INTRODUCTION

The Finance Act, 2019 brings with it a raft of changes in various statutes that will drive the economic agenda of the Country in the next financial year. We take a deep dive into some of the key matters that stood out for us with the assent of the Finance Act, 2019 on 7th November 2019. This alert seeks to explore the anticipated impact of these changes on the affected groups. 

INCOME TAX

Turnover Tax
Effective date – 1st January 2020.
In addition to the presumptive tax introduced in 2018 (a tax charge of 15% of the single business permit/license value that was payable at the time of renewing the annual business permit) the government has re-introduced a turnover tax at the rate of 3% for businesses with sales below Shs. 5 million per annum. The due date for payment is 20th of the subsequent month.
The presumptive tax paid will be offset against the turnover tax payable which makes 3.0% of turnover the effective tax rate. It is important to note that corporation tax and VAT do not apply to this category of businesses.
The tax is not applicable to management/professional/training fees, rental income, income of incorporated companies or any income subject to a final withholding tax regardless of the turnover level.

Commentary
The re-introduction of the turnover tax may be attributable to the tax man’s awareness of the influx of businesses paying presumptive tax that were not previously paying turnover tax. This comes at a time when the government is trying to reel in the informal economy into the tax basket. Tax Base Expansion is a core pillar of KRA’s 7th Corporate plan.The desired effect of the change is an increase in revenue contribution from the informal sector of the economy.
If properly implemented, the government is bound to have a broader view of the actual economic activity and better inform policy formation and implementation.
 
Non- resident Re-insurance Companies
Effective date – 7th November 2019.
Re-insurance premiums paid to Non-resident reinsurance companies were previously not subject to the 5% withholding tax imposed on premiums paid to Non-resident insurance companies. Reinsurance premiums paid to Non-resident reinsurance companies will now attract a 5% withholding tax, going forward. Only premiums relating to aircraft insurance have been excluded.

Commentary
This change to the law is aimed at protecting domestic insurance and reinsurance companies from external competition.
 
Dividends paid from exempt income
Effective date – 7th November 2019.
The Finance Act 2019 has clarified that distribution of dividends from exempt income under the Income Tax Act shall not be subjected to dividend distribution tax. This follows the scrapping of the compensating tax. Unfortunately, there is no clarity on the treatment of dividends paid when a company makes losses.
 
Tax on Demurrage
Effective date – 7th November 2019.
Section 9 of the ITA covers “Income of certain non-resident persons deemed to be derived from Kenya”
Currently, the Act provides that gains/profits earned by Sea and Air companies from their income earned from passengers, mail and cargo that embarks on travel in Kenya is taxable in Kenya at a rate of 37.5%. This has been expanded to include what was previously defined as demurrage charges. Demurrage charges previously attracted a final WHT of 20%, however, the gains will now be taxed at the non-resident corporate tax of 37.5% similar to the above items.
The definition and reference to demurrage has been deleted from the ITA.
 
Taxation of the Digital Marketplace
The Finance Act seeks to bring into the tax bracket, income derived from the digital marketplace. The digital marketplace is defined by the Act a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means. These will include trading activity that occurs through social media platforms such as Facebook, Instagram and Twitter.
It remains unclear on how the Kenya Revenue Authority will actualize taxation of the digital platform, as there are no regulations in place. The acting Cabinet Secretary to The National Treasury is, however, required to formulate regulations for the actualization of the digital marketplace tax. After the introduction of the new regulations, Kenya will be amongst the first countries to introduce a digital tax. Currently, the UK, France, India and South Africa have implemented this tax in differing formats. This taxation is envisaged to further broaden the tax base most of which is now transacting e-commerce which was hitherto not visible to KRA.
 

Thin Capitalisation Restriction

Effective date – 1st January 2020.
The Finance Act 2019 has restricted application of thin capitalization to only loans advanced to a resident company by a non-resident associate. Notably, thin capitalization shall not be applicable to a company implementing a project under an affordable housing scheme upon recommendation by the cabinet secretary responsible for housing.
 
Tax incentives for REITS
Effective date -7th November 2019.
Under the existing tax regime, REITs are exempt from income tax and are only liable for withholding tax on interest and dividends received. The bill proposes to extend the exemption to investee companies. The act defines an investee Company as a company that is fully owned or controlled by the REIT for the purpose of holding property.
 
