The Kenya Finance Bill 2018
Following the presentation of the Budget Statement for the fiscal year 2018/2019 (discussed in our Highlights of the Budget Statement 2018/2019), the Cabinet Secretary for National Treasury and Planning tabled the Finance Bill 2018 (the Bill) for consideration by Parliament.
We highlight below the key taxation and financial proposals the Bill seeks to introduce.
A. Income Tax
| Proposed Amendment |
Comment |
| Dividends: the Bill proposes to amend section 7(1) of the Income Tax Act to reclassify the following as dividends, with effect from 1 July 2018:
i. any cash or asset transferred by a company to or for the benefit of a shareholder or any person related to that shareholder;
ii. the discharge of a shareholder or any person related to a shareholder from a quantifiable obligation owed to the company by the shareholder or related person;
iii. an amount used by a company for the benefit of a shareholder or any person related to that shareholder;
iv. the settlement of a debt by a company to a third party which is owed by a shareholder or any person related to that shareholder; and
v. an amount representing additional taxable income or reduced assessed loss of a company by virtue of a transaction with a shareholder or a person related to a shareholder, resulting from an adjustment. |
The effect of this amendment is to widen the definition of dividends bringing various transactions between companies and their shareholders; persons related to shareholders; transactions by a company for the benefit of its shareholders; or related persons and thus subject such income to taxation as a dividend. |
| Compensating Tax: The Bill proposes to amend the provisions relating to compensating tax in the Income Tax Act. With effect from 1 January 2019, income which is untaxed, out of which dividends are paid, will be subject to tax at the resident corporate rate of 30%. The Bill repeals the provisions relating to the maintenance of a dividend tax account. |
If passed, companies will no longer be required to maintain a dividend tax account. The provision also clarifies that the rate applicable on distributions out of untaxed income will be the resident corporate tax rate.
An effect of this amendment would be that income which has been taxed at a lower tax rate such as capital gains taxed at 5% would not be subjected to compensating tax.
However, it is possible that dividends paid to holding companies that own more than 12.5% of the shares of its subsidiaries which are exempt (proposed in the Income Tax Bill 2018 to increase to 25%), will be treated as untaxed income and thus subject to tax on distributions to ultimate shareholders. |
| From turnover tax to presumptive tax: The Bill proposes to eliminate turnover tax from 1 January 2019 and replace it with a presumptive tax. The presumptive tax is to be payable by a resident person whose turnover from business does not exceed KES 5 million during a year of income.
The presumptive tax shall apply to all persons issued with or liable to be issued with a business permit by a county government, at the rate of 15% of the fee for the business permit. The tax must be paid at the time of payment, or renewal of, the business permit. |
In a bid to widen the tax net, turnover tax, which was introduced by the Finance Act 2006, has been replaced by a presumptive tax applicable to persons who have or are required to have a business permit issued by a County.
The success of presumptive tax in taxing the informal sector is not clear since business permits are required to be obtained by persons operating from business premises which the informal sector does not always have. Additionally, this will require co-operation with the county governments as it is intended (presumably) that the tax be collected by county governments at the same time as they are collecting the fees for the business permits. However, we await to see whether the tax will be paid directly to the KRA or to the county governments as agents of KRA. |
| Reprieve for manufacturers: The Bill proposes to introduce an allowable deduction/expense for manufacturers from 1 January 2019, amounting to 30% of their electricity costs, in addition to the normal electricity expense, subject to conditions to be set by the Ministry of Energy. |
Since manufacturing is one of the pillars of the Government’s Big Four Agenda and electricity costs comprise a major component of manufacturers’ expenses, it is no surprise that the Government has agreed to support this sector by providing relief on electricity costs.
We are aware that manufacturers were seeking various tax reliefs including a removal of all taxes and levies on power bills for manufacturers, deduction of electricity costs and the energy costs to be set off against corporate income tax liabilities. The new provision will add some relief to manufacturers but for the sector to achieve its full potential more will need to be done. |
| Capital gains tax for insurers: The Bill provides for capital gains tax (CGT) on transfer of property of an insurance company, other than property connected to life insurance business at the current CGT rate of 5%, to be effective from 1 July 2018. |
Currently section 19 of the Income Tax Act which provides for ascertainment of income of insurance companies does not expressly provide for taxation of capital gains for property transfers made by general insurance companies, and it has not been clear whether such capital gains are subject to CGT. The proposed amendment to section 19 would indicate that capital gains tax from property transactions that have not previously been subject to CGT for general insurance businesses will be applicable on enactment.
Property would include real property (land, shares, and any other property held by an insurance company).
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| Withholding tax on insurance premiums and demurrage charges: The Bill proposes to expand the categories of payments subject to withholding tax from 1 July 2018, by introducing:
(a) 5% withholding tax on insurance premiums paid to non-resident insurers without a permanent establishment in Kenya, but excluding payments for aircraft insurance; and
(b) 20% withholding tax on demurrage charges payable to non-resident persons without a permanent establishment in Kenya (demurrage charges means the penalty paid for exceeding the period allowed for taking delivery of goods, or returning of any equipment used for transportation of goods). |
This proposal is in response to the growth of the insurance sector, and the need to seal the tax loophole on payment of premiums to non-resident persons. The effect of this provision is likely to increase insurance premiums given the relatively small reinsurance market in Kenya.
