The Finance Bill 2024 (the Bill) was tabled before the National Assembly on 13th May 2024. The Bill proposes to introduce several changes to tax laws that will significantly impact businesses and individuals. In this alert, we analyse the key proposals set out in the Bill.
Effective date: 1st July 2024
Clauses 2 and 25
The Bill proposes an expanded scope of activities constituting digital content monetization by amending the definition of “digital content monetization” to include the following when offered for payment: creative works; creating or sharing of materials; and any other material that is not exempt from tax under the ITA.
This expansive definition broadens the scope of activities that are subject to digital content monetization withholding tax (WHT).
The Bill further proposes to make final the digital content monetization WHT paid on account of non-resident persons.
Clause 2
The Bill proposes to broaden the definition of the term royalty to include payment made as a consideration for the use or the right to use any software, proprietary or off-the-shelf, whether in the form of licence, development, training, maintenance, or support fees and includes the distribution of the software.
The proposed amendment will bring into the ambit of a royalty any payment relating to copyrighted software which have in the past elicited tax disputes wherein the High court has held that such payments do not constitute a royalty for WHT purposes.
The proposed amendment will also have an impact on mixed contracts relating to supply of software combined with provision of services – training, maintenance or support services and distribution of software. Payments made under mixed contracts will now be fully treated as royalty payments for WHT purposes.
Clause 4
The Finance Act, 2023 amended the ITA to limit the deferral period for the deductibility of realized foreign exchange losses for thinly capitalized persons to a maximum of five years. The Bill proposes to further restrict the period of deferral of realized forex losses to three years.
This provision will further limit the time period within which thinly capitalized persons can defer deductibility of their forex losses presenting setbacks viewed in light of the heightened foreign exchange fluctuations.
Effective date: 1st January 2025
Clauses 8 and 25
Further depicting the strenuous journey that the Government of Kenya has embarked on in the quest to tax income from the digital space, the Bill proposes a repeal of digital service tax (DST) and introduction of significant economic presence (SEP) tax which shall be payable by non-resident persons deriving income from Kenya on account of services provided over a digital marketplace. The Bill proposes a deemed profit level of 20% of gross turn-over of the non-resident person’s income. The deemed profit level will be subjected to SEP tax at the rate of 30%.
The income of a non-resident person offering services through a permanent establishment (PE) and the income of a non-resident person carrying on the business of transmitting messages by cable, radio, optical fibre, television broadcasting, Very Small Aperture Terminal, internet, satellite or by any other similar method will be exempted from SPE tax. Similarly, income subject to tax under section 10 of the ITA including payments on account of management or professional fees, royalty and use of property.
The CS National Treasury is expected to make Regulations for the operationalisation of the SEP tax.
Viewed against DST, SEP tax will have a narrower scope since it is not proposed to cover all and sundry income of accruing to non-resident persons from provision of services through businesses carried out over the internet or electronic networks. However, compared with the current DST regime which is set at 1.5% of the gross transaction value, the proposed SEP tax presents a 300% increment in the ultimate tax level which will most likely be felt by the ultimate consumers of the digital services. It is not clear how the 20% profit level benchmark has been arrived at, the steep increment in the ultimate tax level notwithstanding.
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