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May 8, 2020 Kenya proposes Finance Bill, 2020 Executive summary On 6 May 2020, the Chairperson of the Department Committee on Finance & National Planning presented the Finance Bill, 2020 (the Bill) to Parliament. It is anticipated that Parliament will request stakeholder and public comments before the Bill becomes an Act. The Bill is presented as a matter of ordinary Fiscal Budgetary course and follows the enactment of the Tax Laws (Amendment) Act, 2020 on 25 April 2020. The Tax Laws (Amendment) Act, 2020 amended various tax laws and was aimed at responding to the COVID-19 pandemic (for background on the Act, see EY Global Tax Alert, Kenya enacts Tax Laws (Amendment) Act, 2020, dated 28 April 2020). The Bill proposes additional changes to tax laws, but also provides for other miscellaneous amendments to the Insurance Act, Retirement Benefits Act, Capital Markets Authority Act and Public Roads Toll Act, among others. The Bill also re-introduces some of the not-business-friendly provisions that were rejected by Parliament when the Tax Laws (Amendment) Act, 2020 was enacted. While the reason for this is unclear, it is likely that these provisions will likely receive the same reaction from the stakeholders. Once the Finance Bill, 2020 has been subjected to public consultation, it will be submitted by Treasury to Parliament before it is signed into law by end of June. This Alert summarizes the key proposals contained in the Bill. Unless specifically provided, all the proposals will come into effect on the date of assent by the President. Detailed discussion Corporate income tax Introduction of a minimum tax The Bill seeks to introduce a minimum tax payable at 1% of gross turnover. The tax will be payable by the following categories of persons:
The minimum tax will be payable in four installments by the 20th day of the 4th, 6th, 9th and 12th months of the year of income. The proposal seems to be aimed at loss making entities and follows similar legislation in countries like Tanzania, Angola, Mozambique and the Democratic Republic of the Congo. Effective date: 1 January 2021 Introduction of digital services tax The Bill proposes to impose a digital services tax (DST) on income from services provided through a digital marketplace in Kenya at the rate of 1.5% on the gross transactional value. The DST shall be payable via a withholding tax system. Withholding tax agents will be appointed by the Commissioner. The tax paid under this regime by a resident person or nonresident person with a permanent establishment in Kenya, shall be offset against the income tax payable for that year of income. The COVID-19 pandemic has resulted in increased transactions concluded via the digital marketplace (e.g., online shops) and it would seem the Government is keen on capitalizing on this to generate additional tax revenues. Effective date: 1 January 2021 Widening of income threshold qualifying for residential rental income tax The Bill proposes to increase the threshold for income qualifying for residential rental income tax from KES10 million to KES15 million. The proposal is geared towards widening the tax net with the aim of increasing revenue collection. Deductibility of expenses for corporate income tax The Bill proposes to treat the following expenses as non-deductible:
The Tax Laws (Amendment) Act, 2020 sought to introduce these provisions, a move that was rejected by Parliament. The Government’s motive behind this proposal is unclear especially given the challenges that a majority of taxpayers are currently facing. Effective date: 1 January 2021 Exempt income The Bill seeks to repeal exemptions previously granted on incomes accruing to a registered Home Ownership Savings Plan (HOSP) as well as the National Social Security Fund (NSSF). Similar to the proposals on non-deductible expenditure, this proposal was introduced by the Tax Laws (Amendment) Act, 2020 and rejected by Parliament. Effective date: 1 January 2021 Employment tax Repeal of HOSP provisions The Bill seeks to:
If passed, these proposals will discourage savings for homes through HOSP. Again, these proposals were previously included in the Tax Laws (Amendment) Act, 2020 but were subsequently rejected by Parliament. Effective date: 1 January 2021 Repeal of tax exemptions provided to low-income workers The Bill proposes to impose tax on bonuses, overtime and retirement benefits paid to employees whose taxable employment income, before the mentioned benefits, is at the lowest tax band. The proposal disregards and diminishes the COVID-19 tax incentives that were granted to low-income earners. Effective date: 1 January 2021 Tax Procedures Act Introduction of an amnesty program In a positive development, the Government, through the Bill, proposes to establish a tax amnesty program with an effective date of 1 January 2021. The program, which will run for a three-year period, will cover income taxes, value-added tax and excise duty. Under the amnesty:
