Filing of Digital Service Tax (DST) Return

Posted on February 15th, 2021

Further to our earlier legal alert issued on 16th December 2020 on “Understanding Digital Tax and its Implementation in Kenya” we wish to inform and remind all digital service providers operating in the digital marketplace in Kenya of the mandatory requirement to file DST returns and make payment for the tax due, by 20th February 2021.

This is pursuant to Regulation 10 (2) of the Income Tax (Digital Service Tax) Regulation, 2020 which requires all digital service providers to file their DST returns every 20th day of the following month that the digital service was offered. Non-compliance with the requirement shall attract penalties and sanctions as prescribed under the Tax Procedures Act, 2015.

Further to this, Oraro & Company Advocates through its flagship event series dubbed “Fresh Thinking” will host a webinar on 5th March 2021 to discuss the recently enacted Income Tax (Digital Service Tax) Regulations, 2020 and its ramifications on the digital marketplace. We shall provide more details in due course and invite you to participate.

Please click here to download the alert.


This alert is for informational purposes only and is not intended to constitute legal advice. If you have any queries or need clarifications, please do not hesitate to contact Lilian Renee Omondi (renee@oraro.co.ke), Meshack Kwaka (meshack@oraro.co.ke), Wanjala Opwora (wanjala@oraro.co.ke), or your usual contact at our firm.

Recent Decision Underscores Need for Court Sanction in The Carrying Out of Commission’s Mandate

Posted on February 15th, 2021

The High Court (Jairus J) has quashed the decision of the Ethics and Anti-Corruption Commission (the Commission) that purported to compel Telkom Kenya Limited (Telkom) to suspend and recall the recent sale of its property pending investigations by the Commission. In a landmark Judgment, Justice Jairus held that it is only through a Court Order that the Commission may seek to recover public assets and/or prevent their further dissipation.

The Dispute

Sometime in 2018, Telkom resolved to conclude a joint venture with Airtel Networks Kenya Limited (Airtel). Telkom then received a letter from the Commission demanding that it provides various documents to assist in investigations of alleged misappropriation of public funds during the process of privatization. The Commission, however, did not give specific details of the provisions upon which it had anchored its request for information nor of the matters it was investigating as required by law. Telkom only learnt from the press, later on, that that the Commission was seeking to prevent an alleged dilution of Government’s stake in Telkom.

Following the alleged investigations, the Commission directed the Communication Commission of Kenya (CCK) and the Competition Authority of Kenya (CAK) to withhold their approval of the merger, thus stalling completely the joint venture between Telkom and Airtel. Further, by letter dated 26th February 2020, the Commission wrote to Telkom informing it that it was investigating allegations of misappropriation of assets owned and disposed by Telkom before and after its privatization.

In order to facilitate the investigations, the Commission demanded that Telkom provide a list of all its properties and their value. The Commission also demanded that Telkom should recall any recent sale of its property and suspend any further sale pending the conclusion of the investigations.

Aggrieved by these demands, Telkom, through the firm of Oraro & Company Advocates, wrote to the Commission and sought to be provided with the specific details of the allegations made against it. It also clarified that the suspension of the sale would not only hurt its financial operations but also expose it to loss arising from being in breach of its obligations to third parties.

The Commission did not cede to Telkom’s demand, thereby necessitating Telkom, through Oraro & Company Advocates, to institute judicial review proceedings seeking to quash the Commission’s decision directing it to provide the list of properties and recall and/or suspend any recent sale of property or further sale of property.

Decision

In his Judgment, Justice Jairus began by noting the lengthy dispute between Telkom and the Commission and narrowed down to whether the Commission had powers under the Constitution as well as statute law to demand the suspension and/or recall the sale of Telkom’s assets in the manner it purported to do. The Judge proceeded by considering the Commission’s mandate in undertaking its constitutional and statutory functions in the context of investigation.

Justice Jairus held that the law does not only clothe the Commission with the power to investigate but also how the investigation should be conducted in certain instances. In this regard, the Judge held that the moment Telkom, through its Advocates, questioned the legal basis of its decision, it was the Commission’s responsibility to point out which particular provision of the law it relied upon in executing its investigation mandate.

The Court noted that the Commission is not known to write in vain idle letters when the Constitution and statutes have armed it with necessary mechanism to gather whatever information it required to execute its mandate. Therefore, the Judge noted, Telkom’s apprehension regarding the consequences of not complying with the terms of the unlawful letter, were justified.

Turning to the crux of the matter, that is, recovery and suspension of sale of public property, the Judge agreed with submissions by George Oraro SC on behalf of Telkom, that the only known means in law by which the Commission can protect and recover public property, is through Court action. In particular, the Judge noted that “it is only by a Court Order that any of the assets disposed of by the applicant may be recovered and it is only through the same means that the applicant may be restrained from further disposing its property.

For the abovementioned reason, the Judge held that the Commission’s purported decision to recover Telkom’s assets or prohibit its sale was ultra vires, illegal, irrational and tainted by procedural impropriety.

