considered as income subject to income tax. Further, it provides that the reimbursement will not be taxable notwithstanding the ownership or control of any assets purchased.

Tax allowable deductions

The Act designates the following employee contributions as deductible in determining their taxable employment income:

• Contributions made to the Social Health Insurance Fund (SHIF)
• Employee deductions towards affordable housing levy in accordance with the Affordable Housing Act, 2024
• Contributions to a post-retirement medical fund subject to a limit of KES 15k p.m

In addition, the Act repealed the following tax relief:

• National Hospital Insurance Fund (NHIF) relief, which had been at 15% of the NHIF premiums subject to a cap of KES 60k p.a. This is in line with the shift from NHIF to SHIF.
• Affordable housing relief, which had been granted at 15% of the contributions subject to a cap of KES 108k p.a.
• Post-retirement medical fund relief, which had been granted at 15% of the amount of contribution subject to a cap of KES 60k p.a.

Mortgage interest deduction

The Act increased the allowable deduction for mortgage interest from specified financial institutions from KES 25k p.m. to KES 30k p.m.

Exempt retirement income

The Act repealed the exemption from income tax of monthly pension granted to a person who is 65 years of age or more. In its place, the Act provided for exemption on payment of pension benefits by a registered pension fund, registered provident fund, registered individual retirement fund, public pension scheme or National Social Security Fund in the following instances:

1. Upon attainment of the retirement age determined in accordance with the rules of the fund or the scheme
2. Payment of gratuity or other allowances paid under a public pension scheme
3. Payment of a retirement annuity
4. Withdrawals from the fund prior to attaining the retirement age due to ill health
5. Withdraws from the fund after the 20 years from the date of registration as a member of the fund

The Act provides that preferential tax rates will apply on withdrawals from registered schemes prior to expiry of 20 years since joining the scheme. Prior to this change, these preferential rates would apply on withdrawals done before the expiry of 15 years from the date of joining the fund.

Exemption of income on project financed through grant

The Act provides that income earned by a nonresident contractor, subcontractor, consultant or employee involved in the implementation of a project financed through a 100% grant, under an agreement between the Government and a development partner shall be exempt from income tax to the extent provided in the Agreement. The exemption applies on condition that:

1. The subject shall maintain this status for the tenure of the agreement.
2. Any other income not directly related to the project earned by that subject shall be taxable.

3. Value Added Tax Act

Clarification on the time of supply of exported goods

The Act has amended Section 12 of the VAT Act and provided that the time of supply of exported goods shall be the time when the registered person is in possession of the required export confirmation documents.

Suppliers (exporters of goods) are expected to have all the requisite export documentation before declaring the supply in the VAT return. This has been a major issue hindering VAT refund approval and is thus a welcome move as it will simply VAT refund approval process.

Tax relief application for zero-rated or exempt supplies

The Act has amended Section 17(5) of the VAT Act by adding a new Section 5(ea) after Section 5(e), which stipulates that if a taxable supply becomes zero-rated or exempt and this results in a permanent credit position for a registered person due to a difference in tax rates (specifically, the rate applicable on 1 July 2022, and a lower rate), the registered person must apply to the KRA for relief within six months after the commencement of the provision.

This is a welcome change as it will allow VAT registered persons to apply for input VAT relief (accumulated historical VAT credits).

Removal of the 90/10 rule for claiming input tax

The Act has deleted Section 17(7), which provided that where the taxpayer makes 90% of taxable supplies, the entire input tax is deductible but where the taxable supplies are less than 10% of the total supplies no input tax is deductible.

Suppliers of mixed supplies will be able to deduct input VAT proportionately irrespective of the percentage of taxable versus exempt supplies.

Removal of relief for manufacturers to deduct input tax on taxable supplies made to official aid funded projects

The Act has deleted Section 17(8) of the VAT Act, which entitled manufacturers that made taxable supplies to official aid-funded projects to deduct input tax with respect to those supplies.

The amendment implies that manufacturers that make taxable supplies for official aid-funded projects will no longer be able to claim input tax. Additionally, it is possible that this amendment could nullify the validity of Section 5(e), which allows such manufacturers to apply for VAT refund.

Amendment of the status of various supplies

The Act has amended the VAT status of the following supplies from exempt to taxable at standard rate of 16%:

* The amendment implies that any exemption granted after 1 January 2024 is not in force and such investments are subject to VAT at 16%.

The Act has amended the VAT status of the following supplies from taxable (16%) to exempt:

* The Act increase the scope of exemption under Paragraph 57 to include the National Intelligence Service.

** The Act has replaced the name Kenya Defence Forces Canteen Organization (DEFCO) with Defence Forces Welfare Services to align with the change of name for DEFCO.

