On 31 October 2024, the Cabinet Secretary, National Treasury and Economic Planning (the Cabinet Secretary National Treasury) published an explanatory note on changes proposed to be introduced by the Tax Laws (Amendment) Bill 2024 (the Tax Laws Amendment Bill) and the Business Laws (Amendment) Bill 2024 (the Business Laws Amendment Bill).
Background of the Two Bills
On 26 June 2024, the President declined to assent into law the Finance Bill 2024 following weeks of public uproar against the measures that had been proposed in the Finance Bill 2024. It is against this backdrop that the Government through the Tax Laws Amendment Bill seeks to reintroduce some of the provisions that were contained in the ill-fated Finance Bill 2024. The government also seeks to introduce some entirely new provisions. On its part, the Business Laws Amendment Bill seeks to address certain issues which were identified by the Ministry of Investments, Trade and Industry as issues hampering the growth of manufacturing, investments and exports in Kenya.
Proposals that are beneficial to taxpayers
Adjustments to the taxation of employment benefits
The Bill proposes to adjust the taxation of employment benefits by:
- Increasing the value of tax-free meals provided to employees in a canteen or cafeteria operated or established by an employer from Kenya Shillings forty-eight thousand (KES 48,000) per year to Kenya Shillings sixty thousand (KES 60,000);
- Increasing the limit of non-taxable benefits granted with respect to employment from Kenya Shillings thirty-six thousand shillings (KES 36,000) per year to Kenya Shillings sixty thousand (KES 60,000) per year; and
- increasing the limit of tax-free pension contributions that are exempt from tax from two hundred and forty thousand (KES 240,000) per year to three hundred and sixty thousand (KES 360,000) per year.
Implication
This proposal seeks to increase the limits that have remained unchanged for close to nineteen (19) years despite the increase in the cost of living and increase in income levels. In addition, this is one of the positive proposals that were not enacted due to the withdrawal of the Finance Bill 2024.
Deduction contributions made to the Social Health Insurance Fund, post-retirement medical fund and the affordable housing levy are deductible for tax purposes
The Bill proposes to include the following as allowable deductions in determining the taxable income of an individual:
- Contributions made by a person to the Social Health Insurance Fund;
- in the case of an employee, the amount deducted by an employer in accordance with the Affordable Housing Act, 2024; and
- Contribution to post-retirement medical fund subject to a limit of fifteen thousand shillings per month.
Implication
This proposal seems to be in response to concerns relating to the negative impact that contributions to both the Social Health Insurance Fund and the Affordable Housing Levy have had on the net earnings of employees. To this end, the proposal will allow such contributions to be deducted before arriving at the taxable income of an employee. This will lead to a reduction in the pay as you earn (PAYE) payable by employees and therefore ultimately lead to an increase in the net pay of employees. This was one of the proposals that was contained in the Finance Bill 2024.
Increase in the amount deductible as interest mortgage relief
The Bill proposes to increase the limit of the interest deductible with respect to a loan taken towards the purchase or improvement of a home utilised for residential purposes from Kenya Shillings three hundred thousand (KES 300,000) to Kenya Shillings three hundred and sixty thousand (KES 360,000) per year of income.
Implication
This proposal is welcome and is in line with the apparent efforts of the government to reduce the PAYE payable by employees by increasing the amount of deductions.
Expansion of tax-exempt pension income
The Bill proposes to exempt from income tax the payment of pension benefits to a person upon attainment of the retirement age determined by the rules of their respective registered retirement scheme. In addition, the exemption shall also apply where a person retires early before attaining the retirement age due to ill health or withdraws from the fund after twenty (20) years from the date of registration as a member of the fund.
Implications
This proposal will encourage saving for retirement through a registered scheme and prevent early withdrawals due to the conditions for the exemption such as the requirement for withdrawal after twenty years from the date of registration as a member of the fund.
Extension of tax amnesty
The Bill proposes to extend the running of the tax amnesty until 30 June 2025. This will enable taxpayers who had not paid principal taxes prior to 31 December 2022 to pay such principal tax without any penalties and interest accruing until 30 June 2025.
Implication
This proposal is a result of the successful performance of the initial amnesty program that was run until 30 June 2024. In this regard, this is a move by the government to grant taxpayers more time to regularise their tax affairs.