Telkom Kenya Limited was represented in this judicial review by our team led by George Oraro SC, Senior Partner, assisted by Noella Lubano, Partner and Erastus Rabut, Associate.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken to be or construed as a legal opinion. If you have any queries or need clarifications, please do not hesitate to contact Noella Lubano (noella@oraro.co.ke), Erastus Rabut (erastus@oraro.co.ke) or your usual contact at our firm.

The Stamp Duty (Valuation of Immovable Property) Regulations, 2020

Posted on February 9th, 2021

On 5th August 2020, the Cabinet Secretary for National Treasury and Planning published the Stamp Duty (Valuation of Immovable Property) Regulations, 2020 (“the Regulations”). The Regulations expound on various issues including the appointment of private valuers, valuation of immovable property and objection of the ascertained value, where necessary. In this alert, we highlight the salient provisions of the Regulations, as follows:-

  1. Appointment of Private Valuers

The Regulations provide that a person who wishes to be appointed as a private valuer is required to apply in writing to the Chief Government Valuer to be appointed as such. The applicant should be registered in accordance with the Valuers Act (Cap. 532) Laws  of Kenya, and should provide proof of physical office address together with a valid tax compliance certificate.

Upon receipt of the application, the Chief Government Valuer is obliged by a written decision, to either approve or reject the application within thirty (30) days. If approved, the applicant is appointed for a period of three (3) years, after which he or she may apply for reappointment.

  1. Valuation of Immovable Property

The transferee of the immovable property initiates the process by applying in writing to the Chief Government Valuer. The transferee also elects whether the valuation should be undertaken by a Government Valuer or private valuer (“Appointed Valuer”). The Chief Government Valuer assigns the valuation to either a Government Valuer or an Appointed Valuer, as the case may be. Where the task is assigned to an Appointed Valuer, the Chief Government Valuer will notify the transferee within seven (7) days from the application date, details of the name of the Appointed Valuer.

Where a valuation is conducted by an Appointed Valuer, the related costs are to be borne by the transferee.  No fee is however payable, for valuations conducted by the Government Valuer.

The Government Valuer is required to submit the valuation report to the Chief Government Valuer within twenty-one (21) days from the date of election by transferee. On the other hand, the Appointed Valuer has to submit the valuation report immediately after payment by the transferee.

The Regulations specify that the following documents should accompany the valuation report:

  • a copy of the cadastral map indicating the location of the immovable property
  • a copy of the title to the immovable property
  • the KRA Personal Identification Number (PIN) of the transferee
  • any other relevant documents relating to the immovable property

The Chief Government Valuer is required to review the valuation report and upon approval, he should notify the transferee and the Collector of Stamp Duty of the market value of the property and the stamp duty payable. Where the Chief Government Valuer disagrees with the report, the report will be revised and the concerned valuer will be subsequently notified.

The Regulations are also specific that the report is valid for a period of twelve (12) months.

  1. Lodging of Objections

If the transferee is aggrieved by the valuation, he or she can lodge an objection within twenty-one (21) days from the date of receiving the notification of the approved market value. The objection could be based on either of the following grounds:

  • The value assigned to the immovable property
  • The apportionment of the area, dimensions or description of immovable property
  • Immovable property that should have been included in the valuation has been valued separately
  • Immovable property that should have been valued separately has been included
  • The person named in the valuation report is not the real transferee

However, the period within which one can lodge the objection may be extended, on the grounds that the transferee is outside Kenya or is unwell or for any other reasonable reason. The extension will be for a period not exceeding one (1) year, from the date the approved value was communicated to the transferee.

  1. Issuance of Notices and Documents by the Chief Government Valuer

All notices and documents to be issued by the Chief Government Valuer may either be delivered to the transferee or their representative, sending it to the last known address of the person or transmitting it in electronic form to the transferee’s email address.

The Regulations signify a new approach by the Government, regarding valuation of immovable property in the country. People have been granted the much-needed freedom of choice, to determine who will undertake their valuations. Previously, all valuations for Stamp Duty were automatically conducted by Government Valuers.

Further, the inclusion of Appointed Valuers offers the Government extra manpower in the valuation exercise. This will have a domino effect of expediting valuations, as more valuers will undertake valuations, as and when required. This may signify a departure from earlier experiences of backlogs, when Government Valuers were inundated with numerous valuations to undertake.

It is our hope and expectation that both Government Valuers and Appointed Valuers will play their part in improving the overall turnaround time for property transactions in Kenya.

Please click here to download the alert.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact Pamella Ager, Partner or James Kituku, Senior Associate or your usual contact at our firm, for legal advice relating to the Regulations and how the same might affect you.

The Right to Request Court’s Assistance in Taking Evidence in An Arbitration

Posted on February 4th, 2021

In a recent decision, the High Court declined to issue witness summons in the case of Squishy Drinks Limited v Kevian Kenya Limited (2021) eKLR. In its Ruling the Court held that section 28 of the Arbitration Act, 1995 (“the Act”) only permits an arbitral tribunal to make a request to the High Court for assistance in taking evidence. As such, a party to an arbitration may only make the said request with the approval of the arbitral tribunal.