Tax-Exempt Items
Effective date – 1st January 2020.
The first schedule of the ITA has been expanded to exempt the following income.
1.           All income from the National Housing development Fund;
2.           Income earned by an individual registered with Ajira Digital Program;
3.           The amount withdrawn from the National Housing Development Fund to purchase a house; and
4.           Interest income from all listed bonds, notes and securities used to fund infrastructure and projects classified as green bonds or other social services provided maturity > 3 years.

Commentary
We expect to see an increase in issuers of bonds seeking to qualify their issues as Green and Infrastructure projects fundraising through listed bonds.
 
Promotion of Plastic Recycling
Effective date – 7th November 2019.
In 2016, the government placed a ban on a range of plastic carrier bags and is keen to promote plastic waste management. In this line;
•            Corporate tax for Companies recycling plastic will be 15% and not 30% for the first 5 years of operations,

•            Plant, machinery and equipment used in the construction of a plastics recycling plant is VAT exempt.


Exemption for Internal Restructurings
The 8th Schedule of the ITA has been amended to read that no gain/loss arising from the transfers of property shall be considered as taxable income, under the following circumstances;
a)           a legal or regulatory requirement;
b)          as a result of a directive or compulsory acquisition by the government;
c)           an internal restructuring within a group which does not involve transfer of property to a third party; or
d)          in the public interest and approved by the Cabinet Secretary.

Commentary
Effective date – 7th November 2019.
The key beneficiaries of this change will be entities undergoing internal restructurings who will now be exempted from paying CGT on property and other assets moved between related entities. This will make it easier to restructure century-old entities, that have accumulated a significant amount of gains, to achieve operational and management efficiency more easily.
The Stamp Duty Act also provides for an exemption on stamp duty for related parties but with a very high threshold of 90% in similar shareholding in order to qualify for the exemption.
 
Summary of benefits to the Affordable housing program
Laws introduced through the Finance Act, 2019 have re-iterated the government’s commitment to the affordable housing program.
The CBK will be charged with the responsibility of developing prudential guidelines as the CMA develops investment guidelines for the home ownership and savings plan.
Benefits introduced include;
i.            All income from the National Housing development Fund will be tax-exempt;
ii.           The amount withdrawn from the National Housing Development Fund to purchase a house by a member who is also a first-time homeowner will be tax-exempt;
iv.          Exemption from VAT for goods supplied to the affordable housing Scheme development;
v.           Exemption from thin capitalization for Companies implementing the projects; and
vi.          Exemption from stamp duty on the transfer of a developed property under the affordable housing scheme from the developer to the National Housing Corporation.

Commentary
These laws will most definitely entice Companies to get involved in the affordable housing project. The inclusion of commercial and investment banks in the list of entities that will hold deposits for the home ownership and savings plan is bound to generate more confidence in the fund and even more because a member can transfer funds from one custodian to another. The direct cash flow benefit from the VAT exemption of goods supplied under the housing scheme is also a major boost to developers.
 

REPEAL OF THE INTEREST RATE CAP

Section 33B of the Banking Act which was enacted in 2016 and which introduced interest rate caps on loans advanced by commercial banks has now been repealed after calls by the Treasury and the Central Bank of Kenya.

Commentary
It is envisaged that the repeal of the rate caps will unlock capital through market-priced loans to Small and Medium-Sized Enterprises.

  VALUE ADDED TAX (“VAT”)

The following VAT changes are effective as from 7th November 2019

Amendment Details Remarks
Reverse VAT on imported services Persons not registered for VAT shall be subjected to reverse VAT upon importation of services. In effect, their cost of doing business will increase since any reverse VAT paid will be an additional cost which cannot be claimed
Tax point for special economic zones Removal of goods from an SEZ shall constitute a supply at the time of removal. This is to align the tax point for SEZs to that of EPZs.
CS approval for exemption of specialized solar equipment and accessories Suppliers of specialized solar equipment and accessories, including solar water heater and deep cycle-sealed batteries which exclusively use or store solar power shall now be required to seek the recommendation of the CS energy for approval of that exemption.
 
