1. Introduction

The President of Kenya assented to the Tax Laws (Amendment) Act, 2020 on 25 April 2020. In this alert, we set out the amendments to various tax laws, all of which take effect on 25 April 2020 unless stated otherwise.

1.1 Income Tax

1.1.1 Reduced rate of Corporate Income Tax (CIT) rate for resident companies

The rate of CIT on companies resident in Kenya has been reduced from 30% to 25%. This amendment applies to the 2020 year of income.

The rate of CIT on non-resident companies remains unchanged at 37.5%. This difference in effective tax rates means that investors are now even more likely to favour setting up resident companies as opposed to registering branches.

Where a company is engaged in business under a special operating framework arrangement with the government, the rate of tax specified in the agreement shall continue to apply for the unexpired period as provided under the agreement.

Provision: Paragraph 2(a)(viii) and 2(m) of Head B of the Third Schedule to the Income Tax Act, Chapter 470 of the Laws of Kenya (the ITA).

1.1.2. No more preferential rates of CIT for listing on a Security Exchange

The preferential rates of CIT applicable to companies listing on a security exchange have been scrapped.

Given the reduction in the CIT rate to 25% coupled with the generally low level of listing activity at the Nairobi Securities Exchange over the past several years, the impact of this change is unlikely to be widely felt.  

Provision: Paragraphs 2(d), (e), and (g)(i) of Head B of the Third Schedule to the ITA.

1.1.3 Reduced rate of CIT for plastics recycling plants discontinued

Plastic recycling plants will no longer benefit from the reduced CIT rate of 15%.

The preferential tax rate was introduced in the Finance Act, 2019 to incentivise investment in plastic recycling as a suitable means of plastic waste management. This amendment is a backward step in the war against plastics.  

Provision: Paragraph 2(l) of Head B of the Third Schedule to the ITA.

1.1.4. Electricity rebate for manufacturers scrapped

The electricity rebate that was introduced to cushion manufacturers from the high cost of electricity in the country has been scrapped, less than a year after it took effect.

Although the electricity rebate was effective as from 1 January 2019, manufacturers could not apply the rebate until 31 July 2019 when the Cabinet Secretary for Energy introduced Legal Notice 132 of 2019 that provided for the conditions for determination of entitlement of the rebate.

Locally manufactured goods will remain more expensive and less competitive until a sustainable, long-term solution is found to address the issue of electricity costs.

Provision: Section 15(2)(ab) of the ITA.

1.1.5. Overhaul of the Capital Allowance regime

The Act has repealed the entire second schedule of the ITA, which provides for capital allowances, and replaced it with a new second schedule that provides for the following rates:

The 150% investment deduction on the construction of bulk storage and handling facilities of more than KES 5 billion incurred in supporting the SGR with a minimum storage capacity of 100,000 metric tonnes of supply which was recently introduced by the Business Laws (Amendment) Act, 2020 shall remain in force until 31 December 2020.

Provisions: The Second Schedule to the ITA.

1.1.6. Reduced income tax exemptions

The scope of income tax exemptions under the ITA have been reduced significantly. Income that is now subject to tax includes:

1. income of the following parastatals:
   • The Tea Board of Kenya;
   • The Pyrethrum Board of Kenya;
   • The Sisal Board of Kenya;
   • The Kenya Dairy Board;
   • The Canning Crops Board;
   • The Central Agricultural Board;
   • The Pig Industry Board;
   • The Pineapple Development Authority;
   • The Horticultural Crops Development Authority;
   • The Kenya Tea Development Authority;
   • The National Irrigation Board;
   • The Mombasa Pipeline Board;
   • The Settlement Fund Trustees;
   • The Kenya Post Office Bank;
   • The Cotton Board of Kenya;
2. profits or gains of an agricultural society from exhibition or shows in Kenya;
3. interest on tax reserve certificates issued by authority of the government;
4. interest from contributions made by banks to Kenya Deposit Insurance Corporation/deposit protection fund;
5. interest earned on contributions paid into the Deposit Protection Fund established under the Banking Act;
6. gains made by registered venture capital companies from trading in security exchanges;
7. investment income of a pooled fund of a registered retirement scheme;
8. interest income from infrastructure bonds, notes or other securities;
9. interest income of asset-backed securities;
10. compensating tax accruing to a power producer under a power purchase agreement; and
11. income of Export-Import Bank of the United States.