The dispute arose from Squishy Drinks Limited’s allegation that Kevian Kenya Limited had been passing off its juices in identical packaging bearing its trademark and distributing it to unsuspecting members of the public. The dispute was referred to arbitration, and in its course, Squishy Drinks Limited filed an application before the High Court under section 28 of the Act seeking to compel the Director General of the Competition Authority of Kenya and the Registrar of Trademarks Kenya to appear as expert witnesses before the arbitral tribunal, on the basis that their opinion would be beneficial to the arbitral tribunal.

The Court (Mabeya J) found in favour of Kevian Kenya Limited in light of section 10 of the Act which provides that no Court shall intervene in arbitral proceedings, other than as provided for in the Act. The Court also cited the case of Prof, Lawrence Gumbe & Another vs. Honourable Mwai Kibaki & Others, High Court Miscellaneous No. 1025 of 2004, which held that Courts of law can only intervene in the specific areas stipulated under the Act, and in most cases that intervention is usually supportive and not obstructive or usurper-like. These instances include stay of legal proceedings; granting of interim measures; appointment and removal of arbitrators; setting aside of an arbitral award; enforcement and recognition of arbitral awards; grounds for retrial of recognition or enforcement, and questions of law arising out of domestic arbitrations.

With regard to seeking Court’s assistance in taking evidence, the general position is that the High Court has the power to provide assistance to arbitral proceedings including the issuance of witness summons. However, the Ruling clarifies that it is the arbitral tribunal which is expressly given the right to request for assistance from the High Court in the taking of evidence, and the parties cannot take it upon themselves to request for such assistance, without the arbitral tribunal’s concurrence.

Please click here to download the alert.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Noella Lubano (noella@oraro.co.ke) (Partner), Eva Mukami (emukami@oraro.co.ke) (Associate) or your usual contact at our firm, for advice relating to Arbitration matters.

Extension of Timelines for Submission of Beneficial Ownership Information

Posted on January 28th, 2021

By Pamella Ager

Further to our legal alert issued on 2nd November, 2020 on Disclosure of Beneficial Ownership of Companies in Kenya”, we wish to inform you that the Director General of the Business Registration Service (“BRS”) issued a notice on 27th January, 2021 extending the deadline for submission of beneficial ownership information by six (6) months from 31st January, 2021 to 31st July, 2021.

In light of the above, we advise that the BRS has granted all companies a final extension up to 31st July, 2021 to file their respective Beneficial Ownership Registers in accordance with the Companies (Beneficial Ownership Information) Regulations, 2020.

Companies which had not been linked on the e-citizen portal should exploit this grace period and be linked, to enable them submit their beneficial ownership registers on time.

Note that failure to submit the required information by 31st July, 2021 would constitute an offence, which on conviction attracts a fine not exceeding Kenya Shillings Five Hundred Thousand (KES 500,000) payable by the company and each officer of the company in default. Further, if the non-compliance continues, the company and the officers shall be liable for an additional fine not exceeding Kenya Shillings Fifty Thousand (KES 50,000) per day. These are rather steep penalties and the same should be avoided through compliance.

Please click here to download the alert.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Pamella Ager, (Partner), or your usual contact at our firm, for legal advice.

Conversion of old Land Reference Numbers to new Parcel Numbers

Posted on January 13th, 2021

  1. Introduction

On 31st December 2020, the Cabinet Secretary for Lands and Physical Planning, Ms. Farida Karoney published Gazette Notice No. 11348 of 2020 (“the Notice”) notifying the general public of the conversion of specific old land registration numbers to new parcel numbers. The Notice outlines the old registration numbers and the new parcel numbers. It also categorises the listed parcels of land under newly established land registration units, bearing various block numbers.

  1. Legality of the Notice

The Notice is premised on the provisions of Land Registration (Registration Units) Order of 2017 (“the Regulations”) promulgated under Section 6 of the Land Registration Act, 2012 (“the Act”)Section 6 of the Act empowers the Cabinet Secretary to constitute an area as a land registration unit, as well as vary the unit’s limits at any time.

Under Regulation 4 of the Regulations, the office responsible for land survey is mandated to prepare cadastral maps together with a conversion list for existing titles issued under the repealed land Acts. Thereafter, the cadastral maps and conversion list are presented to the Registrar, who forwards them to the Cabinet Secretary for publication in the Kenya Gazette and two (2) national dailies within thirty (30) days of receipt. The Cabinet Secretary is required to specify in the publication, a date not exceeding four (4) months when new land registration units are to take effect.

Please click here to read more.


This alert is for informational purposes only and is not intended to constitute legal advice. If you have any queries or need clarifications, please do not hesitate to contact Pamella Ager – Partner, James Kituku – Senior Associate, or your usual contact at our firm, for legal advice relating to the Gazette Notice and the conversion process and how the same might affect you.