There will be an obligation for importers to account for withholding tax on demurrage payments.
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B. Value Added Tax
| Proposed Amendment |
Comment |
| New exemptions: The Bill introduces exemptions on value added tax (VAT) on the following:
(a) parts imported or purchased locally for the assembly of computers;
(b) alcoholic or non-alcoholic beverages supplied to the Kenya Defence Forces canteen organisation;
(c) equipment purchased for construction of grain storage facilities;
(d) raw materials for production of animal feeds;
(e) specialised equipment for the development and generation of wind energy (currently the exemption only applies for equipment used to generate solar energy); and
(f) postal services provided through the supply of postage stamps, including rental of post boxes or mail bags and any subsidiary services thereto.
The above amendments are proposed to take effect from 1 July 2018. |
The rationale for the exemption on computer parts is to encourage local manufacture and assembly of computers in a bid to expand the manufacturing sector.
The exemption on equipment for construction of grain storage facilities expands the current exemption under the VAT Act which applies only to materials for the construction of grain storage facilities.
Some of the raw materials used to manufacture animal feeds are currently vatable. The exemption of raw materials is intended to make animal feeds more affordable to farmers and attract more manufacturers to invest in the sector. |
C. Excise Duty and Miscellaneous Fees and Levies
| Proposed Amendment |
Comment |
| Increased excise duty for private passenger vehicles: The Bill proposes to increase excise duty for imported private passenger motor vehicles (above 2,500 cc diesel engine capacity and above 3,000 cc petrol engine capacity) from 20% to 30%, effective 1 July 2018. |
This will result in increased import costs for higher capacity private motor vehicles. |
| Money transfer: The proposed amendment (with effect from 1 July 2018):
(a) increases excise duty on fees charged for money transfer services by cellular phone service providers from 10% to 12%;
(b) introduces 0.05% excise duty on any transfer of KES 500,000 or more through such entities; and
(c) introduces 10% excise duty on fees charged by banks, money transfer agencies and other financial services providers for money transfer services.
The amendment also seeks to mandate the Commissioner-General of the KRA (the Commissioner) to pay the excise duty generated from money transfer services into the Sports, Arts and Social Development Fund established under the Public Finance Management Act to support social development including universal health care. |
Over the last few years excise duty has become the go to tax for bridging the deficit.
There is a clear intention for the additional excise duty to go towards funding health care, which is one of the pillars of the Big Four Agenda.
The increase in excise duty will impact the cost of money transfer services which are widely used in the country and likely to impact the less privileged. |
| Kerosene and gas oil: The Bill proposes a single excise duty rate for both illuminating kerosene and gas oil of KES 10,305 per 1,000 litres, effective 1 July 2018. Currently illuminating kerosene attracts a duty rate of KES 7,205 per 1,000 litres while gas oil is subject to excise duty at the rate of KES 10,305 per 1,000 litres. |
By providing a uniform exercise duty rate for both types of fuels, the Government hopes to curtail adulteration of fuel.
The amendment will have the effect of making kerosene expensive for low income households relying on kerosene. |
| Export levy on copper waste: The Bill imposes a 20% export levy on the export of copper waste and scrap, effective 1 October 2018. |
This is intended to deter exports of copper waste and scrap metal with the aim of deterring vandalism. |
D. Tax Procedures Act and Tax Appeals Tribunal Act
| Proposed Amendment |
Comment |
| Extension of time to submit returns: According to the Bill, an application for extension of time must be made at least 15 days before the due date for a monthly return, and 30 days before the due date for an annual return. The Commissioner must respond to the applicant at least 5 days before the deadline, and shall be deemed to have granted the application if there is no response. |
This proposal is aimed at clarifying the procedure and timelines for applying for extension of time to submit a return. |
| Extension of tax amnesty deadline: The Bill proposes to extend the deadline for making declarations under the tax amnesty from 30 June 2018 to 30 June 2019. It is also proposed that the income in respect of which the amnesty applies be income for any period ending on or before 31 December 2017 instead of 31 December 2016.
Pursuant to the amendment, the funds transferred back to Kenya under the amnesty will be exempt from the provisions of the Proceeds of Crime and Anti-Money Laundering Act or any other Act relating to reporting and investigation of financial transactions. However, this exemption shall not apply to funds acquired through terrorism, poaching and drug trafficking. |
The extension of the deadline and exemption from investigation under other laws is aimed at increasing the uptake of the tax amnesty.
Low uptake of the amnesty is probably caused by apprehension about investigation under other laws such as anti-money laundering laws.
It is unclear from the amendments how those that have already applied for amnesty will be treated. |
| Higher late payment interest: The Bill seeks to increase the late payment interest for tax from 1% of principal tax due to 2%.