Effective date: 1 January 2021 Appointment of digital tax agents The Bill proposes to grant the Commissioner power to appoint and revoke the appointment of digital tax agents, to collect and remit tax on digital services. This is likely to be challenged on Constitutionality grounds. Effective date: 1 January 2021 Value-Added Tax (VAT) Introduction of legislation on VAT Auto Assessments (VAAs) The Bill proposes to amend the conditions set for deductibility of input tax to require a registered supplier to have declared the respective sales invoice in a VAT return, before the purchaser is entitled to a claim of the input tax. The change “legalizes” the current VAAs which will result in increased instances where input VAT will be disallowed by the Commissioner. This measure is against the principle of fairness and it’s an abdication of Commissioners duty. The requirement for a purchaser to confirm that output VAT has been declared by the seller before claiming input tax will be administratively burdensome and is currently not supported by iTax. The KRA will need to guide Taxpayers on how feasible it will be for purchasers to verify submissions of buyers. Amendment of status of various VAT supplies The Bill proposes to amend the VAT status of the following products from taxable (14%) to exempt:
The Bill proposes to amend the VAT status of the following products from zero rated to the standard rate of 14%:
The Bill proposes to amend the VAT status of the following products from exempt to the standard rate of 14%:
Excise Duty Act Increase of Commissioner’s powers The Bill proposes to give the Commissioner powers to prescribe additional activities requiring an excise license through a gazette notice. Amendment of thresholds for excise duty The Bill proposes to amend the threshold for excise duty on the following products based on their alcoholic strength percentages:
Miscellaneous Fees and Levies Act The Bill proposes to amend various fees and levies charged under the Act as follows: Import Declaration Fees (IDF)
* The proposed additional import duty is supplementary to import duties on goods declared for home use levied in accordance with Section 171 of the EAC Customs Management Act at rates specified in the EAC Common External Tariff. Railway Development Levy (RDL)
Other miscellaneous amendments Below are some notable proposed amendments to existing legislation: Insurance Act The Bill has introduced a 30-day timeline for parties dissatisfied with a decision of the Commissioner of Insurance in any dispute to file an appeal with the Tribunal. The Act was previously silent on this. Insolvency Act, 2015 The Bill seeks to amend the Insolvency Act to include the KRA among preferential creditors, where all amounts collected on behalf of the KRA by a person registered under the Banking Act, will rank in the second priority claims with the first priority claims being reasonable expenses of the bankruptcy/liquidation. Capital Markets Authority Act The Bill seeks to bring private equity and venture capital companies that have access to public funds under the ambit of control of the Capital Markets Authority enabling Retirement Benefits Investment Schemes to invest in such companies. Kenya Revenue Authority Act The Bill seeks to amend the Kenya Revenue Authority Act to allow the KRA to introduce a limitation of action provision, whereby, legal actions against the Authority are to be instituted within a period of 12 months from the date of the act, neglect or default. If passed into law, this specific provision will be prejudicial mainly to stakeholders that the KRA engages with i.e., employees, suppliers, contractors, etc. However, for taxpayers most disputes are covered for under the various tax laws. _____________________________________________________________________________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young (Kenya), Nairobi
Ernst & Young Advisory Services (Pty) Ltd., Africa ITTS Leader, Johannesburg
Ernst & Young Société d’Avocats, Pan African Tax – Transfer Pricing Desk, Paris
Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London
Ernst & Young LLP (United States), Pan African Tax Desk, New York
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