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 Act has made several amendments to tax laws and tax related laws. We highlight the same hereunder.
The Income Tax Act
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.
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 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.
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.
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.
The rate of Investment allowances for certain Capital Expenditures have been amended as follows:
|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|
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)
The standard VAT rate had been revised from the standard rate of 16% to 14% by way of Gazette Notice.
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.
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.
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%.
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
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 (email@example.com), and Associate, Wanjala Opwora (firstname.lastname@example.org) or your usual contact at our firm, for legal advice relating to the COVID-19 pandemic and how the same might affect you.
By Walter Amoko | Lena Onchwari
Amidst controversy and recriminations across board, the Finance Bill, 2018 (the Bill), was eventually passed on a special sitting of the National Assembly on 20th September, 2018 and the President assented to it on the 21st September, 2018.
While the political branches were considering the Bill, a Constitutional Petition challenging its propriety on multiple grounds including whether or not it had been presented to Parliament in time, as well as the constitutionality of bringing some of its provisions into force before its enactment, was being litigated before the Courts. A day before the Finance Act, 2018 (the Finance Act) was passed, the High Court delivered its decision, upholding two of the grounds the redoubtable Mr. Omtatah had pressed. One was the headline grabbing invalidation of the Provisional Collection of Taxes Act which allowed the Cabinet Secretary (CS) Finance, to enforce provisions of the Finance Act before it was enacted. Lady Justice Okwany held that under Article 94 of the Constitution, only Parliament could pass legislation, and it had to be done within the stipulated process which included such fundamental issues such as effective public participation in law-making. By allowing prior enforcement of provisions of a bill by way of orders issued by a Minister, however temporarily, not only does the Executive unlawfully usurp the exclusive non-delegable powers of Parliament but also undermined the salutary inclusive law-making process.
Click here to read an in depth summary of the key changes introduced by the Finance Act.
Capital Gains Tax (CGT) was re-introduced in Kenya effective 1 January 2015 , consequently, any gain on transfer of property, including shares, is now subject to CGT at the rate of 5%. However, its re-introduction has adversely affected some key sectors in the economy including the Nairobi Securities Exchange (NSE), which has seen a major decline in trading.
Furthermore, the Government has also faced a major challenge in ensuring compliance and administration of CGT, especially on the transfer of shares that are listed on the NSE. In an effort to mitigate this and to encourage trading of shares on the NSE, the Government through the Finance Act 2015 has amended the Income Tax Act. The amendments exclude the transfer of shares traded on any securities exchange licensed by the Capital Markets Authority (CMA) from the provisions of Section 3(2) (f), of the Income Tax Act. The Exclusion means that any gain on transfer of shares that are listed on the NSE (and any other securities exchange that is licensed by the CMA) will not be subject to both CGT and Withholding Taxes. It is noteworthy that this will only take effect from 1 January 2016 and will only apply to shares transferred after this date.
The Finance Act has also given rise to major changes in the taxation regime which mirror the developments in the country’s economy and reflect the Government’s intention of ensuring such development is supported by a sufficient tax regulatory framework. The significant changes made to taxation legislation include:
Income Tax Act(ITA)
Through the Act, the Government seeks to tap into taxation of real estate income and more specifically rental income, to supplement the national budget. It has introduced Residential Rental Income Tax which will be payable by a resident person for rental income which is less than KES 10 million, in any particular year of income. Rental income will be taxed at the rate of 10% of the gross rental receipts. This means that no expenses, including interest expense shall be deducted. Landlords however have an option to elect not to pay Rental Income Tax. This can be done by notifying the Commissioner in writing. The move is not surprising given that Kenya’s property market has seen tremendous growth over the last couple of years, and is expected to remain strong in coming years.
