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.

Legal & Tax Perspective of the Presidential Tax Directive – COVID-19

Posted on March 30th, 2020

With the outbreak of the Coronavirus pandemic come widespread economic challenges affecting the world at large with no country spared. Kenya on its part has seen a decline in economic and business activities following the announcement of the Coronavirus cases in Kenya. In the result, the security of employment and businesses of many Kenyans is uncertain. An even greater challenge faced by companies is the inability to fulfil contractual obligations and more importantly be in compliance with statutory obligations.

It is on this premise that the President in an effort to mitigate the adverse economic effects of the Coronavirus pandemic, directed the National Treasury to implement certain tax reliefs (as set out below) aimed at increasing liquidity in the country.

Pay As You Earn (PAYE)

The President has directed a one hundred percent (100%) Tax Relief for persons earning gross monthly income of up to KES 24,000 and reduction of the highest PAYE rate from thirty percent (30%) to twenty five percent (25%).

This is a good move in ensuring that a taxpayer who earns salary goes home with more disposable income. This will help sustain the common mwananchi in the coming hard times. This directive will however only come into force pursuant to a tax amendment bill being tabled in parliament and the same being enacted.

Value Added Tax (VAT)

The President further directed an immediate reduction of the standard VAT rate from sixteen percent (16%) to fourteen percent (14%), effective 1st April, 2020. The Cabinet Secretary in exercise of his powers under section 6 of the VAT Act has issued Legal Notice Number 35 of 2020 dated 26th March 2020 in terms of the aforesaid directive, which is pending approval by Parliament.

The Kenya Revenue Authority (KRA) was also directed to expedite the payment of all verified VAT refund claims amounting to KES 10 Billion within three (3) weeks or in the alternative to allow for offsetting of Withholding VAT, in order to improve cash flows for businesses in the economy. We must emphasise this VAT Refund Claim only applies to claims that have been verified by KRA and does not extend to contested claims.

Turnover Tax (TOT)

Reduction of the TOT rate from the current three percent (3%) to one percent (1%) for all Micro, Small and Medium Enterprises (MSMEs). The TOT was reintroduced by the Finance Act, 2019. This will provide a major reprieve to taxpayers - entities whose turnover is less than KES 5 Million in a year of income.

Export Processing Zone (EPZ) Enterprises

Further to Presidential directives, the Cabinet Secretary for National Treasury and Planning, on 20th March, 2020, had issued a notice to the Commissioner General of KRA asking that it lifts restrictions of twenty percent (20%) of the total annual production of the EPZs for sale into the domestic market to one hundred percent (100%) with an undertaking that the government pays the dues and taxes to KRA given that there is no legal provision exempting goods from EPZs sold locally from taxes.

The tax and dues payable by taxpayers in the EPZs are charged under the 13th Schedule of the Income Tax Act and the EPZ Act, 1990.  This Presidential directive will allow entities in the EPZs to supply locally all their products in Kenya.

While the move is welcomed and the idea of the government paying taxes and dues on behalf of tax payers to KRA may be economically sound, the same goes against the basic agency principle of ‘a principal being estopped from purchasing its own goods from its agent’. However, it must be noted that this is a temporary measure, pending parliamentary amendments to the law to allow for exemption of EPZs.


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 Lena Onchwari (lena@oraro.co.ke) and Wanjala Opwora(wanjala@oraro.co.ke) or your usual contact at our firm, for legal advice.

Kenya-Mauritius Double Tax Avoidance Treaty

Posted on March 19th, 2019

By Walter Amoko | Lena Onchwari

Introduction

Kenya, as is the case with other countries, has entered into a number of Double Tax Avoidance Treaties (DTAs) with an aim of avoiding or mitigating double taxation of persons (both legal and natural) residing in the contracting states but more importantly as a way of encouraging Foreign Direct Investments.

