THE YEAR IN REVIEW – RECENT TAX DEVELOPMENTS IN KENYA
Members of Bowmans Tax Practice in Kenya have compiled the following list of high-level tax developments that will impact business in Kenya.
The Tax Laws (Amendment) Act, 2020 (the Amendment Act) was assented to on 23 December 2020 with its effective date being 1 January 2021. The Amendment Act has reversed the COVID-19 relief measures (among others) introduced by the Tax Laws (Amendment) Act, 2020. More specifically, the Amendment Act reversed the lower rate of 25% for corporation tax to the pre-COVID-19 rate of 30%.
The Amendment Act did not reverse the 15% withholding tax rate chargeable on dividends paid to non-resident shareholders. This means that non-resident investors/shareholders will be subjected to an effective tax rate of 40.5% (which could be higher if the investee company/ subsidiary is subject to the minimum tax – see below). This will change the dynamics of selecting the investment/operational vehicles in Kenya, as a branch (or Permanent Establishment) is subject to a lower effective tax rate of 37.5%, although it does have some restrictions on deduction of expenses.
Minimum tax payable
The Finance Act, 2020 introduced a minimum tax payable at the rate of 1% of the gross revenues of companies subject to corporation tax, effective 1 January 2021.
The minimum tax will be payable where the instalment tax that would have ordinarily been payable by the entity is lower than the minimum tax whilst instalment tax will be payable if it is higher than the minimum tax. The minimum tax is a final tax which cannot be carried forward and offset against future taxes, unlike instalment taxes.
Value Added Tax
With effect from 1 January 2021, the standard rate of VAT is 16%, increased from the lower rate of 14% introduced as part of the Covid-19 relief measures.
In addition, the Amendment Act has amended the Value Added Tax Act of 2013 (VAT Act) to provide that a VAT registered person who is a manufacturer may make a deduction for input tax with respect to taxable supplies made to an official aid funded project approved by the Cabinet Secretary in accordance with the First Schedule to the VAT Act.
Currently, supplies of taxable goods imported or purchased for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury, are exempt from VAT.
The VAT Act has also been amended to require that in order to claim input VAT, the claimant must confirm that the supplier has declared, accounted for and paid the output VAT due on the supply.
Digital Services Tax
Effective 1 January 2021, a new Digital Services Tax (DST) will be payable by a person whose income arises from the provision of services derived from or accruing in Kenya through a digital market place at the rate of 1.5% of the gross transaction value.
The DST is an advance tax for residents and non-residents with permanent establishments in Kenya, and a final tax for non-residents without a permanent establishment in Kenya. The DST will be due at the time of the transfer of the payment for the services to the service provider and it is expected that the Kenya Revenue Authority (KRA) will appoint digital service tax agents to assist with the collections.
The Finance Act 2020 (the Act), which was assented to by President Uhuru Kenyatta on 30 June 2020, introduced a wide range of tax and other measures aimed at raising additional revenue for the financial year 2020/21. Among these measures is the Voluntary Tax Disclosure Programme (VTDP).
The VTDP is a program designed to assist tax payers achieve tax compliance, by allowing them to voluntarily declare their historical tax liabilities to KRA and settle the principal tax, while obtaining the benefit of not having to pay, under certain conditions, the resulting penalties and Interest.
The VTDP will run for a period of three years - from 1 January 2021 to 31 December 2023.
All taxpayers qualify for the VTDP, provided that:
- The tax liabilities were accrued by the taxpayer within a period of five years prior to 1 July 2020 (1 July 2015 to 1 July 2020);
- The taxpayer is not under audit or investigation and is not a party to ongoing litigation in respect of the tax liabilities or any matter relating to the tax liabilities; and
- The taxpayer has not been notified of a pending audit or investigation by the Commissioner of Domestic Taxes at the KRA (the Commissioner).
Taxpayers who apply for the VTDP will qualify for relief in respect of penalties and interest, and will not be prosecuted with respect to the tax liabilities disclosed.
For the relief to apply, the tax payer will first be required to settle the principal tax liabilities, as the benefit is only available with regard to penalties and interest.
Tax payers who opt for the VTDP will be entitled to a:
- 100% waiver of the applicable penalties and interest, if the principal tax is disclosed and paid within the calendar year 2021;
- 50% waiver of the applicable penalties and interest, if the principal tax is disclosed and paid within the calendar year 2022; and
- 25% waiver of the applicable penalties and interest, if the principal tax is disclosed and paid within the calendar year 2023.
No waiver of the penalties and interest will be available if the principal tax is paid after the third year.
Taxpayers who opt to take up the VTDP are required to apply to the Commissioner in the prescribed form (in all likelihood via the iTax platform).
Provided that the taxpayer has disclosed all material facts in respect of the historical tax liabilities to the Commissioner, relief is expected to be granted and an agreement entered into with the taxpayer setting out the terms of payment of the tax liabilities and the period within which the payment shall be made (being not more than one year from the date of the agreement).
Entry into the agreement with the Commissioner constitutes a waiver by the taxpayer of his/ her rights to seek any other remedy including the right to appeal with respect to the taxes, penalties and interest remitted by the Commissioner.
The relief from payment of penalties and interest and prosecution shall be withdrawn by the Commissioner where:
- the Commissioner discovers that the taxpayer failed to disclose material facts in respect of the relief before the expiry of the agreement entered into with the taxpayer; or
- the taxpayer fails to meet the terms of the agreement entered into with the Commissioner.
In such instances, the Commissioner may issue an assessment in respect of the tax liabilities, penalties and interest or prosecute the taxpayer.