Kenya’s budding film industry has received a major boost. Through the passing of the Act, subject to an amendment of Section 35 of the ITA, payments made by filming agents and producers(who have been approved by the Kenya Film Commission) to actors and crew members of films for an appearance or performance for purposes of entertaining an audience in Kenya will no longer be subject to withholding tax. The benefits don’t end there; any building that is in use for the training of film producers, actors or crew, shall be allowed a capital deduction at the rate of 100%.
High youth unemployment rates remain a challenge; every year, universities release thousands of Kenyan graduates into the job market. To motivate companies to take in these graduates as apprentices(and in an effort to help enhance their skills and give them a better chance at securing employment). The Act will give a tax rebate to any employer who engages at least 10 apprentices for a period of between 6 and 12 months. The Cabinet Secretary will however make regulations on administration of this rebate by making a notice in the Kenya Gazette.
Seen as one of the country’s key economic drivers, the shipping sector is one of the areas the Government is seeking to develop. More specifically it wants to encourage private entities to invest in the shipping sector. Subsequently, the shipping investment deduction has been increased from 40% to 100% on the purchase of a ship of 125 tons.
Transfer of Shares
Since 1st January 2015 upon the re-introduction of Capital Gains Tax(CGT), the transfer of shares in companies that are listed and those that are not was subject to CGT, at the rate of 5%. Sadly, this re-introduction adversely affected some key sectors in the economy including the Nairobi Securities Exchange(NSE). In an effort to mitigate these adverse effects, the Act has amended the ITA, so that the transfer of shares listed on the NSE and any other Securities Exchange that is licensed by the Capital Markets Authority(CMA) is no longer subject to CGT. It is important to note that the transfer of shares that are not listed will still be subject to CGT at the rate of 5%. It is noteworthy, that this will only take effect on 1 January 2016 and will only apply to securities transferred after this date.
Transfer of land
The ITA has been amended to the effect that if an individual transfers land whose transfer value is less than KES 3 million, the gain will not be subjected to CGT. This also applies to the transfer of agricultural land which is less than 50 acres, where it is located in a municipality, gazetted township or an area gazetted by the Minister(Cabinet Secretary of Land, Housing and Urban Development) to be an urban area.
There is great news for companies which are in a tax loss position; the Act has extended the period of utilisation of tax losses from a period of 5 years to 10 years. This legislative move will help boost the level of economic activities in Kenya by ensuring that companies have the necessary cash flow to make further investments.
As a growing economy Kenya has seen a substantial increase in its exports; to encourage investment specifically, in Special Economic Zones, the Government through the Act will tax such companies to a corporate income tax at the rate of 10% for the first 10 years and thereafter 15% for another 10 years. In addition, dividends received by Special Economic Zone Enterprises’(SEZE) developers and operators will also be exempt from taxation. An SEZE company will also be taxed at the reduced rate of 25% for the first 5 years when it introduces its shares through listing or any securities via introduction.
Deduction of Input Tax
The KRA currently owes taxpayers VAT refunds in the billions of shillings. In an effort to ensure prompt claims for refunds the VATA has been amended so that a taxpayer may claim a refund if the excess arises from the supply of zero-rated supplies. In addition, the claim for such refunds must be made within 12 months from the date the tax becomes due and payable.
Apart from Government ministries, departments and agencies, any person appointed by the Commissioner can now withhold tax of 6% upon purchasing taxable supplies and remit the same to the Kenya Revenue Authority(KRA). The 6% will be withheld on the taxable value. On a related note, the KRA Commissioner also has the right to appoint and revoke the appointment of a withholding VAT agent, where he deems it fit to do so.