Kenya signed a DTA with Mauritius (a country that has a vast treaty network and favorable tax framework) which was subsequently gazetted by the Cabinet Secretary of Finance via Legal Notice Number 59 of 2014 issued under the Income Tax Act. The Tax Justice Network Africa challenged both the constitutionality of the DTA and Legal Notice before the High Court on multiple grounds including opacity of the process, the need for public participation in the exercise, that it was not for the benefit of Kenya and lack of Parliamentary scrutiny.

The High Court has now given its Judgment. The constitutional challenge to the DTA failed. The High Court found that the DTA had some form of ratification as required since both states agreed to be bound by it and that the process of its formulation was open and transparent. Further the court found there was no basis for faulting want of public participation. However, the Legal Notice that was intended to domesticate it was void because it was not tabled before Parliament within the time required by the Statutory Instruments Act.

Impact

The High court’s decision did not invalidate the Double Tax Avoidance Treaty by declaring it unconstitutional nor did it affect the propriety of anything done under it prior to the invalidation of the Legal Notice. It merely declared the Legal Notice as void for lack of parliamentary scrutiny. The impact of this is that though the DTA is still valid, it does not have legal effect in Kenya.

It is open to the Cabinet Secretary to issue a new Legal Notice in respect of this (and any other similar Legal Notices on any DTAs entered after 2013) and ensure full compliance with the Statutory Instruments Act including presenting it ; with all the required information, on time to Parliament.


Should you require further information on the DTA, please contact Walter Amoko (Partner) or Lena Onchwari (Partner):

Walking a Tight Rope: Thin Line Between Tax Planning and Tax Abuse

Posted on September 14th, 2018

By Walter Amoko | Lena Onchwari

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Globalization has had its bright side. Liberalization of domestic markets as well as the feeble returns in most Western markets has resulted in dramatic growth in foreign direct investment by multinational companies especially across the globe with developing countries receiving a substantial share. This has been of great benefit to developing countries spurring economic growth. Their tax authorities should also be smiling as growth results in more tax revenue. However, this is not guaranteed as tax efficient multi-nationals are astute at avoiding taxes. Consequently, developing countries have seen the need to drastically amend and enact tax laws that will give them a wider tax base, curb tax evasion and mitigate against tax avoidance.

It is noteworthy that despite the statutory obligation to pay taxes, a taxpayer is allowed under law to so arrange its affairs to mitigate its tax liability. This is encapsulated in the statement of Lord Clyde, in the case of Ayrshire Pullman Motor Services & Ritchie v Inland Revenue Commissioners where he stated that; “….No man…. is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Revenue [authority] to put the largest possible shovel in to his stores. The Revenue [authority] is not slow – and quite rightly – to take every advantage which is open to it under the taxing  statutes for  depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue [authority]….” This passage recognizes the inevitable game of cat and mouse where the tax authorities seek to legally maximize tax collection while the tax payer seeks to legally reduce his/her tax obligations, with the Courts determining the legality of the transaction or structure when confronted with such matters.

The increased sophistication of financial arrangements to minimize tax obligations and the advancement of tax law to address this has occasioned numerous court decisions on tax planning. The Courts have become more sagacious and have moved away from solely looking at the legality of the transactions on the face of it as they have deemed that approach insufficient, the Courts now also examine the underlying commercial rationale of a scheme to determine whether it amounts to an abuse of law.

In the landmark case of Halifax plc v C & E Commrs (and related appeals), the Court  stated  that ‘…the   application of Community legislation cannot be extended to cover abusive  practices by  economic  operators,  that  is  to say  transactions  carried  out  not   in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided  for  by   Community   law. That principle of prohibiting abusive practices also applies to the sphere of VAT….’ The judgment of the court in this case could not be more discerning. The Court opined that  despite  the  legality of a tax planning scheme, the tax payer cannot employ the same without an accompanying commercial purpose as that would be tantamount to an abusive practice. It is therefore pertinent  for the tax payer when formulating a tax planning structure, to take cognizance of the developments in both statutory and juridical law to ensure that the structure will not be deemed to be an abuse of law.

That said, tax planning can be approached from three different angles namely legal, financial and operational.

