KENYA’S 2022/2023 BUDGETARY AND FINANCE BILL, 2022 HIGHLIGHTS – TAX FOCUS
12th April 2022
PROPOSED CHANGES TO THE INCOME TAX ACT
Country by Country reporting Compliance for all Multinational Enterprises operating in Kenya
Kenya formally waged war against tax avoidance and evasion schemes through the enactment of the Tax Procedures Act, 2015 (TPA). This move was further strengthened by the signing and ratification of the Convention on Mutual Administrative Assistance in Tax matters (MAC) with Global forum on Transparency and Exchange of Information on Tax.
In the 2022/23 Budget statement, the Cabinet Secretary, National Treasury & Planning Ministry (the “CS”) proposes to amend the Income Tax Act to require Multinational Enterprises (MNEs) with operations in Kenya to report their activities within Kenya and other jurisdictions to the Commissioner General for the Kenya Revenue Authority (KRA). Consequently, all entities that are tax resident in Kenya and part of an MNE Group shall be required to file with the Commissioner the country by country return on an annual basis. The return contains information on the MNE Group’s activities including revenue, profit or loss before tax, income tax paid among other stipulated information in Kenya and other jurisdictions where the Group has a taxable presence. The aforesaid proposal will enable the KRA to have visibility of financial and related information thus promoting greater tax transparency among the MNEs and increasing compliance with reporting requirements for MNEs operating in Kenya.
Taxation of gains/profits accruing to non-residents on transactions involving derivatives market
The Bill proposes to introduce income tax on gains or profits accruing to non-resident persons who trade in financial derivatives. The Derivatives Market is currently untaxed despite its growing prominence over the years with investment banks looking for business opportunities in the options market which began its operations in 2019. It is not clear from the budget statement how the tax will be implemented. We, therefore, look forward to the guidelines to be issued and published by KRA.
Increase in Capital Gains Tax
The Bill proposes to increase Capital Gains Tax from 5% to 15% as from 1st January 2023
Exemption of Micro-finance institutions from interest limitation provisions
The Bill proposes to exclude microfinance institutions licensed under the Microfinance Act, 2006 from the current interest restriction based on a ratio of earnings before interest, taxes, depreciation and amortization in determining their taxable income (EBITDA). As such registered microfinance companies will be allowed to claim 100% interest expense.
Cash donations to any charitable organization to be deductible
The Bill proposes that all entities that donate cash to charitable organizations to deduct the donation from their taxable income. Currently, deductibility of cash donations for tax purposes is restricted to organizations that are registered with either the Societies Act, Cap 108 Laws of Kenya or the Non-Governmental Organizations Coordination Act (Cap 19, Revised 2012).
PROPOSED CHANGES TO VALUE ADDED TAX (VAT)
Exemption of Plant and Machinery used in Manufacturing of Pharmaceutical Products
The Bill proposes to exempt plant and machinery used by manufacturers of pharmaceutical products from VAT. This proposal seeks to provide relief to new and existing players in the health sector by incentivizing manufacturers of pharmaceutical products.
Exemption of medical supplies from VAT
The Bill proposes to expand the list of medical supplies exempt from VAT to include medical oxygen, urine bags, adult diapers, artificial breasts and colostomy or ileostomy bags for medical use supplied to registered hospitals. This is a welcome proposal since it will lower the cost of healthcare and increase access to quality and affordable healthcare services.
Exemption for locally manufactured passenger motor vehicles
The Bill proposes to exempt from VAT inputs and raw materials used in the manufacture of passenger motor vehicles and on the sale of locally manufactured passenger motor vehicles. This proposal will lower production costs thus encouraging investments into the local manufacture of motor vehicles and promote the sale of locally manufactured motor vehicles.
Removal of zero-rated supplies status on both maize, wheat and cassava flour
The Bill proposes to remove both maize, wheat and cassava flour from zero-rated supplies status with effect from 1st July 2022 provided that the said change shall be in operation for a period of six (6) months after assent.