The Act has made a few changes on supplies which are no longer exempt supplies this includes vaccines for human medicine, several medicaments with varying specifications. On the other hand, some items have been added to the list of exempt supplies including among others aircraft parts, plastic bag biogas digesters, biogas, leasing of biogas producing equipment, as well as:
Under the Act supply of services that are exempt from VAT also include:
Under the Act zero-rated supplies additionally include:
Stamp Duty Act(SPA)
Real Estate Investment Trusts(REITS)
The high interest rates associated with real estate development and the undersupply of housing especially for the lower segment of the market have proven to be a challenge towards the further advancement of this sector. To remedy this, the Government seeks to encourage investments in real estate through REITS which will give Kenyans an opportunity to invest in development projects that may be out of their economic reach. In this regard, no stamp duty shall be payable on an instrument whose effect is to transfer a beneficial interest in property from one trustee to another or from a person(s) for the transfer of units in the REIT. This exemption will only apply in respect to instruments executed before 31 December 2022.
By Lena Onchwari
Groundbreaking in many ways the Finance Act, 2015 (the Act) has had an impact on several sectors of the Kenyan economy. For instance, the statute has introduced a new tax known as “residential rental income tax” by inserting a new Section 6A in the Income Tax Act (Cap 470).
Residential rental income tax is now payable by any resident person (either individual or company) from income which is accrued in or derived from Kenya for the use or occupation of residential property, which does not exceed KES 10 million in a year. Landlords who wish to remain in the pre-existing tax regime (before the introduction of the residential rental income tax) can elect in writing to the Commissioner General of Kenya Revenue Authority(KRA), to be taxed under the normal tax rates.
The new residential rental income tax will be payable at the rate of 10% on gross rent received with effect from 1st January, 2016 and applies to rental income received from January, 2016. It is for this reason that KRA has given a deadline of the end of March 2016, requiring landlords to pay the residential rental income tax due on the rental income received from January, 2016, failure to which KRA will issue an estimated residential rental income tax assessment from the property information available and take various enforcement measures provided in the law.
The Finance Act, 2015 also inserted a new Section 123C. This new section effectively gives landlords a 100% amnesty on principal taxes, penalties and interest for the year 2013 and prior periods. In addition, landlords will get an amnesty on penalties and interest for the years 2014 and 2015. However, in order to be entitled to this amnesty, landlords have to file returns and pay taxes for the years 2014 and 2015 on or before 30th June 2016.
By Lena Onchwari
Kenya has seen tremendous growth in both foreign and domestic investments, which has in turn resulted in an increase in tax revenue contributions to the national kitty. However, both the government and private sector have faced a number of challenges in so far as administration of the different types of taxes is concerned. Furthermore, there have been quite a number of corporate tax structures which the government considers to be schemes for profit shifting from Kenya to other tax friendly jurisdictions. This is where the Tax Procedures Act, 2015 (the Act (which came into force on 19th January 2016)), comes in.
The key objective of the Act is first and foremost, to simplify and consolidate tax administration, both for the government and the taxpayer. Secondly, it is aimed at broadening the tax base to net in more taxpayers. Most importantly, the Act is aimed at preventing tax avoidance schemes which lack commercial substance.
• Directors’ liability – where director(s) or any senior officer(s) of a company enter into an arrangement with the intention of interfering with the company’s current or future tax liability, they will be liable for the tax liability of the company if they fail to demonstrate that they did not benefit from the arrangement, opposed the transaction, were unaware of the arrangement or they notified Kenya Revenue Authority (KRA) of the same.
• Record keeping – taxpayers will be required to retain records for a period of 5 years. This period may be extended in the event of an amendment of filed returns or where legal proceedings have been instituted before the lapse of the 5 year period.
• Tax returns – the period of submission of tax returns may be extended. This is on condition that the Commissioner General of KRA (the Commissioner) is satisfied with the reasons for delay (it is noteworthy here, that this does not mean that there is an extension of the deadline for payment of the tax associated with the return).
• Tax assessments – KRA can only issue assessments for a maximum period of 5 years in the case where there is no neglect, evasion or tax fraud by the taxpayer.
• Payment of Taxes – a taxpayer may apply to the Commissioner in writing for an extension of time to remit taxes due.
• Interest chargeable - The interest chargeable on late payment of tax has now been reduced to 1% from 2% per month and shall be charged as simple interest.
