- A. INTRODUCTION
The Finance Act 2022 dated 23rd June 2022 (hereinafter referred to as “the Act”) came into operation on the 1st of July 2022. The Act amended various tax laws including the: Excise Duty Act, 2015), Miscellaneous Fees and Levies Act, 2016, Tax Procedures Act, 2015, The Income Tax Act Cap 470, and The Value Added Tax Act, 2013.
- B. MAJOR AMENDMENTS TO VARIOUS TAX LAWS
- 1. The Excise Duty Act, 2015
The Act limited the amount of interest that can be paid on delinquent taxes to the principle, as of July 1, 2022.
The Act also exempted from excise duty neutral spirit imported by pharmaceutical manufacturers upon the Commissioner’s approval and locally manufactured passenger motor vehicles.
- 2. The Miscellaneous Fees And Levies Act, 2016
In order to account for inflation, the Act amends the export levy for certain items, making it applicable from a date no later than the first of October of each fiscal year where it was previously applicable from the start of each fiscal year .
- 3. The Tax Procedures Act, 2015
Under the Act, trusts, whether operating for profit or not, are required to inform the Commissioner (Commissioner-General appointed under the Kenya Revenue Authority Act) of any changes to the name, address, or beneficiaries of the trust.
A deduction for input tax must be made within six (6) months after the date of supply in cases where the Commissioner modifies a VAT assessment, according to the Act. This is in accordance with the provisions of the VAT Act on the reimbursable input tax.
Other provisions within The Tax Procedures Act, 2015
- a. The range of assets that the Commissioner may utilize as collateral for delinquent tax has increased. The scope now includes land, buildings, vehicles, ships, airplanes, and other types of property. Moreover, taxpayers may now request that all overpaid taxes, including overpaid instalment taxes, be applied as a credit against future tax obligations.
- b. The registration of a trust was added as a transaction requiring a PIN in the First Schedule to the Tax Procedures Act given that trusts are increasingly being used locally to transfer and store assets.
- 4. The Income Tax Act
- Definition of terms
The Act defined various terms including: (i) “Fair Market Value” to mean the comparable market price available in an open and unrestricted market between independent parties acting at arm’s length and under no compulsion to transact, which is expressed in terms of money or money’s worth; (ii) “Financial derivative” to refer to a financial instrument the value of which is linked to the value of another instrument underlying the transaction which is to be settled at a future date,
and (iii) “Permanent home” to refer to a place where an individual resides or which is available to that individual for residential purposes in Kenya, or where in the opinion of the Commissioner is the place where the individual’s personal or economic interests are closest.
- Exclusion from thin capitalization provisions
Persons now excluded from the thin capitalization regulations are as shown below:
- a. Microfinance institutions licensed and non-deposit taking microfinance institutions licensed under the Microfinance Act, 2006;
(Important to note that the ones that follow below under this list are amendments that were not proposed by the Finance Bill, 2022)
- b. Entities licensed under the Hire Purchase Act;
- c. Non-deposit taking institutions involved in lending and leasing business;
- d. Companies undertaking the manufacture of human vaccines;
- e. Companies engaged in manufacturing whose cumulative investment in the preceding five years from the commencement of this provision is at least five billion shillings;
- f. Companies engaged in manufacturing whose cumulative investment is at least five billion shillings where the investment shall have been made outside Nairobi City County and Mombasa County; and
- g. Holding companies that are regulated under the Capital Markets Act.
- Deferral of realized foreign exchange loss
The Act now allows companies to defer reporting their realized foreign currency losses where their gross interest payments to connected parties and third parties exceeds 30% of their earnings before interest, taxes, depreciation, and amortization in any financial year. This does not apply for people who are exempt from the thin capitalization rules.
- Exemption from the Digital Service Tax for non-residents who have a permanent establishment in Kenya
The Act exempts non-resident individuals who have a permanent establishment in Kenya from paying the Digital Service Tax. This is aimed at curbing double taxation of a Kenyan Permanent Establishment’s income from digital platforms as well as leveling the playing field with local service providers who are not subject to Digital Service Tax.
- Taxation of Cash contributions
The Act now permits charitable contributions made to any tax-exempt organization to be deducted. Prior to this, only "cash" donations made to nonprofit organizations that were registered under the Societies Act or the Non-Governmental Organizations Coordination Act, or for initiatives endorsed by the CS National Treasury, qualified as tax-deductible contributions.