Payment of excise duty
The Bill proposes to increase the time of payment of excise duty relating to alcoholic beverages from 24 hours to the fifth day of the following month.
Implications
This will be a significant relief to manufacturers of alcoholic drinks who have raised concerns over the impact on cash flow on the law requiring payment of excise duty within 24 hours.
Capital gains tax rate of 5% for investments certified by the Nairobi International Financial Centre Authority
The Bill proposes to provide for a capital gains tax (CGT) rate of five per cent on any gain arising on the transfer of investments whereby the Nairobi International Financial Centre Authority certifies that (a) the firm has invested at least KES 3 billion in at least one entity incorporated or registered in Kenya within two years and (b) the transfer of the investments is to be made after five (5) years of the date of the investment.
Implication
This proposal will make setting up in the Nairobi International Financial Centre very attractive due to the lower fixed rate of 5% on gains arising on the exit of investments. The rate will be applicable regardless of when the investment was made.
VAT exemption for the transfer of business as a going concern
The Bill proposes to make the transfer of business as a going concern exempt from VAT. Currently, VAT is applicable on such transfers at the standard rate of sixteen per cent (16%).
Implications
The application of VAT on the transfer of business as a going concern at the standard rate of sixteen per cent (16%) increased the cost of such transfers as the buyer would incur the VAT costs and in addition, where the buyer makes exempt supply, not be eligible to claim the input VAT. Since the transfer of shares is exempt from VAT, to save on the additional VAT cost, transaction parties have in most instances opted for the transfer of shares when acquiring a business. While the exemption is welcome as it will eliminate the additional VAT cost to the buyer, the vendor would not be able to deduct the input tax incurred in relation to the transfer. The ideal treatment would have been to zero rate such transfers to allow the seller to claim the input tax incurred in relation to the transfer.
Proposals that are disadvantageous to taxpayers
Digital Service Tax provision proposed to be repealed and proposed introduction of significant economic presence tax
The Tax Laws Amendment Bill proposes to repeal the provisions on digital service tax and introduce a tax known as significant economic presence tax. The significant economic presence tax will be payable by a non-resident person whose income from the provision of services is derived from or accrued in Kenya through a business carried out over a digital marketplace and is at the rate of three per cent (3%) of the gross turnover earned by the non-resident. Currently, non-resident persons are liable to pay digital service tax at the rate of 1.5% of the gross turnover. Persons who shall be exempt from the significant economic presence tax are (a) non-resident persons who offer digital services through permanent establishments in Kenya, (b) non-resident persons who carry on the business of transmitting messages by cables, radio, optical fibre, television, broadcasting, internet, satellite, or other similar methods of communication, (c) income subject to withholding tax, and (d) non-resident persons providing digital services to an airline in which the government of Kenya has at least forty-five per cent (45%) shareholding.
The significant economic presence tax is due to the KRA on or before the 20th day of the month following the end of the month in which the service was offered.
Implication
The key difference is that the tax burden for non-residents under the significant economic presence tax will be significantly higher at the rate of three per cent (3%) of the gross revenue as opposed to the current digital service tax that applies at the rate of one point five per cent (1.5%) of the gross revenue. This increase in the tax rate is likely to face resistance from non-resident digital service providers.
This was one of the proposals that was contained in the Finance Bill 2024 and which the government seeks to reintroduce.
Taxation of income earned from a digital marketplace or platform
The Bill proposes to deem income paid out by a resident or non-resident person, being the owner or operator of a digital marketplace or platform with respect to digital content monetization, goods, property or services to be income accrued in or derived from Kenya.
A platform is defined as 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.
Having deemed such income to be accrued or derived from Kenya, the Bill then proposes to require that owners and operators of digital marketplace or platforms withhold five per cent (5%) of the payment made to a resident person and twenty per cent (20%) where payments are made to a non-resident person.
Implications
This proposal though well-intentioned is likely to face resistance, especially by non-resident persons who may not derive any income from Kenya but would be required to deduct withholding tax at the rate of five per cent (5%) when making or facilitating a payment to a resident person. To such non-resident persons, this would be an additional compliance burden.
In addition, the Bill as drafted would also require non-resident owners and operators of digital marketplaces or platforms to deduct withholding tax when making payments to non-residents. This would mean that two non-resident persons would be subject to tax in Kenya. We note that there may be concerns as to whether such income is taxable in Kenya taking into account the international principles of taxation.