• Transfer of tax liability - in the event that a taxpayer transfers all or part of its business assets to a related party, the latter shall be liable for the taxes of the transferor.
• Tax rulings – the Commissioner may make a public ruling which will be binding on him unless he withdraws the same by publishing a notice in at least two newspapers with national circulation. Moreover, taxpayers may also apply for private rulings which shall be published (with the taxpayer’s identity concealed) in at least two Kenyan newspapers with national circulation.
• Offences & Penalties - The Act has also introduced some significant stringent penalties for non-compliance with certain tax law provisions. These are as outlined :-
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Kenya has “officially” waged war against tax avoidance and evasion schemes, as mirrored by the recent enactment of the Tax Procedures Act of 2015. The war has now been advanced to international levels, whereby Kenya signed the Convention on Mutual Administrative Assistance in Tax Matters on 8th February 2016. Kenya is the 12th African country to sign it and the 94th jurisdiction, globally. The Convention covers a number of taxes including Income tax, capital gains tax, VAT and excise taxes are all globally included in this Convention.
Enhancing co-operation between countries to counter international tax evasion, tax avoidance and other forms of noncompliance is the principal aim of the Convention. It also aims at facilitating exchange of information, assistance in tax recovery, service of documents and joint tax audits by parties to the Convention. Parties to the Convention have a general obligation to exchange any information relevant for the administration or enforcement of their domestic tax legislation.It is noteworthy that only information considered relevant for tax purposes will be exchanged either upon request, automatic or spontaneous exchange, or through the carrying out of simultaneous tax examinations abroad.
From a taxpayer’s perspective, one of the greatest benefits of this Convention is that it reduces compliance costs. From the government’s perspective, the Convention will serve as a valuable tool for fighting tax evasion. It will also foster the enforcement of other legal frameworks against certain evils like money laundering and corruption. Furthermore, the Convention will not only make it possible to reveal the names of persons suspected and found guilty of tax evasion, but also make it easier for the government to pursue them locally and internationally.
Withholding VAT was introduced by the VAT Act, 2013. It allowed the Kenya Revenue Authority (KRA) to appoint certain suppliers as Withholding VAT agents for purposes of collecting and remitting VAT in advance from suppliers of taxable supplies. This provision was however deleted by the Tax Procedures Act, 2015, effective 19th January, 2016. Despite this deletion, KRA continued to appoint Withholding VAT agents causing concern as to which provision of the law they relied on.
The Government in an effort to correct this through the Finance Act, 2015, re-introduced Withholding VAT provisions by backdating its effective date to 19th January, 2016. This would mean that any person, appointed as a Withholding VAT agent, who failed to withhold VAT on any transaction for the period between 19th January, 2016 and 8th June, 2016 would be subject to a fine not exceeding KES 100,000 (USD 1000) or imprisonment for a term not exceeding six months, or both, as penalties for non-compliance.
However, through Legal Notice No. 117 of 2016, the government has offered reprieve to Withholding VAT agents who did not withhold VAT on taxable supplies after deletion of the relevant provision; they will not be subject to any penalties for non-compliance.
Going forward, following its re-introduction, the Withholding VAT agents will be required to remit 6% of the VAT payable to KRA to avoid the ramifications for non-compliance.
Assented into law on 13th September 2016, the Finance Act, 2016 (the Act) is expected to advance the theme for this year’s budget, “Consolidating gains for a prosperous Kenya.” The amendments to tax legislation such as the Excise Duty Act, 2015 (the Excise Duty Act), Income Tax Act, Cap. 470 (the Income Tax Act), Special Economic Zones Act, 2015 (the Special Economic Zones Act), Tax Procedures Act, 2015 (the Tax Procedures Act) and VAT Act, 2013 (the VAT Act), are targeted towards enhancing growth of certain key sectors including agriculture, construction, health, manufacturing, and tourism. The Government has also been on a campaign to improve the living standards of Kenyans by alleviating poverty and most importantly creating a regulatory framework that is geared towards protection of the environment, all evident in these amendments.
