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Harmonise Changes in Tax Laws

The government began reviewing various tax laws including the
Value Added Tax (VAT) and Excise Tax Act in 2014, but is yet to do
the same with the Income Tax Act.
The tax – usually charged on profits from the sale of assets held for
at least 12 months – was suspended in 1985 as part of measures to
make Kenya more attractive to foreign direct investment, but tax
experts now argue that it should be reintroduced to put the country
in line with global trends.
We are losing a lot of revenue by simply not taxing wealth made
from capital gains leaving the working class to carry the country’s
financial burden,
Opponents of capital gain tax are however arguing that its
introduction in certain sectors of the economy could discourage
investment and slow down growth.
On the other hand the tax should be applied in areas such as the
sale of businesses to help boost the national revenue kitty.
The Finance Bill 2022 proposes to that the tax on disposal of property be
increased from 5% to 15% from January 2023 .Tax experts argue that a
number of the capital gains are attributable to inflation as the value of money
decreases over time therefore , an increase in the capital gain tax
should go hand in hand with the introduction of indexation.
Popular opinion is that the suspension of capital gains tax to
encourage investment has outlived its purpose and needs to be
reintroduced to enhance equity in tax payment. Taxing wealth will
help broaden the revenue base and nurtured an equitable tax regime
In conclusion, if the Bill is to be implemented Kenya’s revenue would
be growing at a higher pace by taxing the wealthy class.
The re-introduction should also factor in inflation, especially for
transactions involving disposal of property that was either acquired
or developed earlier.
By Chartafai.

CHARTAFAI – TAX ALERT – Finance Act 2021

Highlights of the Finance Act 2021, Kenya

This finance Act 2021 was assented by President Uhuru Kenyatta on the June 29, 2021. It has brought new changes effective July 1, 2021. Finance Act enacted on June 29, 2021 amends the following Acts;

  1. Income Tax Act
  2. Value Added Act
  3. Excise Duty Act
  4. Tax Procedures Act

The Act has introduced new provisions on Registered Trusts, Digital Services Tax, Minimum Tax and investment allowances on capital investments

Our analysis of the changed tax laws mainly under the Income Tax Act and Value Added Tax

 

  1. Income Tax Act
  Provision Previously Amendment Effective Date
1 Interest Expense capping – Income tax Act Section 16(2)(j) No capping

Only Thin Capitalization

 Deductible interest cost will be capped at 30% of EBITDA (all loans) Jan 01, 2022
2 Redefining control for FOREX loss restriction purpose Control was defined as holding of at least 25% of the shareholding or voting power Now also includes;

·         Loan advances – 25%

·         Guarantees -75%

·         Appointment of more than 50% of the Board

·         Person owns exclusive rights over the IP

 

 July 01, 2021
3 Redefining permanent establishments (PE) Was defined as “a fixed place of business and includes a place of management, a branch, an office for more than 6 months Lowers the threshold for creating a PE aligning Kenya with international best practice under OECD and BEPS initiative July 01, 2021
4 Taxation of Registered Family Trusts N/A WHT at the rate of 25% on amounts paid out to a beneficiary by a trustee, administrator or executor.

Tax incentives under CGT exemptions during transfer

 July 01,2021
5 Minimum tax Provisions were challenged at the High Court effectively culminating in issuing of Conservatory Orders suspending enforcement measures It now exempted in law the following incomes or businesses;

Insurance Companies

Retail prices controlled by GOK

SEZ and Big manufactures

Commission based distributorships

 July 01, 2021

 
6 Digital Service Tax (DST) DST rate of 1.5% of the gross turnover payable on or before the 20th of the subsequent month DST is now applicable on non-resident person.

Income subject to WHT will not be subject to DST.

Requirement to file a monthly return on or before the 20th of the subsequent month.

 July 1, 2021
7 Carry forward limit for tax losses lifted Limited to 10 years It’s now limitless subject to minimum tax regulations July 01, 2021
8 Investment allowances rates Straight line basis Reducing balance basis Jan 1, 2022
 

 

  1. Value Added Tax
  Provision Previously Amendment Effective Date
1 Reclassification of exported vatable services from a zero-rated supply to Exempt Export of taxable services was zero rated supply Export of VAT vatable service is now reclassified to an exempt supply.

Will result in an VAT Payable due inputs claiming restrictions and elimination of VAT refunds

 July 01, 2021
2 Input VAT restriction on passenger vehicle leasing and hiring No Restriction on input tax Acquisition of passenger vehicles, minibuses and associated expenses are not claimable unless the costs are incurred exclusively for making of vatable supplies July 01, 2021
3 Expanded scope for application of reverse VAT Only persons registered VAT Reverse VAT now expanded to include persons that are not registered for VAT July 01, 2021

 

Reclassification of supplies – Vatable to Exempt

Medicaments and food supplements

 

For additional information with respect to this Tax Alert or any accounting or tax advisory matter, please contact the following:

 

 

For Clarification please contact us

Stephen Musila

Manager, Outsourced Services

stephen.musila@chartafai.com

 

Client Services

info@chartafai.com

 

Njeru Mwangi

Partner, Tax Services

njeru.mwangi@chartafai.com

Digital Service Tax (DST)

TAXATION OF THE DIGITAL ECONOMY

The fact that technology plays a key role in business is undeniable. Technology is integrated into our daily activities and routines through the use of easily accessible smartphones, and computers that support online applications enabled by affordable internet access. As a country, Kenya rapidly adopted and embraced technology, including its integral role in e-commerce. Kenya is among the leading nations in the smartphone penetration rate in the world. The high penetration rate has encouraged businesses to adopt the technology by utilizing online platforms in conducting business activities. Technology enables the undertaking of the entire business cycle on the digital marketplace without the need for physical interaction.