Provisions: Part I and Part II of the First Schedule to the ITA.

1.1.7. Changes to the taxation of dividends paid and received by Special Economic Zone (SEZ) entities

Dividends received by SEZ enterprises, developers and operators are no longer exempt from tax. Similarly, dividends paid by special economic zone enterprises, operators and developers to non-residents will be subject to tax.

Previously, both these categories of payments had been tax exempt.  

This amendment erodes the incentives of the SEZ regime and is likely to reduce the country’s attractiveness as an investment destination.

Provision: Paragraphs 46 and 55 of Part I of the First Schedule to the ITA.

1.2. Withholding Tax (WHT)

1.2.1. Definition of Qualifying Interest expanded

The definition of “qualifying interest” has been widened to include the “aggregate interest, discount or original issue discount receivable by a resident individual in any year of income”.

Previously, “qualifying interest” was limited to include the aggregate interest, discount or original issue discount receivable from a bank or financial institution licensed under the Banking Act, or a Building Society or the Central Bank of Kenya.

The applicable rate of WHT on qualifying interest remains 15% and this remains a final tax.

Provision: Section 2 of the ITA.

1.2.2. WHT introduced on sales promotion, marketing, advertising and transportation services provided by non-residents

Payments to non-residents for services relating to sales promotion, marketing, advertising services and transportation of goods (excluding air and shipping transport services) will now be subject to WHT at the rate of 20%. These payments did not previously attract WHT.  

The introduction of WHT on transportation of goods is likely to drive up the cost of importing cargo into Kenya, as non-resident recipients of the payments are likely to insist on receiving the payments net of tax. Citizens of the East African Community will, however, not be subject to the tax.

Provisions: Section 10(1), 34(2), 35(1), and Paragraph 3(q) of Head B of the Third Schedule to the ITA.

1.2.3. WHT on re-insurance premiums payments clarified

WHT at the rate of 5% of re-insurance premiums paid to non-residents was introduced in the Finance Act, 2019. The Finance Act, 2019 did not, however, amend section 34(2), which brings to tax income of non-residents, including reinsurance premiums.

This amendment seeks to regularise the law.

Provision: Section 34(2) of the ITA and Paragraph 3(p) of Head B of the Third Schedule to the ITA.

1.2.4. Increased rate of WHT on dividends paid to non-residents

The Act has increased the WHT rate on dividends paid to non-resident persons from 10% to 15% of the amount payable.

Non-resident investors are likely to view this increased tax rate as a disincentive.

Provision: Paragraph 3(d) of Head B of the Third Schedule to the ITA.

1.3. Turnover Tax and Presumptive Tax

1.3.1. Overhaul of the Turnover Tax regime

Turnover Tax (TOT), as reintroduced through the Finance Act, 2019, previously applied to the business income of individuals whose income did not exceed KES 5 million per annum at the rate of 3% of gross turnover.

The Turnover Tax regime has been amended as follows:

1. an increased annual turnover threshold for businesses qualifying for TOT from KES 5 million per annum to KES 50 million per annum;
2. an exemption from TOT for businesses whose turnover is less than KES 1 million;
3. a reduction in the TOT rate from 3% to 1% on the gross turnover from business; and
4. application of TOT to incorporated companies.

The amendment seeks to cushion SMEs from the adverse economic effects of the COVID-19 pandemic.

The Presumptive Tax regime has also been scrapped. 

Provision: Section 12C of the ITA, Paragraph 9 of Head B of the Third Schedule to the ITA.

1.4. Pay As You Earn (PAYE)

1.4.1. Reduced PAYE burden for employees

The PAYE bands have been widened and the top marginal tax rate reduced from 30% to 25%. The new bands and applicable tax rates are as tabulated below:

The above rates will also apply to withdrawals from pensions (over the tax-free amounts) made before the expiry of 15 years of joining the fund.