The amendments to the Excise Duty Act, 2015 are mainly targeted towards the manufacturing sector and consequently the following items are now exempt from excise duty:
The Government has taken a give and take approach when it comes to personal taxation. It has expanded the PAYE tax while increasing the personal relief amount by a meager ten percent (10%) entitled to an individual taxpayer from KES 13, 944 to KES 15, 360 per annum. Furthermore, individuals earning low incomes (of maximum KES 121, 969 per annum) will not be subjected to tax on any bonuses, overtime or retirement benefits they receive.
In an effort to encourage real estate developments to mitigate the housing problem in Kenya, a company that constructs at least 400 residential units annually, will be subject to corporation tax at the rate of 15% for that year of income. This is subject to the approval of the cabinet secretary for housing. In the event that the company is involved in different business activities, the rate of fifteen percent (15%) will only apply to the turnovers from its housing construction activities.
It is now possible to transfer properties or assets between spouses, former spouses, immediate family, including as part of a divorce of separation settlement) or a company where the spouse and immediate family members hold one hundred percent (100%) shareholding without having any capital gains taxation, which was initially applicable at the rate of five percent (5%).
Under the Tax Procedures Act, 2015 the Commissioner may now require a taxpayer to furnish the Kenya Revenue Authority with returns showing such information as the Commissioner may prescribe.
For a while now the Government has realised that despite the development of residential houses, very few landlords have been declaring their rental income. The Tax Procedures Act, 2015 has been amended to the effect that the Commissioner shall not assess principal, tax and penalties on a taxpayer before and during the year 2013. Moreover no penalties and interest will be raised in respect of 2014 and 2015, where the income is in respect of the gain or use of property earned by an individual, where the returns for the same years have been submitted latest 30th June, 2016.
In order to encourage repatriation of money for re-investment in Kenya, the Government will grant a tax amnesty to taxpayers who own assets and businesses in other jurisdictions. However, the taxpayer has to file income tax returns for the year 2016 by the end of the year. It is important to note that the Government has given assurances not to investigate or follow up on the source of income and assets.
The Commissioner shall repay overpaid taxes within a period of two years from the date of application for the refund, failure of which the amount due shall (or part thereof that remains unpaid for a period of two years shall attract an interest of one percent (1%) per month).
New timelines have been introduced in respect of certain actions to be undertaken by the Commissioner. Firstly, where a taxpayer has been unable to pay tax due and has notified the Commissioner of the same, the Commissioner shall, in writing accept, cancel, amend or reject the notification within thirty (30) days. A taxpayer’s application to the Commissioner for a refund of overpaid taxes, has to be made within five (5) years from when the tax was paid. On the other hand, the Commissioner shall notify the taxpayer, in writing of the decision in relation to the application within ninety (90) days of receiving the application.
There have been amendments to the Special Economic Zones Act to provide that tax incentives in respect of special economic zones shall be provided for under the country’s tax statutes, being the East African Community Customs Management Act (No. 1 of 2005), Income Tax Act, and the VAT Act.
The VAT Act, has now defined a hotel to include, “service and apartments, beach cottages, holiday cottages, game lodges, safari camps, bandas or holiday villas, and other premises or establishments used for similar purposes..”, bringing all such establishments within the VAT net. This however does not apply to premises with a lease that exceeds one month, student accommodation and medical staff quarters. In addition, any supply of taxable goods intended for the direct or exclusive use for construction of tourism facilities, recreational parks of at least fifty (50) acres, convention or conference facilities will be exempt from VAT upon recommendation by the Cabinet Secretary for tourism. In order to encourage both domestic and international tourism, the park entry fees paid by tourists will now be exempt from VAT. Furthermore, any commissions earned by tour operators will be exempt.
