The National Treasury has submitted the Finance Bill, 2023 (the Bill), to the National Assembly for consideration and enactment into the Finance Act. The Finance Act is a statute that brings into effect fiscal measures proposed by the government as part of the annual budget process.

Whilst the Finance Bill is yet to be officially published, we have reviewed the current version of the bill circulating amongst industry stakeholders and set out below the key proposed changes.

The detailed analysis is attached herein.

• Changes in personal income tax rates – there is a proposal to introduce a higher personal income tax rate of 35% on the income of individuals which is above KES 6,000,000 per year (KES 500,000 per month).
• Taxation of branches/permanent establishments – there is a proposed reduction of the non-resident corporate tax rate from 37.5% to 30% from January 2024.Related thereto, the Bill proposes to tax the repatriated profits of branch/permanent establishment.  Repatriated profit is determined by assessing the profits of a branch for a year of income against the increase in the value of its assets.
• Changes on EBITDA-based restriction of interest expense – there is a proposal to restrict the applicability of EBITDA-based interest restriction rules to interest payable on loans only from non-resident lenders. Previously, interest on all loans including from resident lenders was subject to the restriction.In addition, the restricted interest expense may be deducted within the subsequent three years provided that even then such interest expense together with other interest expenses on foreign loans does not exceed 30% of EBITDA.

  Further, the Bill proposes to exclude companies involved in manufacturing from the exemption from the restriction of interest expenses under the EBITDA rule.

  In addition, the Bill proposes that any exchange losses whose claim have been deferred by a Company whose interest expense on loans to non-resident persons exceed 30% of EBITDA may be claimed over a period of three years from the time the loss was realized.

• Taxation of ESOP benefits for employees of start-ups – taxation of ESOP benefits for employees of startups will be deferred and not taxed immediately the option is exercised but will be taxed within 30 days of the earlier of:

• • the expiry of 5 years from the date the option was granted;
  • the disposal of the shares by the employee; or
  • the date the employee ceases to be an employee of the eligible startup.

A start-up is one set up in Kenya, whose income is below KES 100 million and which has been in existence for less than 5 years.

• Expansion of scope of withholding tax and change of withholding tax due date – it is proposed to subject to withholding tax the following payments to resident persons:

• • payments made in relation to sales, promotion, marketing and advertising services at the rate of 5% of the gross amount the aggregate value of which is at least KES 24,000 in a month; and
  • payments made in relation to digital content monetization at the rate of 15%. This would capture so-called “influencers”.

• Introduction of tax on digital assets – a new Digital Asset Tax is proposed at the rate of 3% and it will be applicable to the income derived from the transfer or exchange of digital assets. Digital assets are defined to include:

• • anything of value that is not tangible and cryptocurrencies, token codes, numbers held in digital form and generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration that can be transferred, stored or exchanged electronically; and
  • a non-fungible token or any other token by whatever name called.

• Investment Allowance Deductions – there is a proposal to introduce investment deduction claims on capital expenditure incurred on the construction of docks at the rate of 10% per annum.
  In addition, there is a proposal to reintroduce investment deduction claim on capital expenditure incurred on industrial buildings at the rate of 10% per annum.

• Deduction of expenditure whose invoice is not generated through an electronic tax invoice system – claim of expenditure which is not supported by invoices generated from an electronic tax invoice system will not be allowed.

• Restriction of accelerated capital allowance – currently, the Income Tax Act provides for accelerated investment allowance as follows:
  • 100% where the investment value outside Nairobi City County and Mombasa City County in the year is KES 250 million, the cumulative investment in the preceding 3 years outside Nairobi County and Mombasa County is at least KES 2 billion or the investment is incurred in a Special Economic Zone; and
  • 150% where the cumulative investment value for the preceding four years from 1 July 2022 or the cumulative investment for the succeeding three years outside Nairobi City County or Mombasa County is at least KES 2 billion.

The Bill proposes to limit the applicability of the 100% and 150% investment deduction allowance to hotel buildings, buildings used for manufacture and machinery used for manufacture.  It further proposes that the investment deduction allowance of 100% shall not apply to investments which due to the nature of their business, must be in places which are outside Nairobi City County and Mombasa County.

• Changes of capital gains tax -the Bill proposes to levy capital gains tax on gains derived from the alienation of shares or comparable interests in a partnership or trust if during the year preceding the alienation, the shares or comparable interests derived more than twenty per cent of their value directly or indirectly from immovable property situated in Kenya.

• Exported services – exemption from VAT of exported services is proposed to be reintroduced. This is a welcome move.

• Transfer of a business as a going concern – the Bill proposes to make the transfer of a business as a going concern exempt from VAT. Such transfers are currently subject to VAT at the standard rate.

• Liquified petroleum gas (LPG) – the Bill proposes to delete the 8% VAT applicable to LPG and make LPG exempt from VAT. The rate of 8% was introduced barely a year ago and prior to that, LPG was subject to VAT at the rate of 16%. In addition, the importation of LPG is proposed to be exempted from import declaration fees and railway development levy. This will make LPG quite affordable.

• VAT on insurance compensation – the Bill proposes to introduce VAT on insurance compensation in relation to assets on which input vat had been claimed.

• Payment of excise duty within 24 hours from closure of transactions of the day – there is a proposal to introduce a requirement for excise duty on betting and gaming offered through a platform or other medium to be remitted to the KRA by a bookmaker within 24 hours from midnight of the relevant day.

• KRA’s power to adjust excise duty rates for inflation taken away – the Bill proposes to repeal section 10 of the Excise Duty Act which empowers KRA, with the approval of the Cabinet Secretary, to by notice in the Gazette adjust the specific rate of excise duty once every year to take inflation into account.

• Tax amnesty – the Bill proposes to grant an amnesty on fines, penalties and interest on tax debt where a person pays the principal taxes not later than 30 June 2023, does not incur a further tax debt and signs a commitment letter for settlement of all outstanding taxes owed.

• Requirement to deposit 20% of the disputed amount before lodging an appeal at the High Court – the Bill proposes to introduce a requirement for taxpayers to deposit with the KRA 20% of the disputed tax or provide a security equivalent to 20% of the disputed tax before filing an appeal of a decision of the Tax Appeals Tribunal at the High Court. If the Court makes a decision in favour of the taxpayer, the KRA would be required to credit the amount or security within 30 days after the determination of the appeal.

• Reduction of the rate of import declaration duty and railway development levy – the rate of import declaration fees is proposed to be reduced from 3.5 to 2.5% and that of railway development levy from 2% to 1.5%