Legal Structure

A company’s legal structure relates to its ownership or share holding. This is especially important when it comes to withholding taxes on dividends  and most importantly in the  eventuality  of an exit from a country. In the Chinese Chongqing case (State Tax Bureau, 27 November 2008) a Singapore parent company sold to a Chinese buyer its Singapore subsidiary, which was a SPV(special purpose vehicle) that held a subsidiary in China. The Chongqing tax bureau disregarded the Singapore subsidiary and treated the  transaction as a sale by the Singapore parent of the Chinese subsidiary. Consequently, the Singapore parent  company  had to pay income tax in China at a 10% rate on the capital gain from the sale, as if it had sold the Chinese subsidiary directly. The tax bureau was of the view that the Singapore subsidiary had a very small amount of capital and also did not carry on any business activity other than owning the shares of the China subsidiary. Hence, the Singapore subsidiary lacked economic substance.

Financing Structure

Companies finance their operations in two major ways,  intercompany  loans or loans from third party financial institutions. However the  deductibility of the relevant interest expense is governed by certain specific and general anti-avoidance rules.

As already stated above, the Courts expect financing arrangements between companies to be driven by an economic goal. This was reflected in the recent judgment of the Supreme Court of Netherlands dated 5th June 2015  in a case that involved a listed parent company of a South African media group. The parent company issued shares of which approximately 60% of the proceeds were  directly  wired  to its Dutch third-tier subsidiary. From a legal perspective, the proceeds were contributed as capital to a second-tier Mauritian company, which in turn granted an interest free loan to its 100% owned Mauritian subsidiary, the group’s internal financing (low-substance) company. This company lent the proceeds to the Dutch holding company through an interest bearing loan. The Dutch holding company used the proceeds to acquire other companies and claimed interest deduction on the Mauritian Debt. The Supreme Court denied the claim for interest deduction and consequently referred the matter back to a lower Court to determine whether commercial reasons had duly motivated the funding provided by the holding company.

Operational Structure

It is common practice for companies in a group to offer other sister companies services at a cost. These services include management and professional services, marketing services, intellectual property leasing   among   others.   Payments for such services will be allowable deductions in one company  and  may be subject to  taxation  in  another.  It is however prudent to note that the transfer pricing guidelines will apply in such transactions.

The  spaghetti  plate  of  divergent views on  tax  planning  is  not  only  of a legal nature, but also of a moral, economic and political nature. As already discussed above, tax planning or avoidance is not illegal but it may be deemed by the Courts and the revenue authorities to be an abuse of law, in which case the tax payer may be denied the tax advantage they sought to enjoy.

There are proponents, especially the civil society, who consider tax planning to be outright immoral. Such a stance may adversely affect a company’s reputation, especially in cases where there is public outcry. However, such reputational risks can be allayed by putting in place certain measures which among others include intense lobbying and engagement with the government and tax authorities.

Flowing from the above, it is noteworthy that the Courts look at a number of factors in  order  to  determine  whether a company’s tax planning activities amount to an abuse of law. It was the trend that Courts mainly considered whether the structure was highly motivated by a commercial or economic benefit to the company. However a recent judgment of the UK Supreme Court in the case of HMRC V Pedragon plc & 5 others (2015) UKSC added a new twist to this. In the case the court held that it is not sufficient that a transaction has a commercial benefit, this will be open to challenge if the  accrual  of  a tax advantage is established to be the principal aim of the transaction.

In essence, while determining whether a tax planning structure amounts to an abuse of law or not, the Court will now consider two key factors; whether a company wished to obtain a tax advantage and whether the tax planning structure was driven by a commercial benefit. This decision of the Court is mirrored in the recent development of tax legislation in developing countries. For instance the Tax Procedures Bill in Kenya intends to look beyond the legality of the structure or transaction; it seeks to determine the commercial purpose of the same. It essentially lays the burden upon the tax payer to demonstrate the commercial purpose of certain transactions, failure of which the tax payer may be subjected to paying double the tax avoided as a penalty.

Therefore a tax payer should ensure that they structure their affairs in such a way that on one hand they are able to achieve their commercial or economic goals and on the other hand they get to optimally benefit from tax advantages brought about by the structure, without abusing the law.