A good healthcare system is key to any economy, in Kenya the system has mainly been dominated by public hospitals. In order to encourage more private individuals to invest in this sector by constructing medical facilities, the Government has now exempted from VAT any goods that are used for direct and exclusive use in the construction of specialised hospitals, with accommodation facilities upon recommendation by the Cabinet Secretary for Health.
In an effort to reduce the cost of production for the manufacturing sector, petroleum products will remain exempt for VAT purposes for another twelve (12) months after September, 2016. These include aviation spirits, gas oil, kerosene, motor spirits and liquid gas.
In an effort to boost the agricultural sector, some specific raw materials used in the manufacture of animal feeds will now be exempt from VAT, it is anticipated that this will make animal feeds more affordable for farmers and reduce their cost of production.
In case of any queries in respect of these developments, please contact our lawyers (listed below) or your main contact at our firm.
As is now well-known, Kenya has signed on to the multi-lateral framework for the sharing of financial information that enables tax authorities detect those seeking to use international borders to avoid paying tax. The Multilateral Convention on Mutual Administrative Assistance in Tax Matters established the Common Reporting Standards (CRS) that were approved by the Organisation for Economic Co-operation and Development (OECD) in July 2014, and which have made it possible for tax authorities of participating countries to access financial information of their tax residents.
While it has been a great international success story, CRS’s full potential is still being undermined by tax-payers who, with assistance of their advisers, are still able to hide their assets and income under various cross-border devices, taking advantage of gaps within CRS to avoid detection. For example, CRS is limited to financial institutions that are located in participating jurisdictions. It is therefore easy to avoid its ambit by restricting one’s dealings to financial institutions located in nonparticipating countries which are not required to report any financial information in regards to a reportable person – a boon to aggressive tax planners hatching tax avoidance schemes.
The Model Rules
In line with their continuing programme of improving mutual disclosure requirements which are uniform but sensitive to local needs, on 9th March 2018, the OECD published the Model Mandatory Disclosure Rules for Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures (the Model Rules) which specifically target all categories (compendiously referred to as intermediaries) tax advisers. The OECD recognises detecting and deterring offshore tax avoidance schemes “is key both for the integrity of the CRS and for making sure that taxpayers that can afford to pay advisors and to put in place complex offshore structures do not get a free ride.”
As with other rules by the OECD on collection and access of relevant financial information for tax purposes, the Model Rules were developed so as to give a shared model for countries on the contents and structure of their own local regulatory framework in respect to professional service providers such as accountants, tax and financial advisors, banks, lawyers “to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the OECD/G20 Common Reporting Standard (CRS) or prevent the identification of the beneficial owners of entities or trusts.”
The Model Rules are targeted at CRS Avoidance Arrangements or Opaque Offshore Structures. The former is ‘...any arrangement where it is reasonable to conclude that it has been designed to circumvent, or has been marketed as or has the effect of circumventing CRS legislation...” while the latter “…a passive offshore vehicle that is held through an opaque structure” and passive vehicle defined as “legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident.” Whilst not exactly crystal clear from the various examples provided, it is possible to get a sense of what activities and/or structures the Model Rules have in mind. CRS avoidance relates to efforts to exploit gaps within the relevant legislative or administrative framework to avoid disclosure of the information required under CRS.
An opaque structure may also be described as the application of the well known commercial purpose test of an entity to CRS. The idea here is to isolate genuine financial arrangements serving an identifiable commercial purpose from those designed for concealing income and assets and thus avoid disclosure under the CRS regime.
Inquiry is directed at whether the structure has the effect of not allowing the accurate identification of the beneficial owners and specifically identifies well recognised tax planning techniques that can be used to achieve this outcome, such as the use of nominee shareholders, indirect control arrangements or arrangements that provide a person with access to assets held by, or income derived from, the offshore vehicle without being identified as the beneficial owner.
