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The American Chamber of Commerce Business Summit was held on 29 and 30 March 2023 in Nairobi. The objective of the Business Summit was to provide a strategic platform for strengthening two-way trade and investment between the US and East Africa though unleashing the power of private enterprises in driving long-term economic ties, enhancing trade, and promoting investment.
In President Ruto’s keynote speech at the Business Summit, the President had highlighted various fiscal policy changes which would be expected in the Finance Bill 2023 and the Budget Policy Statement.
The proposed changes are highlighted below. These positive proposals are clearly indicative of the current administration’s commitment to introducing these legislative changes to Parliament through the provisions of the Finance Bill, 2023. The Finance Bill, 2023 will need to go through a public participation process prior to enactment into law by the Parliament. Therefore, it should be noted that the actual legislation enacted may differ in form or in substance from the position pronounced in the President’s keynote speech as a result of the enactment and public participation process.
We set out below a summary of the proposed changes in the law that were announced by the President:
A. Introduction of the National Tax Policy
It is the case that National Tax Policy has been undergoing public participation. In response to taxpayer and investor concerns relating the uncertainty and unpredictability of Kenya’s tax system, the President indicated his administration’s commitment to introduce the National Tax Policy within the next three (3) months, so as to take effect as from 1 July 2023. The National Tax Policy will provide certainty over the medium-term period of three (3) years during which the tax laws would be expected to remain stable. This will ensure investors can anticipate a predictable and certain tax regime thereby promoting investment in Kenya.
B. Review of the Digital Service Tax Framework
With the digitalisation of the Kenyan economy Kenya, through the Finance Act, 2019, introduced the Digital Service Tax (DST) on income accruing through a digital marketplace. Subsequent amendments in the Finance Act, 2020 and 2021 were made to this regime resulting in a wider application of DST which is currently applicable to income accruing from a business carried out over the internet or an electronic network, including through a digital marketplace with effect from 1 January 2021.
The DST provisions were introduced amid the on-going global tax discussions popularly referred to as OECD/G20 Base Erosion and Profit Shifting (BEPS) Pillar One and Pillar Two blueprints. Kenya had taken the view that it would take a unilateral approach and therefore was one of two countries (together with Nigeria) that withheld their support of the OECD Inclusive Framework’s Two Pillar Solution to address the taxation of the digitalisation of the economy. As part of the agreement under the Inclusive Framework, the 136 countries who joined this common goal agreed to cede to international tax reforms by the OECD and any states that had undertaken unilateral measures such as DST agreed to abolish the same. Meanwhile, Kenya publicly declined to join these efforts and continued with its imposition of DST, especially given the anticipated revenue that was expected at the time. The administrative challenges and the lack of a clear framework to administer tax on digital services at the OECD level so far, led Kenya to the view that a unilateral measure was the best way forward to tap into the revenues currently being generated online.
President Ruto’s remarks were that the Government of Kenya has been in discussions with digital service providers on the impact of DST on their operations in Kenya. As such, President Ruto announced that Kenya will undertake a comprehensive review of its DST framework with an aim to align its policy with the OECD Two Pillar Solution. This is expected to provide guidance on the taxation of digital commerce transactions in Kenya through a multilateral approach to ensure the most optimal solution for the effective taxation of players that operate within the digital sector in Kenya.
C. Scrapping of VAT on Exported Services
The Finance Act 2022 introduced VAT on exported services. This was a change that resulted in the imposition of VAT of 16% on services exported by Kenyan businesses to non-resident customers. This move contrasted with the globally accepted ‘destination principle’ and resulted in significant challenges for businesses with cross-border clientele.
President Ruto announced that this move had rendered Kenya uncompetitive and inhibited investors from making Kenya their regional hub to service regional markets. Therefore, his administration would seek to amend the law through Finance Act 2023 (once enacted), with the result that the VAT on exported services would either be exempted or zero-rated. At present it is not clear which option would be adopted. We will provide further updates on this issue once the Finance Bill, 2023 is issued to the public.
D. Streamlining the Tax Refund Process
Tax refund delays has been a major concern for many taxpayers thereby affecting their cash flows and ability to meet their daily business needs. To allay the cash crunch that is caused by delays in the processing of verified tax refunds, the President announced that effective June 2023, all verified tax refund claims will be payable within 6 months. Furthermore, he announced that in those cases where a refund is not made by the KRA within this period for whatever reason, the taxpayer will be able to offset their claim against future tax liability without further application to the KRA. We would expect that further clarity on the implementation mechanics of this provision will be provided in the Finance Act 2023, and possibly through additional VAT Regulations that may be required to be promulgated.
E. Review of the Special Economic Zone (SEZ) and Export Processing Zone (EPZ) Legislative Framework
The President recognised the role that SEZs and EPZs play in attracting investments and provided that a comprehensive review of the enabling legislative framework of SEZ’s and EPZs is currently ongoing with the aim of adding more tax incentives whilst removing impediments to attract investors. It is expected that this review will be concluded, and the changes introduced in the course of 2023.
F. Startups to be Exempt from ESOP Tax Requirements
The President acknowledged the role of innovation and enterprise in spearheading Kenya’s economic growth. However, it was noted that a key stumbling block on start-ups is the imposition of payroll taxes on individuals who are entitled to stock options and shares under Employee Share Ownership schemes (ESOPs). In this regard, the President committed that his administration would review the relevant tax legislative provisions in relation to ESOPs, with a view of eliminating payroll taxes arising on gains made by individuals even where a realisation event has not occurred. It is anticipated that this amendment will be introduced through Finance Act 2023.
G. Review of Local Content Requirements for Foreign ICT Companies
Pursuant to policy guidelines known as the Information and Communications Technology Sector Policy Guidelines (ICT Guidelines) previously published by the Cabinet Secretary in charge of information and Communications, it is the case that any firm licensed to provide telecommunications services in Kenya is required to have at least a thirty percent (30%) local Kenyan equity ownership.
While this requirement may have served an important strategic national security purpose in the past, the President recognised that the global technology space was quickly changing, and Kenya would need a National ICT Policy framework that would attract global technology giants such as Amazon and Google amongst others.
In this regard, the President announced that the local shareholding requirements under the National ICT Policy will be scrapped off to pave the way for investment into Kenya by multinational technology companies.
As part of President Ruto’s strategic objective to make Kenya an attractive business destination, the President outlined his commitment that the Government of Kenya will provide the necessary framework and environment for business to thrive, attract foreign investment and spur the growth of Kenya’s economy.
Should you have any questions on this legal alert, please do not hesitate to contact Daniel Ngumy or Kenneth Njuguna.