The move is aimed at ensuring that the exemption is not misused to benefit ineligible supplies.

 
Changes in VAT status of supplies
Exempt to vatable

  • Road tractors for semitrailers

Vatable to zero-rated

  • Agricultural pest control products

Vatable to exempt

  • Locally manufactured motherboards;
  • Inputs for the manufacture of motherboards approved by the CS, information communication technology;
  • Plant, machinery and equipment used in the construction of a plastic recycling plant;
  • The supply of maize (corn) flour, cassava flour, wheat or meslin flour and maize flour containing cassava flour by more than ten percent in weight;
  • Goods imported or purchased locally for the direct and exclusive use in the construction of houses under an affordable housing scheme approved by the Cabinet Secretary on the recommendation of the Cabinet Secretary responsible for matters relating to housing; and
  • Musical instruments and other musical equipment imported or purchased locally, for exclusive use by educational institutions, upon recommendation by the Cabinet Secretary responsible for Education.

 
Withholding VAT reprieve
Effective date – 7th November 2019.
The withholding VAT rate has been amended from 6% to 2%. This will ensure that refunds arising from the operation of Withholding VAT are minimized. This change will help reduce the cashflow constraints experienced when the rate was previously 6%.
 

TAX PROCEDURES ACT

Transactions which require a KRA Pin
Effective date – 7th November 2019.
The Commissioner has been empowered to grant exemptions to persons or class of persons on the requirement to have a KRA pin for transactions specified in the first schedule of the Tax Procedures Act (“TPA”). Such transactions include, registration of companies and opening accounts with financial institutions. The move is geared towards simplifying government processes and boost foreign direct investments.
Additionally, the following transactions shall require a KRA pin not unless an exemption has been granted by the commissioner;

  • Registration and renewal of membership by professional bodies and other licensing agencies;
  • Registration of mobile cellular pay bill and till numbers by telecommunication operators.

This is aimed at ensuring that there is sufficient data available for effective data mining so as to profile non-compliant taxpayers and eventually increase the tax net.
 
Tax Amnesty on penalty and Interest for companies listing in the GEMS
The provision was effective on 7th November 2019 and shall cease to apply after three years.
The TPA has been amended to grant tax amnesty on penalties and interest for companies that list on the growth segment of a securities exchange in Kenya provided that;
The company makes full disclosure of its past income, assets and liabilities for the two years immediately preceding the date of listing;

  • The principal tax due has been paid in full;
  • The company has not been assessed on that tax;
  • The company is not under audit or investigation on any matter; and
  • The company does not delist from the exchange before the expiry of five years from the date of listing.

The move is aimed at promoting listing of companies in the Growth Enterprise Market Segment

Departure prohibition order for tax representatives
Effective date – 7th November 2019.
Tax representatives shall now be issued with departure prohibition orders where the Commissioner believes that they want to leave Kenya without payment of taxes. Previously only the company chief executive officer, managing director, director, company secretary, treasurer or other company officers were eligible.
This will ensure that compliance levels are enhanced.
 
Extension of time for commissioner’s decision on an objection
Effective date – 7th November 2019.
The time the Commissioner is expected to make an objection decision has been extended by allowing the commissioner to request for additional information from the tax-payer and thereafter make the decision within sixty days of receipt of such documents. This may create inefficiencies in the objection process.  

Penalty for late filing of tax return

Tax paid and withholding tax deducted shall be deducted from the tax due in a return for the purposes of computing the applicable late submission penalty. This is to align iTax functionalities with the law. The provision has already been effected on iTax.
 
Changes in miscellaneous fees and levies

Nature of fee Old Rate New Rate Effective Date
Import Declaration Fees (“IDF”) * 2% 3.5% 07.11.2019
Railway Development Levy (“RDL”) * 1.5% 2% 07.11.2019

 
*In a bid to promote the big 4 agenda on manufacturing, both IDF and RDL remain at 2% and 1.5% respectively for the following;

  • Raw materials and intermediate products imported by manufacturers approved by CS, on the recommendation of the Cabinet Secretary responsible for matters relating to the industry.
  • Inputs for the construction of houses under an affordable housing scheme approved by the CS on the recommendation of the Cabinet Secretary responsible for matters relating to housing.