Imposition of withholding tax on payments made for the supply of goods to a public entity
The Bill proposes to subject to withholding tax any payments made to a person for the supply of goods to a public entity. The requirement to deduct withholding tax shall apply whether the payment is made to a resident person or a non-resident person without a permanent establishment. The public entity shall deduct withholding tax at the rate of zero-point five per cent (0.5%) of the payment made if the payment is to a resident person and five per cent (5%) if the payment is to a non-resident person. In relation to a non-resident person, the withholding tax shall be final. The income shall be deemed to be the person’s income for the year in which the payment is received.
A public entity is defined as a ministry, state department, state corporation, county department, or agency of the national or county Government.
Implications
The provision is a measure by the Government to ensure that persons who supply goods to the government also pay tax on the income earned from such supplies. There are many instances where supplies of goods by local persons to Government bodies are paid for, but such persons do not account for tax on the payment received. With the introduction of withholding tax on payment for goods, it will now be possible for the suppliers to be tracked through iTax as the tax withheld will appear on their ledgers. However, this is likely to face strong opposition from some suppliers who would argue that the amount withheld by the government amounts to all or a significant part of their profit especially where the goods involved have a low profit margin.
In addition, non-resident suppliers of goods will likely increase the cost of such goods since the withholding tax deducted in Kenya may not be recoverable in their home countries, and further, it is unlikely that the concerned Government bodies will gross up their payments to account for the withholding tax.
Proposed taxation of interest income earned from infrastructure bonds
The Tax Laws Amendment Bill proposes to subject to tax the interest income earned by resident and non-resident persons from all listed bonds, notes and other similar securities used to raise funds for infrastructure and other social services (commonly referred to as Infrastructure Bonds). Accordingly, a five per cent (5%) withholding tax shall be applicable on the payment of such interest to resident and non-resident persons should the proposal be adopted.
However, the interest earned from Infrastructure Bonds listed before this proposal’s coming into force shall continue to be exempt from tax.
Implications
Infrastructure Bonds and bonds in general have become quite popular with both retail and non-resident investors in the past with reports indicating that retail investors have overtaken traditional holders of government bonds such as insurers. Accordingly, this proposal can be seen as an attempt by the government to subject to interest income paid with respect to such bonds and increase the tax base. It remains to be seen what the effect of the imposition of the reduced 5% withholding tax as opposed to the 15% withholding tax applicable on normal bonds will have on the uptake of Infrastructure Bonds.
Minimum top-up tax
The Bill seeks to introduce a minimum top-up tax which is payable by a covered person where the combined effective tax rate in respect of that person for a year of income is less than fifteen per cent (15%).
The effective tax rate for a covered person shall be determined as follows:
Effective tax rate = (sum of all the adjusted taxes/ sum of all net income or loss for the year of income)*100%
The amount of tax payable shall be determined as follows:
The amount of tax payable = (15% of the net income or loss for the year of income of a covered person less the combined effective tax rate for the year of income) multiplied by the excess profit of the covered persons.
Covered persons means a resident person with a permanent establishment in Kenya who is a member of a multinational group and the group has a consolidated turnover of Euros seven hundred and fifty million (EUR 750,000,000) 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.
The following persons shall be exempt from minimum top-up tax:
- A public entity not engaged in business;
- A person whose income is exempt from tax under paragraph 10 of the First Schedule;
- A pension fund and its assets;
- 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; or
- An intergovernmental or supranational organisation including a wholly owned agency or organ of the intergovernmental or supranational organisation.
Adjusted covered taxes means 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 interests, and includes taxes on distributed profits, deemed profit distributions under this Act subject to such adjustments as may be prescribed.
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 recognised accounting standards in Kenya.
Excess profit means the net income or loss of a covered person for the year of income less:
- 10% for the employee costs; and
- 8% for the net book value of tangible assets:
Provided that the employee cost and book value of tangible assets may be adjusted as prescribed in regulations.
Impact and recommendation
This proposal is based on the Global Anti-Base Erosion Rules designed to ensure that multinationals pay a minimum level of tax in each jurisdiction. This is one of the proposals that was contained in the Finance Bill 2024 and which the government seeks to reintroduce.