Taxation in the Upstream Oil and Gas Sector

Posted on September 14th, 2018

By Geoffrey Muchiri

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26th May 2012 is a date that will forever remain etched in the minds of Kenyans as it is the day when the announcement was made that vast quantities of oil had been discovered in Turkana County. Commercial viability of those discoveries had not been determined but from that date Kenya became a new petroleum province of great interest to all in the global oil and gas industry. It is in the context of this discovery that Kenya’s numerous oil blocks are seeing a renewed interest from International Oil Companies(IOC) (be they: small independents or the oil majors/seven sisters and their successors in title) or National Oil Companies from other countries.

The exploration and production of oil and gas is a very expensive capital intensive undertaking as the preliminary shooting of seismic and the drilling of exploratory wells in an oil block in accordance with the work programme agreed with any Government in any country may cost between US$1 million to over US$ 15 million and Kenya is no exception (this is coupled with the attendant risk that there is always a great possibility that the oil(if any that is found) may not be in commercial quantities). The development and production phase may involve the construction of the infrastructure necessary to transport the oil from the wellhead to the port of Mombasa or Lamu and may cost hundreds of millions of dollars.

For that reason any IOC that  seeks to sign a Production and Sharing Contract (PSC) with the Kenyan Government in respect of the available oil and gas blocks (be they onshore or offshore) would like to ascertain up front what taxes if any are applicable during the exploration phase as well as the production before the IOC can proceed to make any contractual commitment by signing and sealing the PSC. This accords with what Lord Mansfield stated in 1774, that in all mercantile transactions the great object should be certainty. This aphorism holds true to this day especially in the oil and gas sector.

The taxes applicable to the oil and gas company undertaking exploration and production of oil in Kenya are as follows:

  1. Corporation tax on the profits during the production phase (with an allowance being given for amongst others: production costs (recovered from the cost oil within a period of between 4 and 5 years), intangible drilling costs, payments to the government under the PSC, executive and general administrative expenditure incurred in Kenya ( as well as outside Kenya with special exception in the sense that those expenditures although incurred outside Kenya relate to Kenya), management fees, interest paid on loans(provided tax on the interest has been deducted and paid). The corporation tax rate is 37.5% for non-resident companies and 30% for resident companies.N/B: Since many IOCs which happen to be oil majors are vertically integrated there is a likelihood they may sell oil to their subsidiaries involved in marketing and for that reason there are rules that govern and ensure that such sales are done on an arms- length basis.
  2. A tax on any transfers of any interest in the property and/ or shares of an oil company was introduced in This attempts to cover: take-overs and farm-outs as well as outright sales of the whole interest. This tax was introduced as a result of a battle that the Kenyan Government lost when it tried to call for its share of taxes when an international take-over of a company had the effect of resulting in the acquisition of stakes in some oil blocks in Kenya.
  3. Government share of profit oil is also a tax from the IOC’s. The Government share of profit oil is calculated on a sliding scale with the government share increasing dependent on how many barrels of oil are produced from a particular oil block (akin to the sliding scale that applies to an individual person’s income in Kenya whereby the government take/tax increases with  each  increasing level of income). The Government share of profit oil is a negotiable variable and this is a factor which ought to be taken into consideration as one engages the Government in  negotiations leading up to the signing of a PSC.
  4. Windfall profits tax may be included in some concluded Production Sharing however, in light of the continued sharp price decline in the global oil prices. This might not be a very attractive tax model.

Ring-fencing is applicable to the upstream oil and gas sector in Kenya. This means that losses from one oil block cannot be used to reduce the taxable income in respect of another profitable oil block.

The Kenyan Government is currently at an advanced stage of concluding the preparation of new legislation that will govern the upstream oil and gas sector in Kenya.

Securities Transfers Tax

Posted on September 12th, 2018

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.

Related Practice areas

Tax

Finance Act, 2015: Key Changes to the Tax Regime

Posted on September 12th, 2018

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)

Rental Income

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.

Film Industry

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%.

Apprentices

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.