Understanding Digital Service Tax and its Implementation in Kenya

Posted on December 16th, 2020

Following the recent and rapid expansion of digitisation and digitised aspects of the economic and societal space, numerous global debates have been sparked in many legal and regulatory tax statutes. The tax implications of digitisation range from direct and indirect taxation, tax policies and tax administration. With the emergence of new digital streams of income, the allocation of profit and the nexus rules to distribute taxing rights on income generated from cross-border activities has given rise to ambiguities as to the manner these tax issues may be resolved.

The Organization for Economic Co-operation and Development (the “OECD”) recognized these emerging tax challenges. Consequently, the OECD and G20 formulated the Inclusive Framework on the Base Erosion and Profit Shifting (the “BEPS Framework”) to resolve them. The Framework contains fifteen (15) actionable measures that may be implemented by member states.

Action 1 relates to the tax challenges arising from digitisation. This action sought to address the fact that the emergence of new and often intangible value drivers has eroded the need for physically proximate markets, hence, the nexus rules to distribute taxing rights on income accrued digitally is difficult to determine. Member states have since dedicated and pledged to co-operate to secure the integrity of the global tax system.

Please click here to read more.


This alert is for informational purposes only and is not intended to constitute legal advice. If you have any queries or need clarifications, please do not hesitate to contact Renee Omondi – Partner, Meshack Kwaka – Associate, or your usual contact at our firm, for advice relating to the Digital Service Tax and related Regulations.

Disclosure of Beneficial Ownership of Companies in Kenya

Posted on November 2nd, 2020

Introduction

Under recommendation of the Financial Action Task Force on International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation, members are urged to maintain adequate and timely information on the beneficial ownership and control of legal persons.

Following this recommendation, Kenya introduced section 93A of the Companies Act of 2015 in July 2019, through the Statute Law (Miscellaneous Amendments) Act. It provides that companies incorporated or registered in Kenya should keep a register of beneficial owners with the relevant information relating to such owners. Further, through a Legal Notice dated 18th February 2020, the Attorney-General published the Companies (Beneficial Ownership Information) Regulations, 2020 (the Regulations) which give effect to section 93A of the Companies Act.

The latest development in this area of the law is a public notice issued by the Registrar of Companies advising that the beneficial ownership e-register is operational as from 13th October 2020.

Definition of Beneficial Owner

The Companies Act defines a beneficial owner as “the natural person who ultimately owns or controls a legal person or arrangements or a natural person on whose behalf transactions are conducted, and include persons who exercise ultimate effective control over a legal person or arrangement.”

Under the Regulations, a beneficial owner is a natural person who directly or indirectly:

  • holds at least ten percent (10%) of the issued shares of the company;
  • exercises at least ten percent (10%) of the voting rights in the company;
  • holds the right to appoint or remove a director of a company; or
  • exercises significant influence or control over a company.

Significant influence or control under the regulations means participation in the finances or financial policies of the company.

Salient Features of the Regulations

Particulars of Information of Beneficial Owner

A company is required to enter the following particulars of the beneficial owner in the register – the full name; the birth certificate number; the national identity number and the passport number; the nationality; the date of birth; the postal address; the business address; the residential address; telephone number; the email address; the occupation or profession; the nature of ownership or control; the date the person became the beneficial owner; the date the person ceases to be a beneficial owner and any other information that may be required by the registrar from time to time.

Obligations of the Company

Duty to Investigate the Beneficial Owner

The Regulations provide that a company has a duty to investigate and obtain the particulars of a beneficial owner. The first step in the investigation is issuance of a notice to the person they believe to be the beneficial owner of the company. A person issued with this notice by the company is required to comply with the notice within twenty-one (21) days from the date that the notice was issued. In case a person fails to comply with the notice within time, the company shall issue them with a warning notice of fourteen (14) days.

Restriction of Persons Who Fail To Comply With the Warning Notice

If a person fails to comply with the warning notice within fourteen (14) days from the date of issuance, the company shall restrict the relevant interest of the person. Thereafter, the company files with the registrar a copy of the restriction issued fourteen (14) days after issuance of the restriction.

The effect of the restriction is that:

  • any transfer of interest by the person shall be void;
  • the person shall not exercise his rights in respect to the interest;
  • no shares shall be issued to the person in an allotment; and
  • no payment shall be made to the person in respect of the interest he holds in the company.

Restrictions on Sharing Beneficial Ownership Information

In an effort to ensure that the officers of the company comply with the provisions of the Data Protection Act, 2019, the regulations provide that the company should not disclose the information of the beneficial owner to the public, unless the beneficial owner has consented to the disclosure.

The beneficial owner information can only be disclosed for purposes of complying with the Regulations, for purposes of communicating with the beneficial owners or in compliance with a Court Order.

A person who discloses beneficial ownership information to the public risks a fine not exceeding Kenya Shillings Twenty Thousand (KES 20,000) or imprisonment for a term not exceeding six (6) months or to both.