The amount of personal relief has also been increased from KES 16,896 per annum (KES 1,408 per month) to KES 28,800 per annum (KES 2,400 per month).

These changes will effectively reduce tax payable by employees and will increase taxpayers’ take-home pay.

Provision: Paragraph 1 of Head A of the Third Schedule to the ITA and Paragraph 1 of Head B of the Third Schedule to the ITA.

1.4.2. Reduction in the tax rate of pension withdrawals

Pension payments or withdrawals in excess of the tax-free amounts paid after the expiry of 15 years after joining a fund, or on attainment of 50 years of age, or upon early retirement on grounds of ill health or infirmity, shall be taxed as follows:

This amendment should put slightly more money into the pockets of pensioners.

Provision: Paragraph 5 (d)(i) and (ii) of Head B (Rates of Tax) of the Third Schedule to the ITA.

2. Value Added Tax (VAT)

The standard rate of VAT was reduced from 16% to 14% with effect from 1 April 2020 through Legal Notice No. 35 of 26 March 2020 issued by the Cabinet Secretary responsible for the National Treasury. This change was subsequently approved by the National Assembly on 14 April 2020.

2.1. Taxable value of petroleum products

The taxable value for petroleum products will now include excise duty, fees and other levies.

This increased value will lead to increased VAT on petroleum products and, ultimately, higher pump prices for consumers. This makes it unlikely that average Kenyan consumers will reap the benefits of the record-low global petroleum prices. This amendment is effective 15 May 2020.

Provision: Section 5(2)(aa) of the VAT Act, 2013 (the VAT Act).

2.2. Increased scope to issue credit notes

The Act has amended section 16(1) of the VAT Act to allow for issuance of credit notes within 30 days after the determination of a commercial dispute in court relating to the price payable on the tax invoice.

Prior to this amendment, a credit note could only be issued within six months after the issue of the relevant tax invoice.

This amendment recognises that commercial disputes which escalate to courts on prices payable are unlikely to be resolved in court within six months. This amendment will allow suppliers to issue credit notes after commercial disputes are determined, no matter how long the dispute takes, provided that the credit note is issued 30 days after determination of the dispute.

Provision: Section 16(1) of the VAT Act.

2.3. Reduced timeline to seek refunds of VAT on bad debts

The timeline within which taxpayers may apply for a refund of VAT on bad debts has been reduced from five years to four years from the date of supply.

Taxpayers should note the new limitation on making applications to avoid their applications being time barred.

Provision: Section 31(1) of the VAT Act.

2.4. Record keeping

All persons are now required to keep, in their course of business, full and true written records, whether in electronic form or otherwise, of every transaction made for a period of five years.

This requirement should assist the government in curbing VAT fraud and other misdeeds.

Provision: Section 45(1) of the VAT Act.

2.5. VAT exemption for Personal Protective Equipment

In a move clearly aimed at combatting the COVID-19 pandemic, Personal Protective Equipment, which had previously been standard rated for VAT purposes, is now VAT exempt.

Whilst this is an attempt to reduce the cost of these items, perhaps a more effective approach would have been to zero-rate these items.

2.6. Change of VAT status from exempt to standard rated

The following supplies, which had previously been VAT exempt, will now be subject to VAT at the standard rate of 14%.

2.7. Change of VAT status from zero-rated to exempt

The following medicaments, which had previously been zero-rated, are now VAT exempt. This change of status is likely to drive up the cost of medicines for Kenyans. These changes come at a time when the country is struggling to contain the COVID-19 pandemic and are far from ideal.

3. Excise Duty

3.1. Clarity on the definition  of “other fees”

The definition of “other fees”, which are subject to excise duty has been amended to clarify that the fees are only payable in relation to fees, charges or commissions charged by financial institutions relating to their “licensed activities”.

The amendment reduces the scope of the applicable excise duty.