PROPOSED CHANGES TO EXCISE DUTY
Exemption of Excise Duty
The Bill proposes to exempt the following from Excise Duty:
- Eggs for hatching imported by licensed hatcheries upon recommendation by the CS to ensure that the hatcheries have access to sufficient eggs required for hatching and consequently, lower the cost of chicks sold to the farmers;
- Neutral spirit used by a registered pharmaceutical manufacturer upon approval by the Commissioner General. Currently, manufacturers of pharmaceutical products are not subject to Excise Duty and therefore, are entitled to a refund of the Excise duty incurred on raw materials; and
- Locally manufactured passenger motor vehicles meant to encourage investment in this sector and enhance competitiveness of locally manufactured passenger motor vehicles. Currently, only locally assembled motor vehicles are exempt from Excise Duty.
Introduction of Excise Duty on advertisement of alcoholic beverages, betting and gaming
The Bill proposes to introduce Excise Duty at the rate of 15% on advertisement of alcoholic beverages, betting and gaming in order to discourage consumption of the products. This Excise Duty will apply on fees charged by television stations, print media, billboards and radio stations for advertisements of these activities. This proposal is aimed at reducing the negative effects of addictive and harmful behaviour from alcohol abuse, betting and gaming among the youths, which has become prevalent in the society.
Change of Excise Duty on liquid nicotine
The Bill proposes to change the taxation regime for liquid nicotine from the current KES 1,259.64 per Kg to an excise duty of KES 70 per milliliter. This proposal is aimed at reducing the negative effects of nicotine addiction by making the product less accessible to school children and the youth.
Increase in Excise Duty on specific products
The Bill proposes to increase the Excise Duty by 10% for a number of products except petroleum products due to the recent global increase in oil prices. However, the list of the specific products that will be affected by the increase is yet to be provided.
Increase in Excise Duty on specific products
The Bill proposes to empower the Commissioner General to exclude certain products from inflation adjustment on consideration of economic circumstances facing the products. These products have not been listed.
PROPOSED CHANGES TO MISCELLANEOUS FEES AND LEVIES ACT
Export Levy
The Bill proposes a reduction of export levy on raw hides and skins from 80% (USD 0.52 per Kg) to 50% (USD 0.32 per Kg).
IDF and RDL Exemption
The Bill proposes exemption of Import Declaration Fee (IDF) and Railway Development Levy (RDL) on input and raw materials used for manufacture of pharmaceutical products. Currently, IDF and RDL are applicable at the rate of 3.5% and 2% of the customs value of the goods respectively.
PROPOSED CHANGES TO TAX ADMINISTRATION - TAX PROCEDURES ACT
Expansion of scope of assets to be used as securities for unpaid taxes
There is a proposal to increase the scope of assets that can be used as security for any unpaid taxes to include ships, aircrafts, motor vehicles and any other properties. This will be through notifying the relevant registrars of the respective properties. Consequently, such assets would be restricted from disposal or transaction. The proposal is an effort by the Commissioner to secure any taxes in dispute.
Cap on the timelines for issuing an objection decision
The TPA provides that the Commissioner should issue a tax objection decision within 60 days from the date of filing a notice of objection. Through the Finance Act, 2019, the TPA was amended to provide that the 60 day count would recommence from the day when the Commissioner requests for any additional information in relation to the objection. This provision potentially prolongs the period for issuing the tax objection decision. In a bid to cure this, the Bill proposes that the Commissioner shall be bound to issue an objection decision within one cycle of 60 days upon receipt of a valid objection.
Increase of time for the Commissioner to Inform a taxpayer whether a notice of objection has
been validly lodged
The Bill proposes that where the Commissioner has determined that a notice of objection lodged by a taxpayer has not been validly lodged, the Commissioner shall within 14 days notify the taxpayer in writing that the objection has not been validly lodged. Currently, the commissioner is required to notify the taxpayer that the objection has not been validly lodged immediately.