Penalty In Case of Non-Disclosure by the Company

Under section 93A of the Companies Act, failure by a company to comply with the disclosure requirements is an offence which on conviction attracts a fine not exceeding Kenya Shillings Five Hundred Thousand (KES 500,000) payable by the company and each officer of the company in default. Further, if the non-compliance continues, the company and the officers shall be liable an additional fine not exceeding Kenya Shillings Fifty Thousand (KES 50,000) per day.

Operationalisation of Disclosure of Beneficial Ownership Information

The Registrar of Companies announced through a Public Notice that with effect from 13th October, 2020 the beneficial ownership e-register is operational. As such, companies are required to update their beneficial ownership e-register by 31st January 2021. Therefore, company officers are required to take attendant steps to ensure compliance with the provisions of the Act and the regulations. In summary some of the steps that company officers could take include:

  • Issuance of notices to the persons that can be termed as beneficial owners as per the definition in the Act and the regulations;
  • Adherence to timelines outlined in the regulations for example, timelines on issuance of notices;
  • Updating the e-register in case of any new information of beneficial owners;
  • Updating the registrar of companies in case of any restriction measures placed on beneficial owners; and
  • Ensuring that the information of the beneficial owners is not disclosed to the public without their consent, contrary to the provisions of the Data Protection Act.

Nullification of the Statute Law (Miscellaneous Amendments) Act of 2019

On 29th October, 2020 the High Court of Kenya in Constitutional Petition Number 284 of 2019 (as consolidated with Petition No. 353 of 2019) declared amongst other laws that the Statute Law (Miscellaneous Amendments) Act of 2019 is unconstitutional thus null and void for failure to involve the Senate in their passage. As stated above, this particular Act introduced section 93A of the Companies Act; the main provision on disclosure of beneficial ownership information by companies in Kenya.

However, the Court in its Judgment suspended the nullification of the impugned Acts for a period of nine (9) months to enable the Respondents to comply with Article 110 of the Constitution and regularize the Acts. The suspension of the nullification of the affected statues means that companies still have an obligation to comply with the laws and the regulations on beneficial ownership information.

Conclusion

In absence of the above-mentioned laws and regulations, many individuals who are beneficial owners of companies remain legally anonymous. As such, money launderers and those involved in covert criminal activities and terrorism would invariable take advantage of hitherto opaque corporate structures to conceal their true ownership of assets and properties. Therefore, the disclosure of beneficial ownership information is expected to promote greater transparency within corporates in Kenya, by shedding light on true ownership structures within companies.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Pamella Ager (pamella@oraro.co.ke) (Partner), or your usual contact at our firm, for advice relating to the Regulations and how the same might affect you.

The VAT (Electronic Tax Invoices) Regulations, 2020 & The VAT (Digital Market Place Supply) Regulations, 2020 in a Nutshell

Posted on October 13th, 2020

Introduction

On 25th September, 2020, the Cabinet Secretary of National Treasury and Planning Ukur Yattani (“the CS Treasury”) gazetted two regulations under the Value Added Tax Act being the Value Added Tax (Electronic Tax Invoices) Regulations, 2020 and the Value Added Tax (Digital Market Supply) Regulations, 2020. These Regulations come at a time when there is pressure on Kenya Revenue Authority (“KRA”) to collect more taxes and the need to optimize the taxation of the ever-growing digital economy. In this legal alert, we give an overview of these two regulations.

Value Added Tax (Electronic Tax Invoices) Regulations, 2020

These Value Added Tax (Electronic Tax Invoices) Regulations, 2020 have been enacted to ensure that daily supply of goods and services is monitored for purposes of taxation. As such, these Regulations require every VAT registered person under section 34 of the Value Added Tax Act (“VAT Act”) to have a register.

A register is defined under these Regulations as “an electronic tax invoicing or receipting system that is maintained and used in accordance with these Regulations.”

The objective of these Regulations is to ensure that: the KRA’s system will be integrated with other entities’ such as National Transport Safety Authority, Kenya Power, National Construction Authority and other agencies;  and that there is efficient transmission of data from the Register into KRA’s system thus improving the efficiency of collecting taxes.

Use of the Register

The register is used to ensure that each sale is recorded at the point of sale. An invoice is recorded with respect to each sale and thereafter the invoice generated is transmitted to the purchaser and the invoice details transmitted to KRA on a daily basis.

Accordingly, these Regulations places the following obligations on the part of a VAT registered taxpayer: ensure that the register is available at the point of sale; facilitate the inspection of the register by the registered person; ensure that the register is properly maintained through regular servicing; keep and maintain a register every time a register is serviced including record of persons who serviced; and comply with any other requirements as directed by the Commissioner.

The Taxpayer is also required to ensure continuity of operations of the register if there is an interruption of power supply.

Further, if at any given time the user is unable to use the register, such a user should notify the Commissioner within 24 hours and user will be given directions on an alternative mode of keeping the record. Once the user is able to use the register, such a user is expected to register the sales which were recorded in the alternative manner into the electronic register. Additionally, if the user intends to stop using the register either because of closure of business, cessation of supply of Vatable supplies or any other reason, the user should notify the Commissioner of the intended discontinuation 30 days prior to the discontinuation.