Provision: Part III of the First Schedule to the Excise Duty Act, 2015 (the Excise Duty Act).

3.2. Exempt excisable goods

The following goods, which had previously been exempted from excise duty, are now subject to tax:

Provision: Paragraphs 13 and 14 of the Second Schedule to the Excise Duty Act.

4. Miscellaneous Fees and Levies Act

4.1 Import Declaration Fees (IDF)

The following goods, which had previously been exempt from IDF, will now be subject to the IDF tax:

1. gifts or donations (excluding motor vehicles) sent by foreign residents to their relatives in Kenya for their personal use;
2. samples which, in the opinion of the Commissioner, have no commercial value; 
3. raw materials for direct and exclusive use in construction by developers or investors in industrial parks, goods imported for the construction of liquefied petroleum gas storage facilities; and
4. goods imported for implementation of projects under a special operating framework arrangement with the government.

Provision: Part A of the Second Schedule to the Miscellaneous Fees and Levies Act, 2016.

4.2. Railway Development Levy (RDL)

RDL collected will now be used to finance the construction and operation of the Standard Gauge Railway network, which has struggled to meet its operational costs.

Previously, RDL funds were used exclusively for the construction of the standard gauge railway network.

The Act has removed the following exemptions from RDL:

1. raw materials for direct and exclusive use in construction by developers or investors in industrial parks;
2. goods imported for the construction of liquefied petroleum gas storage facilities; and
3. goods imported for implementation of projects under a special operating framework arrangement with the government.

Provision: Part B of the Second Schedule to the Miscellaneous Fees and Levies Act, 2016.

4.3. Processing fee on duty-free vehicles

A processing fee of KES 10,000 has been introduced on motor vehicles, excluding motor cycles, which have been purchased on a duty-free basis.

Provision: Section 8B of the Miscellaneous Fees and Levies Act, 2016.

5. Tax Procedures Act, 2015

5.1. Private rulings

The Commissioner now has 60 days to issue a private ruling upon receiving an application from a taxpayer. This is up from 45 days.

The amendment further removes the requirement for the Commissioner to publish a private ruling in redacted form in at least two daily newspapers with a national circulation.

The complete removal of the requirement to publish private rulings may lead to a “private body of tax law”. The overall effect of the amendments will be an increase in uncertainty, delay and reduced transparency in the private ruling regime.

Provisions: Sections 65(3) and 69 of the Tax Procedures Act, 2015.

6. Kenya Revenue Authority Act

6.1. Additional rewards for whistle-blowers

The Act amends the Kenya Revenue Act to empower the KRA to reward KES 500,000 to anyone who provides information to the KRA leading to enforcement of tax laws. This is in addition to the existing rewards.

Provision: Section 5A (2) of the Kenya Revenue Authority Act.

6.2. Appointment of revenue agents

The Commissioner can now appoint persons registered under the Banking Act to act as an agent for revenue banking services through an agreement. A person appointed is required to transfer funds to Central Bank accounts within a maximum of two days following the date of collection. If the transfer of the revenue collection is delayed, the person appointed is liable to a penalty equivalent to 2% of the revenue collected but not transferred. The penalty will be compounded for each day that the delay continues.

The penalty for delay is to be treated as a tax debt due to the government, and the enforcement measures for collection and recovery of tax shall apply.

Banks appointed under this provision will have to remit revenue collected on behalf of KRA within two days of collection otherwise the penalty will apply. This may expose the bank to enforcement measures.

Provision: Section 15A of the Kenya Revenue Authority Act.

7. Retirement Benefits Act, No.3 of 1997

Members of retirement benefit schemes can use a proportion of the money saved in a retirement benefits scheme to purchase a residential home.

Provision: Section 38(1)A of the Retirement Benefits Act, No.3 of 1997.

8. Conclusion

While the adverse economic effects of the COVID-19 pandemic have necessitated changes to the tax regime, some of the new measures introduced are likely to have the effect of driving up the cost of living as well as the cost of doing business in the long run. Only time will tell if the tax relief measures are enough to cushion Kenyans from the negative effects of the economic downturn.