Shipping Industry

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.

Tax losses

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.

Tax holidays

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.

 

VAT ACT(VATA)

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.

Withholding VAT

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.

VAT-exempt supplies

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:

  1. Taxable goods, excluding motor vehicles, imported or purchased for direct and exclusive use in implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury
  2. Taxable goods imported or purchased for direct and exclusive use in the construction and infrastructural works in industrial and recreational parks of 100 ha or more approved by the Cabinet Secretary for the National Treasury
  3. Goods imported or purchased locally for use by local film producers or film agents subject to approval by the Cabinet Secretary
  4. Inputs or raw materials locally purchased or imported by manufacturers of agricultural machinery and implements upon approval by the Cabinet Secretary responsible for industrialization

VAT-exempt Services

Under the Act supply of services that are exempt from VAT also include:

  1. Taxable services for direct and exclusive use in implementation of official aid funded projects
  2. Taxable services for direct and exclusive use in construction and infrastructural works in industrial and recreational parks of 100 ha or more
  3. Services imported or procured locally for use by local film producers or film agents
  4. Supply of sewerage services by national and county government
  5. Supply of taxable services to SEZEs, developers and operators

Zero-rated supplies

Under the Act zero-rated supplies additionally include:

  1. Goods purchased by duty free shops by passengers departing to places outside Kenya
  2. Supply of taxable services in respect of goods in transit
  3. Inputs or raw materials supplied to pharmaceutical manufacturers for manufacturing medicaments
  4. Left hand vehicles subject to certain provisos
  5. The medicaments excluded from the exempt supplies schedule(see VAT exempt supplies above)

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.

Related Practice areas

Landlords, Beware: The New Residential Rental Income Tax Provisions in the Finance Act, 2015

Posted on August 13th, 2018

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.

Tax Amnesty

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.

Related Practice areas

Tax

Even More Changes: A Look at the New Tax Procedures Act, 2015

Posted on August 13th, 2018

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.

Principal objectives of the legislation

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.

Key highlights of the Act include:

• 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 :-

  • Failure to register or de-register for tax purposes; Penalty of KES 100,000 per month or part thereof subject to a maximum of KES 1 million.
  • Failure to maintain proper documents; Penalty equal to 10% of the amount of tax payable subject to a minimum of KES 100,000.
  • Late submission of PAYE returns; Penalty equal to 25% of the tax due or KES 10,000; whichever is higher.
  • Late filing of any other tax return; Penalty of 5% of the amount of tax payable under the return subject to a minimum of KES 20,000.
  • Failure to file any other document, other than a tax return; Penalty of KES 1,000 per day subject to a maximum penalty of KES 50,000.
  • Failure to submit a tax return online or pay a tax electronically as required; Penalty of KES 100,000.
  • Tax shortfall as a result of deliberate provision of false statement or omission;
    • 75% penalty on tax shortfall attributable to fraudulent tax filing
    • 20% penalty on tax shortfall not attributable to fraud.
    • Penalty reduced by 10% when a person discloses tax shortfall voluntarily to the KRA.
  • Tax avoidance; Penalty equal to 200% of the amount deemed avoided by a taxpayer.
  • Fraudulent claim for a refund of tax; Penalty of 200% of the amount of the claim.
  • Offences committed by KRA officers or persons required to act on Commissioner Instructions; Fine not exceeding KES 2 million and to imprisonment for a term not exceeding 5 years or both.
  • Fraudulent act of omission or commission in relation to a tax period; Fine not exceeding KES 10 million or 200% of the amount of tax evaded whichever is higher or to imprisonment for a term not exceeding 10 years or to both.
  • Offences committed by tax agents e.g participating in creation of tax avoidance or evasion schemes; Fine equal to 200% of the amount of tax evaded or a fine of KES 5 million whichever is higher or to imprisonment for a  term not exceeding 5 years, or to both.
Related Practice areas

Tax

A Matter of Co-operation: Kenya Signs the Convention on Mutual Administrative Assistance in Tax Matters

Posted on August 13th, 2018

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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.

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