  Refund of anti-adulteration levy
Effective date – 7th November 2019.
Anti-adulteration levy is imposed on all illuminating kerosene imported into the country for home use at the rate of eighteen shillings per litre. Where imported illuminating kerosene is subsequently used by a licensed or registered manufacturer to manufacture paint, resin or shoe polish, the importer shall be eligible for a refund of the anti-adulteration levy. This will promote local manufacturing in line with the big four agenda.

EXCISE DUTY

Effective – 7th November 2019.
Changes in ad valorem duty rates

Description Rate of excise duty
Motor vehicles of tariff heading 87.02, 87.03 and 87.04 excluding- locally assembled motor vehicles; School buses for use by public schools, motor vehicles of tariff no.8703.24.90 and 8703.33.90 and, imported motor vehicles of cylinder capacity exceeding 1500cc 20%
Imported motor vehicles of cylinder capacity exceeding 1500cc of tariff heading 87.02, 87.03 and 87.04 25%
Motor vehicles of tariff no.8703.24.90and 8703.33.90 35%
100% electric powered motor vehicles of tariff no. 8702.40.11, 8702.40.19, 8702.40.21, 8702.40.22, 8702.40.29, 8702.40.91, 8702.40.99 and 8703.80.00 10%
Imported gas cylinders 35%
Betting (amount wagered or staked) 20%

  Changes in specific duty rates

Description Rate of excise duty
Cigars, cheroots, cigarillos, containing tobacco or tobacco substitutes Shs.12,624 per kg
Electronic cigarettes Shs.3,787 per kg
Cartridge for use in electronic cigarettes Shs.2,525 per unit
Cigarette with filters (Hinge lid and soft cap) Shs.3,157 per kg
Cigarette without filters (plain cigarettes) Shs.2,272 per kg
other manufactured tobacco and manufactured tobacco substitutes “homogenous” and “reconstituted tobacco”; tobacco extracts essences Shs.8,837 per kg
Wines including fortified wines, and other alcoholic beverages obtained by fermentation of fruits Shs.189 per litre
Spirits of undenatured ethyl alcohol; spirits liqueurs and other spirituous beverages of alcoholic strength exceeding 10% Shs.253 per litre
Imported sugar confectionary of tariff heading 17.04; Shs.20 per kg
Imported white chocolate, chocolate in blocs, slabs or  bars of tariff Nos,1806.31.00, 1806.32.00, 1806.90.00 Shs.200 per kg

 
Annual inflation adjustment
Effective date -7th November 2019.
The date for annual inflation adjustment date has been moved from July to October. This provides ample time for obtaining the Kenya National Bureau of Statistics report for the preceding year and effect the inflation adjustment in line with the average rate of monthly inflation of the preceding financial year.  

DROPPED ITEMS

We have also noted the following proposed amendments were dropped in the Act, even though they were in the budget proposals presented to Parliament, in the Finance Bill.

1. The proposed changes to the Proceeds of Crime and Money Laundering Act, 2009 to designate advocates, notaries and other independent legal professionals as reporting entities to whom the Anti-Money Laundering/Terrorism Financing obligations would lie. This would have meant that Advocates and other professionals would have been legally obligated to the Financial Reporting Centre, the affairs of their Clients as prescribed by the Proceeds of Crime and Money Laundering Act, 2009.

2. The proposed increase of Capital Gains Tax from 5% to 12.5% in the Income Tax Act was rejected.

3. The proposition to amend section 37 of the Retirement Benefits Act to reduce the period under which retirement benefits schemes can withdraw funds from guaranteed funds from 3 years to 1 year or any such shorter period by an instrument of appointment was rejected.

4. The intended amendment to section 45 of the Tax procedures Act empowering the Commissioner to issue a prohibition Order to officers of a corporation from leaving Kenya where such a corporation has unsolved tax liabilities was also rejected.

5. The proposed amendment of section 10 of the Income Tax Act, to broaden the scope of applicability of Withholding Tax to include security services, cleaning services, fumigation services, catering services offered by outside caterers, transportation of goods, marketing and advertising services.