The income of a registered family trust now subject to income tax
The Bill proposes to subject to tax the income of a registered family trust. Currently, the income and principal sum of a registered family trust is exempt from income tax.
Implications
There has been a significant uptake of registered family trusts as a preferred method of estate and succession planning. A key reason why registered family trusts have become quite popular is due to the tax exemptions such as making the income of a registered family trust exempt from income tax. Accordingly, the removal of the exemption will be a significant setback in making registered family trusts as preferred option of estate and succession planning in Kenya. This may also lead to a return of the popularity of offshore family trusts.
Gains on the transfer of immovable property to a family trust is now subject to income tax
The Bill proposes to subject to tax any gain arising from the transfer of immovable property to a family trust.
Implications
As mentioned above, the removal of tax exemptions relating to family trusts is likely to result in a reduction in the uptake of family trusts as preferred methods of succession planning.
Time of supply for exported goods
The Bill proposes to introduce a new test to determine the time of supply for exported goods as being the time when the registered person has the required export confirmation documents.
Implications
The time of supply for exported goods currently is the earlier of (a) the date on which the goods are delivered; (b) the date on which an invoice for the supply is issued; or (c) the date on which payment for the supply is received, in whole or in part. Various documents are declared concerning the exportation of goods and it is unclear what export confirmation documents (which would vary depending on the type of goods exported) mean. It could be argued that an export confirmation document means an export certificate which is issued upon exit of the goods through the border/port.
Changes concerning the claim of input VAT
The Bill proposes that the deduction of input tax be based on the actual ratio of taxable supplies to total supplies. Accordingly, a taxpayer who makes 90% zero-rated supplies would no longer be entitled to claim 100% of the input VAT.
Removal of tourism sector VAT exemptions
The Bill proposes to remove the following VAT exemptions that had been introduced to boost the tourism sector:
- Specially designed locally assembled motor vehicles for transportation of tourists, purchased before clearance through Customs by tour operators upon recommendation by the competent authority responsible for tourism promotion;
- Entry fees into national parks and national reserves; and
- The services of tour operators, excluding in-house supplies.
Implications
The exemptions had been introduced to incentivise the growth of the tourism sector. The sector has continued to grow every year with more tourists arriving in Kenya and the removal of the exemptions will have the effect of making tourism in Kenya more expensive.
Standard rate of VAT to be applicable on aeroplanes and aircraft
The Bill proposes to delete the VAT exemption provided for:
- 30.00-Aeroplanes and other Aircraft of unladen weight exceeding 15,000 kgs;
- 60.00- Spacecraft (including satellites) and suborbital and spacecraft launch vehicles;
- Hiring, leasing and chartering of aircraft excluding helicopters of tariff numbers 8802.11.00 and 8802.12.00;
- Direction-finding compasses, instruments and appliances for aircraft;
- Any other aircraft spare parts imported by aircraft operators and persons engaged in the business of aircraft maintenance upon recommendation by the competent authority responsible for civil aviation.
Implications
The VAT exemption for the sector was to encourage the acquisition of modern aircraft and aeroplanes primarily due to safety concerns associated with acquiring older aircraft or aeroplanes. The introduction of VAT at the standard rate may result in increased safety concerns where obsolete aircraft or aeroplanes are acquired due to the cost of new aircraft being prohibitively high. In addition, the proposal to impose VAT on aircraft spare parts will make Kenya a less attractive hub for aircraft maintenance due to the increased cost of such spare parts.
Removal of VAT exemption for goods intended to promote investment in the manufacturing sector
The Bill proposes to remove the VAT exemption available upon the determination of the Cabinet Secretary that such goods promote investment in the manufacturing sector and the value of such investment is not less than KES 2 billion.
Implication
This seems to be in line with the Government’s objective of doing away with exemptions that the Government does not deem necessary.
Goods subject to export and investment promotion levy
The Business Laws Amendment Bill proposes to delete the current list of goods subject to the export and investment promotion levy and replace it with a new list that will impose the levy on among others, the following items, imported footwear at 20% of customs value, vodka at 3% of customs value, cement clinker at 10% of the customs value, fully built motorcycles 3% of customs value and fully built electric motor cycles 3% of the customs value.