Late payment penalty: The Bill introduces a penalty for late payment of tax at the rate of 20% of the tax due. |
This proposal is made in response to taxpayers filing returns on time but without paying the taxes due on time. This is meant to “encourage” due payment of taxes on time. |
Late submission penalty: the Bill proposes to distinguish the penalties for late submission of tax returns as follows:
| |
Current penalty |
Proposed
penalty |
| VAT and excise duty |
The higher of 5% of the tax payable or KES 20,000 |
The higher of 5% of the tax payable or KES 10,000 |
| Any other case for an individual (besides employment income and turnover tax**) |
The higher of 5% of the tax payable or KES 20,000 |
The higher of 5% of the tax payable or KES 2,000 |
| Any other case for a non-individual (besides employment income and turnover tax**) |
The higher of 5% of the tax payable or KES 20,000 |
No change |
** Proposed to be replaced with presumptive tax. |
The rationale for reducing the penalty for VAT and excise duty may be because the returns for those categories of tax are submitted more frequently. The reduction of penalties on returns by individuals would provide a reprieve to individual taxpayers. |
| The Bill proposes to amend the Tax Appeals Tribunal Act to allow parties to an appeal to settle the dispute out of the Tribunal. The time taken to resolve the matter out of the Tribunal will not be included in the 90 day period within which the Tribunal must determine an appeal. |
This allows the parties to an appeal the option to resolve the dispute through alternative means. |
The above amendments proposed to the Tax Procedures Act and Tax Appeals Tribunal Act, if passed, will take effect from 1 July 2018.
E. Introduction of special operating framework arrangement
The Bill introduces the concept of a special operating framework arrangement. A “special operating framework arrangement” has not been defined in the Bill. In the Budget Statement, the Cabinet Secretary indicated that the purpose of the framework and the related incentives is to encourage investment in the country. Further guidance will be required to understand what a special operating framework arrangement entails. With regard to this arrangement, the Bill proposes:
(a) that for income tax purposes, the rate of tax applicable for companies engaged in business under a special operating framework arrangement with the Government shall be determined in that arrangement, with effect from 1 January 2019;
(b) exemptions from VAT, excise duty, for goods imported or purchased locally for direct and exclusive use in the implementation of projects under a special operating framework arrangement, with effect from 1 July 2018;
(c) exemptions from import declaration fee and railway development levy for goods imported or purchased locally for direct and exclusive use in the implementation of projects under a special operating framework arrangement, with effect from 1 October 2018; and
(d) exemption from VAT for services imported or purchased locally for direct and exclusive use in the implementation of projects under a special operating framework arrangement, with effect from 1 July 2018.
F. Other reforms
The Bill proposes a number of changes to various statutes, including:
(a) The Banking Act: the Bill proposes to amend the Banking Act to remove the capping of interest rates.
(b) The Betting, Lotteries and Gaming Act: the Bill introduces “fit and proper” criteria for applicants for licences under the Act. It also mandates the Commissioner to pay all the proceeds of tax paid under the Act into the Sports, Arts and Social Development Fund established under the Public Finance Management Act. The Bill also introduces provisions on late payment of tax that mirror the proposals in the Tax Procedures Act.
(c) The Stamp Duty Act: the Bill seeks to amend the Stamp Duty Act to exempt from stamp duty all instruments executed for purposes of collection and recovery of tax and instruments relating to the business activities of licenced special economic zone enterprises, developers and operators.
(d) The Retirement Benefits Act: the Bill seeks to amend the Retirement Benefits Act to provide for penalties payable for late submission of investment returns and contribution returns by fund managers and administrators. The amendments are intended to increase compliance with the requirements on submission of statutory returns under the Act.
(e) The Central Bank of Kenya Act: the Bill seeks to expand the mandate of the Central Bank of Kenya (CBK) to include licensing and supervision of mortgage refinance companies who engage in mortgage refinance business (defined as the business of providing long term financing to primary mortgage lenders for housing finance and any other activity that CBK may from time to time prescribe).
(f) The Employment Act: there is a proposed amendment of the Employment Act to provide that effective 1 January 2019, an employer shall contribute to the National Housing Development Fund, in respect of each of their employees, 0.5% of the employee’s gross monthly emoluments while the employee will contribute 0.5% of their monthly earnings, both totalling a maximum of KES 5,000.
(g) The Proceeds of Crime and Anti-Money Laundering Act: the proposed amendments seek to require reporting institutions to apply enhanced customer due diligence on business relationships and transactions with any natural and legal persons, legal arrangements or financial institutions originating from countries identified as posing a higher risk of money laundering, terrorism financing or proliferation, and apply countermeasures to mitigate money laundering or terrorism financing risks. The Bill also proposes to include the Sacco Societies Regulatory Authority as one of the supervisory bodies under the Act, in order to give it a legal basis to monitor the compliance of deposit-taking SACCOs with respect to prevention of money laundering.
Some of the provisions in the Bill may change as the Bill undergoes debate in Parliament. We will update you on any variations once the Bill is enacted into law.
For further assistance please contact Alex Mathini, Partner Corporate Commercial and Head of Tax, the Bowmans Kenya Tax Team or your relationship partner at Bowmans Kenya.
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