- Indefeasible Right of Use allowance alignment
The Act removes the clause that permitted telecommunication companies to deduct 5% of the cost of buying or acquiring an irrevocable right to utilize fiber optic cable.
The cost of the indefeasible right of use of a fiber optic cable by telecommunication operators is already subject to a capital allowance of 10% under the Income Tax Act.
- Increment of Capital Gains Tax
The Act increases the rate at which capital gains is taxed from the current 5% to 15% with effect from 1st January, 2023.
- 5. The Value Added Tax Act 2013
- Digital Market place
The definition of a digital market place was amended to now refer to an online platform which enables users to sell goods or provide services to other users.
The Kshs. 5 million barrier for VAT registration was amended to exclude individuals who provide imported digital services over the internet, electronic network, or a digital marketplace.
- VAT reduction on liquefied petroleum gas
The Act lowered the VAT on Liquefied Petroleum Gas from 16% to 8%. Petroleum gas includes propane.
Section 17 of the VAT Act, which allows for the deduction of input VAT to the extent that it was purchased in order to produce taxable supplies was amended to include that a registered person may only claim input VAT if the input VAT was stated in a return for the relevant financial period.
- Changing a commodity or service's status from exempt from VAT to standard-rated
The following supplies are changed from exempt to a standard rate of 16% under the Act:
- i. Taxable goods for the direct and exclusive use in the development and outfitting of specialized hospitals with a minimum bed capacity of fifty persons; and
- ii. Taxable services for the direct and exclusive use in building and outfitting specialized hospitals with lodging facilities.
- C. AMENDMENTS SET TO TAKE EFFECT FROM 1ST JANUARY 2023
- Taxation of gains from financial derivatives for non-residents
Gains made by non-residents in financial derivatives transactions in Kenya, save for those involving financial derivatives traded on the Nairobi Securities Exchange, are now subject to tax. According to regulations that will be published by the CS National Treasury, the gains will be subject to a 15% withholding tax.
- Consequences of transfer pricing for firms operating under a preferential tax system
Transactions between residents and the following parties (who are subject to a preferential tax system) have been added to the scope of transfer pricing (TP) by the Act's amendment to section 18 (A) of the Internal Revenue Code:
- a. A related resident person;
- b. A non-resident person;
- c. An associated enterprise of a non-resident person; and
- d. A permanent establishment of a non-resident person.
This amendment will expand the range of transactions that come under the purview of transfer pricing. This will also subject taxpayers who conduct business with non-residents under a favorable tax regime to more scrutiny and compliance cost.
- Lower tax rate for businesses running a carbon market
The Act subjects revenue received by a business that runs a carbon market exchange or emission trading system that has been approved by the Nairobi International Financial Centre Authority to taxation under the Income Tax Act. For the first ten years following the start of activities, the relevant tax rate will be 15%; after that, it is anticipated that it will revert to the applicable resident corporation tax rate of 30%.
- Income from shipping businesses
The Act reduces the rate of taxation for the profits made by a firm running a maritime operation in Kenya. For the first ten years following the start of operations, the relevant tax rate will be 15%; however, beyond that time, it will increase to 30% for resident corporations. This will promote shipping sector investment, which will subsequently promote international trade and foreign direct investment.
- Bearer bonds issued outside of Kenya that have interest paid on them
Bearer bonds issued to non-residents outside of Kenya for at least two years are subject to withholding tax at the rate of 7.5% of the gross amount due for interest and presumed interest, as well as interest, discount, or original issue discount.
The low rate of withholding tax is expected to make such bonds appealing to the market and profitable on the global market.
- Annual inflation adjustment
The annual inflation adjustment provision is amended to allow the Commissioner General appointed under the Kenya Revenue Authority Act to exempt certain products from inflation adjustment after taking the year's economic conditions into account. This will be done through a notice in the Kenya Gazette on receiving the CS for matters finance’s approval.
This was aimed at shielding customers from price increases brought on by yearly inflation adjustments on the excise duty on particular goods.
- D. CONCLUSION
The strides made by the various amendments brought by the Act will stimulate growth in various sectors in Kenya, promote foreign investment, provide clarification through the inclusion of new definitions on tax concepts and protect different entities.
Article by & Ann Yvonne Muriithi & Matthew Mbelenga
Published on 9th September 2022
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