*** Currently, carrier tissue white, 1 ply 14.5 GSM of tariff number 4703.21.00 and IP super soft fluff pulp- for-fluff 310 treated pulp 488*125mm (cellulose) of tariff number 4703.21.00 are exempt under Paragraph 69 and 70 of the First Schedule of the VAT Act. The Tax Laws (Amendment) Act 2024 has deleted these two paragraphs and replaced Paragraph 69 with 'goods of tariff number 4703.21.00 for use in the manufacture of baby diapers, adult diapers, sanitary towels (pads) and tampons'. Any other goods of tariff 4703.21.00 for other use is not exempted from VAT.

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 Act has amended the VAT status of the following products from zero-rated (0%) to exempt:

The exemption of the above supplies implies that the suppliers will not be entitled to a claim of input tax. Additionally, the suppliers will need to consider VAT deregistration as persons dealing wholly in exempt supplies are not required to register for VAT.

The Act has amended the VAT status of the following products from zero-rated (0%) to standard rated (16%):

Manufacturers of agricultural pest control products are likely to incur additional VAT on inputs and raw materials acquired locally for manufacture of these products. Additionally, they will not be able to apply for any VAT refund because all agricultural pest control products have been exempted from VAT.

4. Excise Duty Act

Key changes

Introduction of excise duty on digital services by nonresident persons

The scope of excise duty has been expanded to include excisable services offered in Kenya by non-resident persons through digital platforms. This duty will be payable by the nonresident service provider.

Services offered through a digital platform are currently chargeable to VAT at 16% and income tax at an effective rate of 3%.

Excise duty payment timeline for alcoholic beverages

The timeline for paying excise duty by licensed manufacturers of alcoholic beverages has been revised to the fifth day of the following month.

Previously, the manufacturers were required to remit excise duty within 24 hours of removing goods from the stockroom.

Remission of excise duty

The Act has included spirits as one of the goods that may be subject to the grant of remissions on excise duty on condition that they are made from sorghum, millet or cassava or any other agricultural products, (excluding barley), grown in Kenya.

Currently, remission of excise duty applies to beer and wine. It is granted, in respect to beer, at the rate of 80% pursuant to the Excise Duty (Remission of Excise Duty) Regulations, 2017.

Excise duty on fees charged by digital lenders

The Act has introduced the following definitions in respect to fees charged by digital lenders:

• A digital lender is defined as a person holding a valid digital credit providers license issued by the Central Bank of Kenya.
• Fees charged by digital lenders means any fees, charges or commissions charged by digital lenders relating to their licensed activities but does not include interest, pre-loan interest, post-loan interest, return on 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.

These definitions are critical in that they clarify the applicability of excise duty on fees charged by digital lenders. The fees are chargeable to excise duty at the rate of 20%.

Changes to the schedules to the Excise Duty Act

Additional goods and services brought within the ambit of excise duty

1. Goods

2. Services

Introduction of excise duty on advertising fees for digital platforms

The Act introduced excise duty on advertising fees for alcoholic beverages, betting, gaming, lotteries, and prize competitions on the internet and social media platforms. Previously, excise duty only applied to advertising fees on traditional channels such as television, radio, print and billboards.

Changes to excise duty rates

1. Goods

*Small independent brewer has been defined to mean manufacturers of beer, cider, perry, mead, opaque beer, wine and fortified wines and mixtures of fermented beverages with nonalcoholic beverages manufactured whose production volume does not exceed 150,000 liters per month.

2. Services

Amendments to descriptions of excisable goods

Goods removed from the ambit of excise duty

The following items have been excluded from the applicability of excise duty:

• Imported pasta of tariff 1902, whether cooked or not cooked or stuffed or otherwise prepared, such as spaghetti, macaroni, noodles, lasagna, gnocchi, ravioli, cannelloni, couscous, whether or not prepared

5. Miscellaneous Fees and Levies Act

The following key changes have been made to the Miscellaneous Fees and Levies Act:

1. Increase in the rate of railway development levy

The Act increased the rate of railway development levy (RDL) from 1.5% to 2% of the customs value of imported goods. It is payable by the importer at the time of entering the goods for home use.

This comes slightly more than one year after the rate was reduced from 2% to 1.5% by the Finance Act, 2023.

2. Goods exempt from import declaration fee and railway development levy

The Act included the following exemptions from import declaration fee (IDF) and railway development levy (RDL):

• All goods including material supplies, equipment, machinery, and motor vehicles for the official use by the National Intelligence Service (NIS) and the Defence Forces Welfare Services.
• Goods of Chapter 5407 and Chapter 6309 imported as raw materials for manufacture of textile products in Kenya upon recommendation of the Cabinet Secretary responsible for investment, trade and industry.