The Model Rules define “intermediaries” as those persons responsible for the design or marketing of CRS Avoidance Arrangements and Opaque Offshore Structures “promoters” as well as those persons that provide assistance or advice with respect to the design, marketing, implementation or organisation of that Arrangement or Structure “service providers”.
The knowledge and actions of an intermediary include those of their employees acting in the course of their employment, as well as contractors working for an employer, and the disclosure obligation and the penalties for a failure to disclose are imposed on that employer.
To be subject to the obligations imposed by the Model Rules, intermediaries must have a connection – “sufficient nexus” – with the reporting jurisdiction which extends to intermediaries operating through a branch located in that jurisdiction as well as one who is resident in, managed or controlled, incorporated or established under the laws of that jurisdiction.
An intermediary is required to file disclosure in respect of a CRS Avoidance Arrangements or Opaque Offshore Structures at the time the Arrangement is first made available for implementation, or whenever an Intermediary provides services in respect of the Arrangement or Structure. This ensures that the tax administration is provided with early warning about potential compliance risks or the need for policy changes as well as ensuring that it has current information on the actual users of the scheme at the time it is implemented.
There may be certain instances where the user of a CRS Avoidance Arrangement or Opaque Offshore Structure may have disclosure obligations under the Model Rules. More specifically, in instances where the intermediary is not subject to disclosure obligations as well as those cases where the intermediary is unable to comply with its disclosure obligations under the Model Rules either because it has no nexus with that jurisdiction or because it is relying on an exemption from disclosure such as professional secrecy.
The information required to be disclosed includes the details of the Arrangements or Structures, as well as the clients and actual users of those Arrangements or Structures, and any other intermediaries involved in the supply of the Arrangements or Structures. The requirements under the Model Rules are designed to capture the information that is likely to be most relevant from a risk-assessment perspective and to make it relatively straight forward for a tax administration to determine the jurisdictions with which such information should be exchanged.
The Model Rules do not require an attorney, solicitor or other recognised legal representative to disclose any information that is protected by legal professional privilege or equivalent professional secrecy obligations but only in respect to the scope of such protected information.
All relevant non-privileged Arrangements or Structures that are within the legal representative’s knowledge, possession or control should still be provided. While understandable and correct for legal professional privilege is now accepted as a component of the fundamental right to privacy, this might limit the Model Rules’ efficacy as more and more reliance is placed on practitioners in respect to whom such privilege attaches i.e. lawyers. Efforts by accountants to have legal professional privilege extended to them while giving legal advice, have thus far failed.
Striking a Balance
The information requirements of the model rules seek to strike a balance between the compliance burden on intermediaries to a minimum and still capturing the information that is likely to be most relevant. The requirement to separately identify the jurisdictions where the scheme has been made available for implementation and to specify the tax details of all the intermediaries, clients and reportable taxpayers in connection with that arrangement is intended to make it relatively straightforward for a tax administration to determine the jurisdictions for whom the disclosed information will be relevant for information exchange purposes.
The rules have put in place punitive measures for non-disclosure in the form of penalties. However the same are not cast in stone but are to be determined by each jurisdiction depending on its unique circumstances. However it is expressly stipulated that such penalties are to be set at a level that encourages compliance and maximises their deterrent effect.
The Model Rules are a continuation of concerted international efforts to tighten the noose around tax cheats or dodgers seeking to exploit international borders. As Arthur Vanderbilt remarked “taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.” While the problem of crossborder tax avoidance affects most countries, the less developed countries are, by a significant factor, the most affected and disproportionately so. It will therefore come as no surprise if Kenya adopts the Model Rules as part of its CRS regime.
Even as the Government moves to implement CRS, a national debate on our entire tax system may well be warranted. It is a recurring question on which no answers are available and, as far as we can tell, has never fully engaged us as citizens despite the constant complaint that we are being overtaxed. It may well be possible that our tax system is inhibiting economic activity and thus, ironically, undermining rather than boosting revenue collection.
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