Introduction of excise duty on excisable services offered by a non-resident through a digital platform
The Bill proposes to introduce excise duty on excisable services offered in Kenya by a non-resident through a digital platform that would be payable by the non-resident person offering the service. The current list of excisable services in the Excise Duty Act and the current and proposed rates are set out below:
|
Description |
Current Excise Duty Rate |
Proposed rate |
|
Telephone and internet data services |
15% of their excisable value |
20% |
|
Fees charged for money transfer services by banks, money transfer agencies, and other financial service providers |
15% of their excisable value |
20% |
|
Betting |
12.5% of the amount wagered or staked |
15% |
|
Gaming |
12.5% of the amount wagered or staked |
15% |
|
Prize Competition |
12.5% of the amount wagered or staked |
15% |
|
Lottery |
12.5% of the amount wagered or staked |
15% |
|
Fees charged by digital lenders |
20% |
No new rate proposed. |
|
Fees charged on advertisements on television, print media, billboards, and radio stations on alcoholic beverages, betting, gaming, lotteries, and prize competition |
15% |
Introducing excise duty on advertisements on the internet or social media on alcoholic beverages, betting, gaming, lotteries, and prize competition |
Implications
We note that this provision would bring into the tax base, non-residents offering the above-mentioned services in Kenya through a digital platform which would ensure equality with the residents offering the services that are required to pay the same amount of excise duty. There is a risk that the non-residents offering the above services through a digital platform may block persons in Kenya from accessing their platforms.
Penalty for failure to remit withholding VAT
The Bill maintains the imposition of a penalty of ten per cent (10%) of the amount due where a withholding tax agent fails to deduct and remit the tax due. However, the penalty will be imposed if the tax deducted is not remitted by the fifth (5th) working day after the deduction was made.
Implications
This is among the various provisions geared towards enhancing compliance.
Proposals intended to clarify the legal position
Definition of royalty
The Bill proposes to amend the definition of royalty to include ‘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’.
Implications
The Bill proposes to tax the purchase of software whether by licence or otherwise as acquisition of royalty. This approach goes against International Best Practice as envisaged under the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital which recognises that software distributors make payment for copyrighted software but do not commercially exploit such software. This provision, if adopted will present an interesting divergence from the decision of the High Court in Seven Seas Technologies Limited v the Commissioner of Domestic Taxes which held that for a software-related payment to amount to a royalty that is subject to withholding tax, the payer must have acquired any or all of the rights that enable them to commercially exploit the software as envisaged under section 26 of the Copyright Act. These rights include the exclusive right to reproduce the software in any material form and the exclusive right to translate or adapt the software.
Clarification on products sold within the special economic zone
The Business Laws Amendment Bill seeks to provide that goods sold and that remain within the customs-controlled area of a special economic zone are not deemed to have entered the customs territory and therefore benefit from the benefits conferred in the Special Economic Zones Act.
Implication
This is a welcome clarification in light of the increased trade between entities within the customs-controlled areas of a special economic zone.
Non-resident contractors, sub-contractors, consultants, and employees subject to tax on income not directly related to aid projects
This proposal clarifies that any other income earned by a non-resident contractor, sub-contractor, consultant, or employee other than the income from the project financed by a grant shall be subject to tax.
The definition of the phrase “digital marketplace”
The phrase “digital marketplace” is currently defined in the Income Tax Act to mean “an online or electronic platform which enables users to sell or provide services, goods or other property to other users”.
The Tax Laws Amendment Bill proposes to amend the definition of the phrase to include specific examples of digital services such as “ride-hailing services, food delivery services, freelance services, and professional services”.
Implication
This proposal is seen as a move by the Government to clarify that providers of such platforms are providing a digital marketplace for the Kenyan Income Tax Act.
Content of a tax invoice and procedure with respect to small businesses or small farmers
The Bill proposes to amend the Tax Procedures Act to clarify the contents of an electronic tax invoice. In addition, the Bill proposes to provide that where a supply is received from a small business or small-scale farmer whose turnover does not exceed KES 1,000,000, the purchaser shall issue a tax invoice for purposes of ascertaining tax liability.
Implication
This proposal is seen as a move by the Government to clarify the position on electronic tax invoices and also clarify the concerns that have previously been raised with respect to the uptake of electronic tax invoices by small-scale business persons.
