Executive summary

Kenya has, through the Tax Laws (Amendment) Act, 2024 (the Act), introduced a domestic minimum top-up tax to align with the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Pillar Two. The law was assented to on 11 December 2024 and took effect from 27 December 2024.

As part of the OECD's Two-Pillar Solution, Pillar Two aims at addressing tax challenges arising from the digital economy and base erosion by multinational enterprises (MNEs). It introduces a global minimum tax of 15% for qualified MNEs. The key components include:

1. Qualified Domestic Minimum Top-Up Tax (QDMTT): Allows countries to impose a top-up tax to ensure that domestic profits meet the 15% minimum rate before foreign jurisdictions apply the IIR
2. Income Inclusion Rule (IIR): Requires parent entities of in-scope MNEs to apply a top-up tax if their subsidiaries in other jurisdictions are taxed below 15%
3. Undertaxed Profits Rule (UTPR): Acts as a backstop to the IIR by allowing other group entities to collect top-up taxes when the IIR is not applied

Kenya's introduction of a domestic minimum top-up tax falls under the QDMTT. This ensures that in-scope MNEs with operations in Kenya pay at least 15% corporate income tax.

Detailed discussion

Background

The domestic minimum top-up tax applies to MNEs that report annual consolidated revenues of at least €750m, which is roughly equivalent to 95 billion Kenyan shillings (KES95b), in at least two of the previous four accounting periods.

The primary objective of this tax is to ensure that these MNEs maintain a minimum effective tax rate (ETR) of 15% on income generated in Kenya.

A significant difference in Kenya's QDMTT is that the ETR is calculated at the entity level, rather than at the jurisdiction level as outlined in the OECD Guidance on Pillar Two Rules.

Highlights

The Act provides exemptions for certain entities, including:

1. Public entities that are not engaged in business
2. Persons whose income is exempt from tax under the provisions of the First Schedule to the Income Tax Act (ITA)
3. Pension funds and their assets
4. Real estate investment vehicles that qualify as an ultimate parent entity
5. Non-operating investment holding companies
6. Investment funds that qualify as an ultimate parent entity
7. Sovereign wealth funds
8. Intergovernmental or supranational organizations, including their wholly owned agencies or organs

Implications

Kenya is expected to issue further regulations and guidelines on the implementation of the domestic minimum top-up tax. Future Global Tax Alerts will provide updates as and when the regulations are published.