3. Export and Investment Promotion Levy

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 Miscellaneous Fees and Levies Act has introduced the following items within the ambit of EIPL:

2. Tax Procedures (Amendment) Act, 2024

The Tax Procedures (Amendment) Act, 2024 introduced several measures on procedural, administrative and related matters. The changes entailed amendments to the Tax Procedures Act (TPA).

Alignment of the TPA with the Electronic Tax Invoice Regulations, 2024

The TPA outlines the requisite details for electronic tax invoices. Specifically, a tax invoice must include:

• The name, address and PIN of the supplier
• The name, address and PIN if any, of the purchaser
• The serial number of the tax invoice
• The date and time which the tax invoice was issued and the date and time which the supply was made, if it is different from the date the tax invoice was issued
• The description of the supply including quantity of the goods or the type of services
• The details of any discount allowed at the time of supply
• The consideration for the supply
• The tax rate charged, and total tax amount of tax charged
• Any other prescribed information

Businesses must ensure that their electronic invoicing systems are updated to capture all the details.

The Bill amended Section 23A of the TPA to introduce reverse invoicing. Where a supply is made by a small business or a small-scale farmer, the purchaser is required to issue an invoice. The threshold of the small business or small-scale farmer is an annual turnover not exceeding KES 5m.

The introduction of reverse invoicing shifts the administrative burden of issuing invoices from small businesses and small-scale farmers to purchasers.

Extension of tax amnesty

The Act extended the tax amnesty period from 30 June 2024 to 30 June 2025. The tax amnesty automatically applies on penalties and interest where a person had paid all the principal tax by 31 December 2023.

Where by 31 December 2023 the principal tax was not paid, a person may apply to the KRA for the tax amnesty and propose a payment plan. The tax amnesty shall only be granted once the person has met the following conditions:

1. Applies for tax amnesty
2. Pays all outstanding principal taxes by 30 June 2025
3. Does not incur a further tax debt
4. Gives a written undertaking for settlement of the outstanding taxes owed

If any of the principal tax remains unpaid on 30 June 2025, it will attract applicable penalties and interest.

Relief from collection of tax

The Act has reintroduced a provision allowing the KRA to refrain from collecting taxes due to doubt or difficulty in recovery of the tax.

Before abandoning the tax, the KRA is required to first seek written approval from the Cabinet Secretary in charge of the National Treasury.

Failure to remit WHT on time

The Act has introduced a 10% penalty for persons who fail to withhold and remit tax.

Businesses will need to ensure that their systems are robust to mitigate the penalties from failure to remit WHT on a timely basis.

Offset of overpaid taxes against liability

The Act has amended 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 12 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.

Integration of taxpayer's financial reporting systems

The Act granted the KRA the authority to issue notices requiring any person to integrate their electronic tax systems with the KRA data management and reporting system for the purpose of transmitting electronic documents including electronic invoices.

This will apply to businesses with a turnover exceeding KES 5m.

Failure to comply with this requirement will be considered an offense, subject to a maximum penalty of KES 100k p.m. of noncompliance. The penalty will also apply to individuals who fail to comply with a notice to submit electronic documents through the KRA data management and reporting system.

Period for lodging objections

The Act has excluded Saturday, Sunday or public holidays in the determination of the time within which to lodge an objection.

Currently, all days are considered and where the due date falls on a weekend or public holiday, the due date is the previous working day.

The amendment effectively extends the period and aligns with the definition of business days as provided in other laws.

3. Statutory Instruments (Amendment) Act, 2024

Public notification of expired or annulled statutory instruments

The Act has mandated Parliament to notify the public when a statutory instrument ceases to have effect, by publication on the parliamentary website. Further, annulled statutory instruments should be published in the Kenya Gazette within 14 days of being received.

Review of statutory instruments emanating from the judiciary

All rules, regulations and orders emanating from courts in Kenya under a legislative instrument will be required to be tabled before Parliament for review and scrutiny by Committee on Delegated Legislation. Previously, such instruments were excluded from this requirement.

Penalty for breaching provisions of statutory instruments

The Act has increased the maximum monetary penalty for breaching the provisions of a statutory instrument from KES 20k to KES 1m. Further, the maximum imprisonment term for such breach has been increased from six months to five years.

Continuity of statutory instruments

The mandatory requirement for review of subsidiary legislation and the expiration of statutory instruments has been eliminated. Going forward, statutory instruments will continue to be in operation unless annulled.

Validity of statutory instruments that were in force prior to 24 January 2024

The Act has introduced a clause providing that all statutory instruments that were in force before 24 January 2024 will continue to be in operation.

Next steps

Businesses should review and assess the impact of the various tax and related changes on their businesses.