Requirements in A Tax Invoice

The Taxpayer shall ensure that that the PIN of the registered user, time and date of the invoice, buyers PIN, total gross amount ,total amount, item code of supplies for exempt, zero-rated supplies as provided by the Commissioner is entered, brief description of goods and services, quantity of supply, unit measure, tax charged, unique register identifier, unique invoice identifier , quick response (QR) code and any other requirement as may be specified by the Commissioner.

Specifications of the Register

In order for the register to be effective it should: be capable of being connected with information technology networks; have sufficient storage to maintain records; display clear messages in the official languages; be secure and tamperproof; be capable of being integrated with the Authority’s system; be capable of transmitting data to the systems; allow for updating of changes tax laws; and be capable of capturing information required by the regulations.

Impact of the Regulations

The regulations will enable efficient tax collection by KRA as it provides the Authority with necessary information on transactions involving the persons registered for VAT. It is therefore a mandatory requirement that every VAT registered taxpayer must have. The Electronic Tax Registered will also alert KRA of Taxpayers who are charging VAT and have not registered obligation thereby widening the tax base as the taxpayer will be required to activate VAT obligation.

The Register shall be capable of transmitting the KRA’s system the tax invoice data and the end of day summary of the respective day’s data in the manner specified by the Commissioner. The import of this is, KRA shall have real time information and this will also eradicate the VAT inconsistencies which have caused problems as Output and Input declared sometimes results in mismatched data.

The Regulations requires that all VAT registered persons should have a Register in place on or before 25th September 2021. Provided that a VAT registered taxpayer can on application to the Commissioner, at least 30 days before the 25th of September, 2021, seek for an extension of compliance which extension shall not exceed six months.

Offence

Failing to comply with the Regulations will result in a conviction and one shall be liable to pay a fine not exceeding one million shillings, or to imprisonment for term of not exceeding 3 years, or both.

The Value Added Tax (Digital Market Supply) Regulations, 2020

The Finance Act of 2019 introduced the taxation of services offered at the digital marketplace, hence, these Regulations have been enacted to offer further guidelines on the Value Added Tax to be charged on supplies made in the digital market place.

Scope of Taxable Supplies

The Regulations define the following supplies as taxable supplies at the digital market place:

  • Downloadable digital content including mobile applications, e-books and films;
  • Subscription based media including news, magazine and journals;
  • Over the top services including streaming television shows, films, music, podcast and any other digital content;
  • Software programmes which include software, drivers, website, filters and firewalls;
  • Electronic data management including website hosting, online data warehousing, file sharing and cloud storage services;
  • Music and games;
  • Search engine and automated help desk services including customizable search engine services;
  • Tickets for live events, theatres and restaurants;
  • Distance teaching through pre-recorded media or e-learning including online courses and training;
  • Digital content for listening, viewing or playing on audio, visual or digital media;
  • Services that link the supplier to the recipient including transport hailing services;
  • Electronic services under section 8(3) of the Act; and
  • Any other service that is provided through a digital market place and is not exempt under the Act.

Registration

The Regulations regards a person as a supplier of digital services and as eligible for VAT registration in the following instance. Firstly, where the supplies are made by a person in an export country to a recipient in Kenya in a business to consumer transaction(B2C).

Secondly, where the person is conducting business in Kenya as provided under section 8(2) of the VAT Act and either: the recipient of the supply is in Kenya; the payment of the services is made to a supplier in the export country from a bank registered under the Banking Act; or the payment of the services that is made to the supplier in the export country is authorized in Kenya.

If the export country (non-residents) who make business to consumer (B2C) supplies chooses not to register under the simplified framework, they have the option of appointing a tax representative to account for the VAT on their behalf in accordance with Section 15A of the Tax Procedures Act, 2015.

The regulations also provide for a simplified VAT registration framework which applies to export country (non-residents) who makes supplies on in the digital marketplace. The registration will be done online using a format to be prescribed by the Commissioner after which the applicant will be issued with a PIN for purposes of filing returns and payment of taxes.

Further, the Regulations also requires that a B2C supplier who has registered under these Regulations is exempted from issuing the electronic tax invoice. However, notwithstanding the exemption, they will still be required to issue a receipt showing the value of supply and tax deducted thereon. The Regulations also provide the option for deregistration, upon application to the Commissioner, for a non-resident who is no longer making supplies in the digital marketplace as provided in Section 36 of the VAT Act.

Place and Time of Supply 

Given that the time and place of supply is crucial in determining when VAT is due, these Regulations provide that a digital supply is deemed to have been made where: the recipient of the supply is in Kenya; the payment proxy including credit card information and bank account details of the recipient is in Kenya; or where the residence proxy of the recipient is in Kenya.

As to the time of supply, it shall be earlier of the date on which the supply is received in part or in whole; or the date on which the invoice or receipt for the supply is issued. It is important have the correct declaration made as this will determine whether additional assessments may be raised in future should KRA find that wrong information was provided while declaring VAT.