PROPOSED CHANGES TO THE TAX APPEALS TRIBUNAL
Deposit of 50% of tax in dispute as a prerequisite for appeal to the High Court
The Bill seeks to amend the Tax Appeals Tribunal Act, 2013 to compel a taxpayer to deposit 50% of disputed taxes where the Tax Appeals Tribunal (the Tribunal) rules in favour of the Commissioner before lodging an appeal to the High Court. This amount is proposed to be deposited in a special account at the Central Bank of Kenya (CBK). In the event that the taxpayer receives judgement in their favour, the deposit is to be refunded to the taxpayer within 30 days of the final determination of the matter by the Courts.
This amendment would place Kenya within the same framework with countries such as Tanzania which requires a deposit of 30% of the disputed tax before lodging the appeal with the High Court.
A similar proposal was rejected by the National Assembly in 2014 when the Tax Procedures Bill, 2014 was tabled. Section 51 (2) of the said Bill proposed that “… in order for a notice of appeal to the Tribunal to be valid, the taxpayer should have paid 30% of the tax in dispute under the assessment at the time of lodging the notice”. The National Assembly declined to pass this proposal stating that it was unreasonable and unconstitutional.
PROPOSED CHANGES TO THE KRA ACT
Change of Name from Kenya Revenue Authority to Kenya Revenue Service
The Bill seeks to amend the KRA Act and rename the Kenya Revenue Authority (KRA) to Kenya Revenue Service. This is proposed with an intention to rebrand and transform the authority’s public image and enhance its public relations with the taxpayers. The amendment will also alter all tax laws that make reference to KRA.
PROPOSED CHANGES TO THE STATUTORY INSTRUMENTS ACT
Tax regulations exempted from automatic expiry after 10 years
The Statutory Instruments Act, 2013 provides for the automatic revocation of any Statutory Instrument after 10 years from the date it was made unless it is repealed or a regulation is made to exempt the expiry. In a bid to cure this with respect to tax regulations, the Bill proposes to exempt from the automatic expiry any tax-related regulations made under the various tax laws so as to provide certainty and continuity in relation to the various tax regulations.
MISCELLANEOUS PROPOSED AMENDMENTS
Public Procurement and Asset Disposal (Amendment) Bill, 2021
The Bill proposes enactment of the Procurement and Asset Disposal (Amendment) Bill, 2021 which is geared towards allowing submission of multiple awards where several bidders can be awarded the same contract.
Capital Markets Act, Cap 485A
The Bill proposes a review of the legal and regulatory framework to address emerging issues in the capital markets space. These include aspects on collective investment schemes and investment-based crowd funding. As such, there is a proposal to amend the Capital Markets Act to expand the scope of persons who can act as investment advisors. The move is aimed at allowing single director companies and partnerships to be licensed as investments advisors.
Insurance Regulations
The Bill proposes to amend the Insurance Regulations to require motorcycles and three wheelers used by fare-paying passengers to take insurance for the passengers. This will cater for compensation for damages occasioned by motorcycle-related accidents.
Unclaimed Financial Assets Authority (UFAA)
The Bill proposes to amend the UFAA to provide for waiver of penalties, fines and audit fees in justifiable circumstances to encourage reporting and recovery of identified assets by the Unclaimed Financial Assets Authority, including capping accumulated penalties and interest to the value of the asset.
In addition, the Bill proposes to introduce a 12-month Voluntary Disclosure Program amnesty to grant relief of penalties on unclaimed financial assets subsequently declared and delivered, under the program.
Pensions
There is a proposal to amend the Retirement Benefits Investment Guidelines to allow pension funds to invest in unlisted Real Estates Investment rusts (REITs) that are incorporated in Kenya and approved by the Capital Markets Authority (CMA). This will widen the scope of investment where pension schemes can invest their funds.
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