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In this article, Daniel Ngumy, Kenneth Njuguna and James Karanja of ALN Kenya talk to Bloomberg Tax as they analyse tax measures in the recent Kenya Finance Bill that will impact multinationals and other businesses operating across various sectors.
Kenya published a far-reaching Finance Bill in May 2023, with the aim of boosting the government’s tax collection efforts amid ongoing economic challenges. These have been exacerbated by a huge public debt burden and depleting foreign currency reserves.
The bill will be debated in Parliament this month and is expected to be passed into law before July 1. Multinationals and other businesses need to carefully assess the implications of the following proposed changes, evaluate the impact of the proposals on operations, profitability, and compliance, and adapt their strategies accordingly.
Petroleum products. The bill proposes increasing the value-added tax on petroleum products from 8% to 16%. The increase in VAT rates on petroleum products, including petrol and diesel, is expected to lead to higher fuel costs and affect the overall cost of living for consumers. The price of fuel has a direct impact on all sectors of the economy. This proposal will also negatively affect Kenya’s suitability as a hub for direct foreign investment.
Digital content. Aiming to ensure that influencers and content creators fulfill their tax obligations, the bill suggests subjecting income from digital content, including brand partnerships, sponsorships, and subscription services, to a non-final 15% withholding tax.
Turnover tax thresholds. To enhance overall tax collection, the bill proposes revisions to the turnover tax thresholds. The qualifying threshold would be lowered from KES 1 million (USD 7,180) to KES 500,000, and the upper limit would be reduced from KES 50 to KES 15 million.
Consequently, businesses with a turnover exceeding KES 500,000 and up to KES 15 million would be liable for turnover tax, while residents with a turnover over KES 15 million would be subject to corporation tax. The bill also suggests increasing the turnover tax rate from 1% to 3%.
Withholding tax deductions. The government has been grappling with liquidity challenges due to impending debt obligations and delays in salary payments. To address these issues, the bill recommends that withholding tax deductions should be remitted within 24 hours after the deduction is made; at present, withholding tax deductions are required to be remitted by the 20th day of the following month.
Additionally, the bill suggests that bookmakers should remit excise duty on betting and gaming, conducted through any platform or medium, within 24 hours after the daily transaction closure. The bill also proposes a mandatory remittance of withholding VAT within three days of deduction.
These provisions will place a substantial administrative and compliance burden on taxpayers.
Tax amnesty. To free up tax debt that is locked up in disputes before the Tax Appeals Tribunal and superior courts, the bill proposes a tax amnesty on penalties and interest and fines where a taxpayer paid all the principal tax due before 31 December 2022. In instances where all the principal tax due hadn’t been paid before 31 December 2022, the taxpayer should apply to the commissioner for an amnesty on interest penalties and fines on the unpaid tax and propose a payment plan for the outstanding amount.
This proposal is a welcome move and may incentivise the settlement of ongoing tax disputes.
New tax bracket for income tax bands. The bill proposes to introduce a new tax bracket to the graduated income tax bands for all income earned above KES 6 million per annum, at the rate of 35%. As has been the case in the past, the graduated income tax bands apply to employment income, income from services rendered, as well as business income earned by individuals.
The number of taxpayers in this bracket is minimal, and the impact of this new tax should be balanced against the risk that entrepreneurs will consider Kenya a high-tax jurisdiction compared to its regional neighbours.
Promoting technology. To promote the use of technology in a taxpayer’s business operations, the bill suggests the creation of an electronic system for issuing tax invoices and managing stock records. However, this proposal is expected to lead to higher compliance expenses for taxpayers, who would be responsible for procuring and maintaining the electronic system. Businesses may choose not to engage with individuals or companies unable to afford the electronic system, as such costs wouldn’t qualify as deductible allowances for income tax purposes.
In a positive proposal for start-up employee share ownership schemes, the bill proposes to defer the tax point for benefits obtained by employees who are offered company shares instead of cash payments by an eligible start-up. This amendment is geared towards continuing to bolster Kenya as a hub for an accelerating growing community of venture capital entrepreneurs, particularly in the fintech space.
Cryptocurrencies and digital assets. The taxation of cryptocurrencies and similar digital assets has posed challenges for countries worldwide. The bill introduces a proposed income tax, the Digital Asset Tax, to be imposed on digital assets, encompassing intangible items of value such as cryptocurrencies, token codes, and non-fungible tokens. Under the proposed tax, individuals deriving income from digital assets would be required to pay 3% of the transfer or exchange value at the gross fair market value consideration received.
However, the digital asset tax doesn’t specify whether it is a final tax, potentially subjecting the income derived from it to regular income tax provisions as well.
Moreover, the application of the digital asset tax based on the gross fair market value consideration fails to account for the principle that income tax should be levied on income itself rather than gross proceeds. This approach implies that the digital asset tax would tax the capital investment, rather than the actual gains or profits derived from business activities.
Capital Gains Tax. The bill also proposes far-reaching changes to expand the scope of the capital gains tax regime. Any capital gains arising from the sale of shares in foreign entities which derive more than 20% of their value directly or indirectly from immovable property situated in Kenya would be subject to capital gains tax.
This article was first published by Bloomberg Tax.