Claim for Input Tax

Crucially, a deduction for VAT input by a supplier shall not be allowed for B2C transactions for supplies in the digital marketplace. This is a departure from the provision of Section 17 of the VAT Act.

Impact of the Regulations  

These regulations will widen the tax base and enhance tax collection by the Authority.  However, it is a case of “wait and see” for us to assess the efficiency of collecting VAT on a digital economy given the transnational nature of the digital economy. Further, KRA may have some challenges when it comes to enforcing these Regulations against international digital market players.

All digital suppliers are required to comply with these regulations not later than 25th February 2021. Additionally, the Regulations are categorical that a person who fails to comply with these regulations shall be liable for penalties under the VAT Act or the Tax Procedures Act.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Lilian Renee Omondi (renee@oraro.co.ke) Partner, Wanjala Opwora (wanjala@oraro.co.ke) Associate or your usual contact at our firm, for advice relating to the new VAT Regulations on Electronic Tax Invoices and Digital Market Supply.

New Changes Introduced by the Tax Laws (Amendment) Act, 2020

Posted on April 27th, 2020

INTRODUCTION

Kenya’s economy is currently sailing through uncharted waters, forcing the government to come up with tax amendments aimed at alleviating the tax burden on Kenyans and boosting liquidity amidst the coronavirus pandemic. Parliament has passed the Tax Laws (Amendment) Act, 2020 (the “Act”) which was assented to by the President on 25th April 2020.

 

THE AMENDMENTS

The Act has made several amendments to tax laws and tax related laws. We highlight the same hereunder.

The Income Tax Act

Qualifying Interest

The definition of ‘Qualifying Interest’ under section 2 of the Income Tax Act has been amended by removing the restriction to interest from financial institutions, banking institutions, building societies or the Central Bank. This effectively means that interest earned in other commercial investments amounts to qualifying interest and withholding tax on the same will be Final tax.

Withholding Taxes 

Sections 10(1) and 35(1)(o) of the Income Tax Act have been amended to the effect that payments made to non-residents for sales promotion, marketing, advertising services, and transportation of goods (excluding air and shipping transport services) will now be subject to withholding taxes at the rate of 20% of the gross amount.

Paragraph 3(d) of the Third Schedule of the Income Tax Act has been amended by increasing the non-resident tax rate from 10% to 15% with respect to a dividend. Paragraph 3(p) too has been amended to include reinsurance and by further adding to the list sales promotion, marketing, advertising services, and transportation of goods (excluding air and shipping transport) services at 20% of the gross amount.

The rates of the resident withholding tax rates (Paragraph 5(d)) have been amended by increasing the amounts of money applicable with respect to pensions funds and pensions income. This means that those earning pensions below Kshs. 288,000 will not have the withholding rates applicable to them.  Finally, paragraph 9 of the Third Schedule has been amended reducing the presumptive tax rate from 3% to 1% in line with the presidential directive on tax reliefs

Turnover Tax

Turnover tax was previously applicable at the rate of 3% on businesses earning a maximum income of Kshs. 5 Million. Subject to an amendment of section 12C (1) of the Income Tax Act, companies as well as businesses (including partnerships and sole proprietors) with an income of between Kshs. 1 Million and Kshs. 50 Million can opt to be subjected to turnover tax at the rate of 1% of the gross receipts.

Presumptive Tax

By deleting section 12C (5) of the Income Tax Act, presumptive tax at the rate of 15% of the single business permit at the time of renewal has been removed. It will consequently be payable by monthly filings to Kenya Revenue Authority.

Allowable Expenses

Section 15 (2) (ab) of Income Tax Act that provided for a 30% rebate on electricity costs incurred by manufacturers has been deleted. This means that the same will no longer be deducted in the ascertainment of the total taxable income.

Incomes Exempt from Taxes

The First Schedule of the Income Tax Act that sets out incomes expressly exempt from income tax has been amended by deleting a number of paragraphs. This means that the following incomes will now be subject to Income Taxes.

  1. Income from certain state boards and authorities including Pyrethrum Board of Kenya, Sisal Board of Kenya, Kenya Dairy Board, Canning Crops Board, Central Agricultural Board, Pig Industry Board, Pineapple Development Authority, Horticultural Crop Development Authority,  National Irrigation Board, Mombasa Pipeline Board, Settlement Fund Trustees, Kenya Post Office Savings Bank; and  Cotton Board of Kenya.
  2. Profits made by the Agricultural Society of Kenya from an exhibition held for purposes of the society.
  3. Interest on tax reserve certificates which may be issued by authority of Government.
  4. Gains on transfer of shares of a local authority.
  5. Gains on transfer of land adjudicated under Land Consolidation Act and Land Adjudication Act when the title has been registered under the Registered Land Act and transferred for the first time.
  6. Interest earned on contributions paid into the Deposit Protection Fund.
  7. Interest earned on loans granted by the Local Government Loans Authority established under the Local Government Loans Act.
  8. Dividends received by a registered venture capital company.
  9. Gains from the trade in shares of a venture company earned by a registered venture company within the first ten years from the date on first investment in that venture company by the venture capital company.
  10. Interest income generated from cash flows passed to the investor in the form of asset backed securities.
  11. Dividends paid by a registered special economic zone enterprise, developer and operator to non-resident persons.