The COVID-19 pandemic demonstrated the significance of technology in daily activities cemented the importance of e-commerce at a time when social distancing is encouraged.

The Finance Act, 2019 amended Section 3 of the Income Tax Act (“ITA”) to provide for the charging of income tax on income accruing through a digital marketplace. Also, through the Finance Act, 2019, the ITA provides for a definition of the digital marketplace giving powers to the Cabinet Secretary to the National Treasury to publish regulations on implementation of taxation of income accruing through a digital marketplace. In this regard, the Draft Digital Tax Regulations, 2020 (“Draft Regulations”) have been published for public participation.

This Tax Alert summarizes the recent developments concerning taxation of the digital economy and the Draft Regulations.

 

 Introduction of Digital Service Tax

  • The Finance Act, 2020 introduced the Digital Service Tax (“DST”) charged on income generated from the provision of services through a digital marketplace in Kenya.
  • The Income Tax Act (“ITA”) defines a digital marketplace as a platform that enables the interaction between buyers and sellers of goods and services through online platforms.
  • DST is charged at the rate of 1.5% of the gross transaction value.
  • DST is an advance tax and shall be deducted from the corporation tax payable for the year of income in which the digital tax was payable.

 

VAT clarity on supplies made through a digital marketplace 

  • The Finance Act, 2020 brought under the ambit of Value Added Tax (“VAT”) supplies undertaken in the digital marketplace.
  • VAT is applicable on supplies undertaken in the digital marketplace at the standard rate, currently 16% effective 1st January 2021.
  • The VAT Act defines the digital marketplace in the same way as the ITA.

 

 PROPOSED PROVISIONS IN THE DRAFT DIGITAL TAX REGULATIONS, 2020

Proposed online transactions applicable to DST

The Regulations seek to outline the services for which DST is applicable:

  • Transmission of data collected about users’ activities on a digital marketplace.
  • Provision of a digital marketplace, e-commerce including websites, online applications, that link buyers and sellers.
  • Subscription-based media, including news, magazines and journals.
  • Electronic data management, including web hosting, online data warehousing, cloud storage services.
  • Supply of search-engine and automated helpdesk services.
  • Tickets bought for live events, including theatres, restaurants, purchased through the internet.
  • Streaming and downloading services of digital content which includes but not limited to movies, music games, and e-books.
  • Online teaching via pre-recording medium or e-learning.
  • Any other service provided or delivered through an online digital or electrical platform.

The Regulations propose that a supplier should be considered as being located in Kenya as guided by the following parameters:

  • The user accesses a digital interface from a terminal located in Kenya, such as a computer or phone;
  • Payment for the digital services is made using credit or debit facility provided by a financial institution or company in Kenya;
  • Digital services are acquired using an internet protocol address registered in Kenya, or an international mobile phone country code assigned to Kenya; or
  • The user has business, residential or billing address in Kenya.

 

Proposed online transactions not applicable to DST

  • Online services provided by licensed financial institutions providing online services which facilitate their activities (non-trading).
  • Services whose payments are subjected to withholding tax (management or professional services, interest, royalties, commissions, winnings, insurance and reinsurance payments to non-residents).

 

Administration and governance of DST

  • DST is proposed to be payable by the digital service provider or any person that collects the payments, and is due at the time of the transfer of the payment to the service provider.
  • DST is to be due on or before the 20th day of the succeeding month in which the digital service was offered through a return indicating the value of transactions and the tax remitted.
  • A person who fails to comply with provisions provided under the regulations is liable to the penalties under the Tax Procedures Act (“TPA”) with the risk of being restricted from accessing the digital marketplace in Kenya.

The TPA provides that non-compliance attracts penalties at the rate of 5% of the tax payable and monthly accrual of interest at the rate of 1% of the tax payable.

  • A non-resident person without a permanent establishment or presence in Kenya may appoint a tax representative who should account and remit DST to Kenya Revenue Authority.
  • A payment service provider may be appointed by the Commissioner as a tax a representative for resident persons, non-resident persons with a PE in Kenya, and non-residents who fail to appoint tax representatives.

In this regard, the tax shall be due at the time of transfer of payment for the service to the service provider.

For residents and companies with a permanent establishment in Kenya, the DST will be offset against the income taxes due in the year of income. For non-residents and companies without a permanent establishment in Kenya, DST will be a final tax.