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26 September 2018 Kenya enacts Finance Act, 2018 The objective of the Act is to provide clear regulations on all procedural aspects and provisions relating to income tax, value added tax, and excise duty, among other changes. The Act introduces amendments to existing provisions in the different tax laws. The Act also streamlines and clarifies various provisions as set forth in the Finance Bill, 2018. This Alerts summarizes the key changes. Unless noted otherwise, the effective date for these amendments is 1 July 2018. The definition of dividends has been expanded in the Act to include any amount paid by a company on behalf of its shareholder or a person related to the shareholder. Such payments deemed as a distribution would include a debt owed by the shareholder or its related person that is settled by the company. Transfer pricing adjustments that result in additional income/reduced losses will also be deemed to be dividends. While the Act proposes to maintain compensating tax which is payable on the distribution of dividends from untaxed income, the applicable rate has been reduced from the punitive 43% to 30%, aligning it with the current corporation tax rate for resident companies. Compensating tax however shall not be applicable to collective investment schemes. The Act has introduced a presumptive tax on resident persons with an annual turnover that is below KES5m. This replaces the existing turnover tax. The tax will apply to persons issued or liable to be issued with a business permit or a trade license by a county government in a year of income. The tax will not apply to income from management or professional services, rental income or incorporated entities. The tax will be payable at 15% for the amount payable for a business permit or trade license. The tax will be due at the time of payment of the business permit or trade license or renewal of the same. The tax seems to be geared towards the Government's objective of expanding its tax base through taxation of the informal sector. In a bid to reduce the cost of manufacturing in Kenya, the Act has provided that manufacturers will be allowed to claim an additional 30% of their electricity expense in addition to the normal allowance for electricity expense. The deductibility of the additional 30% will be subject to the conditions set by the Ministry of Energy. The Act has introduced withholding tax on demurrage charges and insurance premiums payable to a nonresident person. The withholding tax rates shall be 20% and 5% for the demurrage charges and insurance premiums respectively. Insurance premiums paid for the insurance of an aircraft will be exempt from withholding tax. Under the new provision, all employers and employees will each be required to contribute 1.5% of the employee's gross monthly earnings subject to a maximum limit of KES5k to the NHDF. Guidelines on how these remittances will be made are yet to be issued. The VAT Act, 2013 has modified the manner in which VAT is levied on mobile cellular transactions from using a tax base of the value of supply exclusive of excise taxes to now include excise duties as part of the taxable value for purposes of applying the standard rate of 16%. The Act has introduced a concessionary 8% VAT rate on petroleum products which over the transition period from September 2013 to August 2018, were previously exempt. Determination of the taxable value of these goods shall exclude excise duty, fees and other charges.
The Act has increased the penalty for offenses relating to operation or importation of goods requiring an excise stamp without an excise license to a minimum of KES5m. It has also provided that such goods may be forfeited to the Commissioner. The Act has amended Section 10 of the Excise Duty Act, 2015 which provided for an adjustment of the excise duty rates every two years to an adjustment at the beginning of every financial year.
A person required to submit a tax return under a tax law may apply in writing to the Commissioner for an extension of time to submit the return. The TPA has been amended to provide specific timelines for making this application:
Only one extension to an applicant is allowed in respect of a tax period. The grant of an extension shall not alter the date for payment of any tax due but shall exempt the taxpayer from penalties. The Commissioner will now be required to furnish a taxpayer with the reasons for rejecting an amended return within 30 days of receiving the application. The Act has repealed Section 37B of the TPA thereby extending the period of filing returns under tax amnesty from 30 June 2018 to 30 June 2019. The extension also covers income received in the year 2017. The new Section 37B also proposes an amendment which provides that the Commissioner shall not question the source of the funds unless the funds are from terrorism, poaching or drug trafficking. Further, repatriated funds are to be excluded from provisions of the Proceeds of Crime and Anti-Money Laundering Act, 2009 and other Acts relating to investigation of financial transactions. The TPA has been amended to allow a taxpayer to apply for an extension to pay any undisputed tax amount where an additional assessment is issued by the tax authority. An objection to a tax assessment is only valid where a taxpayer has paid the undisputed tax. A late tax payment penalty of 5% of the tax due and payable has been introduced for persons who fail to pay tax on the due date. Interest on the late payment of tax has also been increased from 1% to 2% from per month. The TPA has been amended to provide for new penalty rates on late submission of tax returns as follows:
Section 89 of the TPA has been amended to clarify that the Commissioner can only waive penalties and interest to a limit of KES1.5m. Where the application exceeds this amount, the Commissioner is to seek prior approval from the Cabinet Secretary (CS) in charge of the National Treasury. In addition, the Commissioner is to make quarterly reports to the CS on the remissions granted. The Act introduces two new sections to the TPA imposing penalties for unauthorized access or improper use of and interference with computerized tax system.
The TAT Act provides for disputes to be heard and resolved within 90 days. The Act has been amended to take into consideration settlements out of the tribunal such as the Alternative Dispute Resolution (ADR) mechanism. The time taken to engage in such deliberations will not form part of the 90-day time limit. The Government expects that the additional revenue generated by these proposals will support the development of both social and physical infrastructure in the country which will ultimately benefit the citizens of Kenya. There are various measures that apply retroactively as of 1 July 2018. It remains to be seen how these will be implemented.
Document ID: 2018-6130 | |||||||||