 

Capital Deductions

The rate of Investment allowances for certain Capital Expenditures have been amended as follows:

Particulars Rate
Hotel buildings, buildings in use for manufacture, hospital buildings, petroleum or gas storage facilities, 50% in the year of first use and 25% per year on reducing balance.
Educational and commercial buildings 10% per year on reducing balance
Machinery used for manufacture, hospital equipment, ships or aircrafts 50% in the year of first use and 25% per year on reducing balance.
Motor vehicle and heavy earth moving equipment, computer and peripheral computer hardware and software 25% per year on reducing balance.
Furniture and fittings, telecommunications equipment, 10% per year on reducing balance
Filming equipment by local producer 25% per year on reducing balance.
Machinery used to undertake exploration or operations on prospective rights or mining right 50% in year of first use and 25% on a reducing balance basis thereafter

 

PAYE

The amount of personal relief has been increased from Kshs.16,896 p.a to Kshs. 28,800 p.a.

The rate of tax in the highest income tax bracket has been reduced from 30% to 25% and the income subject to tax in the highest bracket has been increased from Kshs. 47,059 to Kshs. 57,333.

Withdrawals from a registered pension or provident scheme or the National Social Security Fund (NSSF) before the expiry of 15 years from the date of joining the scheme has been aligned to the individual tax rates. On the other hand, any withdrawal from a registered pension or provident scheme or NSSF after the expiry of 15 years from the date of joining the scheme for amounts exceeding Kshs 1.2 million, has been reduced from 30% to 25%.

 

The Value Added Tax Act (VAT Act)

Standard Rate

The standard VAT rate had been revised from the standard rate of 16% to 14% by way of Gazette Notice.

Credit Notes

Subject to the VAT Act, Credit Notes can be issued after 6 months from the invoice date. In the case where there is a commercial dispute in relation to the price payable, a credit note can be issued within 30 days after determination of the matter.

Refunds of Tax on Bad Debts

Section 31 of the VAT Act has been amended by reducing the period within which a taxpayer may apply for a refund from 5 years to 4 years from the date of the supply.

Record Keeping

The Act has also amended section 43(1) of the VAT Act  by deleting the word “every registered” and inserting the article “A” this means that every person whether  registered or not, is required to keep records of all their business transactions for at least 5 years.

Exempt Items

Personal protective gear including masks that were subject to VAT at the standard rate of 14% are now exempt. Further, vaccines for use in human and veterinary medicine, infusion solutions and medicaments cease are now exempt.

The following items that have been exempt will now be subject to VAT at the standard rate of 14%.

  1. Plant and machinery used for manufacture of goods.
  2. Taxable supplies imported or locally purchased for use in construction of power generating plants.
  3. Plastic biogas digesters.
  4. Biogas and Leasing of biogas production digesters.
  5. Parts imported or purchased locally for information technology purposes (subject to approval of the Cabinet Secretary).
  6. Goods imported or purchased for use in construction and development of industrial parks of 100 acres.
  7. Exhibits, specimens, equipment, chemical reagents, films, film strips, visual aid equipment for public museums.
  8. Asset transfer and other transactions related to the transfer of assets into a Real Estate Investment Trusts (REIT) and other asset-based securities.

 

The Excise Duty Act, 2015

The definition of “other fees’ as set out in the First Schedule Part III of the Excise Duty Act has been amended by deleting the words “licensed financial institutions” and substituting it with the words “licensed activities.” This effectively means that excise duty is only applicable on licensed activities of a financial institution.

 

Tax Procedures Act, 2015

Private Ruling

Sections 65(3) of Tax Procedures Act has been amended by extending the period within which the Commissioner should determine a private ruling from 45 days to 60 days. Further, section 69 requiring publication of Private Ruling has been repealed.

 

Penalty for Late Filling of Turnover Tax Returns

Subject to the amended section 83(1)(b) of the Tax Procedures Act, the penalty for the late filing of Turnover tax returns has been reduced from Kshs. 5,000 to Kshs. 1,000.

 

The Kenya Revenue Authority Act, 1995

The KRA Act has been amended by inserting a new section 15A that empowers the Commissioner to appoint a bank to act as an agent for revenue banking services .The said agent is required to transfer the funds to the designated Central Bank of Kenya accounts within a maximum of 2 days following the date of collection. Failure to comply with this provision imposes a tax debt on the appointed agent.


This alert is for informational purposes only and should not be taken as or construed to be legal advice. If you have any queries or need clarifications, please do not hesitate to contact Partner, Lena Onchwari (lena@oraro.co.ke), and Associate, Wanjala Opwora (wanjala@oraro.co.ke) or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.

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