The Cabinet Secretary responsible for the National Treasury read his budget statement on 7 April 2022. In this alert, we summarise the salient tax proposals set out by the Cabinet Secretary. 

1. Is the National Tax Policy Framework really on the way?

In his 2021 budget statement, the Cabinet Secretary indicated that he had initiated a process for developing a National Tax Policy Framework that was intended to "… not only enhance administrative efficiency of the tax system but provide consistency and certainty in tax legislation and management of tax expenditure".

Almost a year down the line, the policy has not been released, but the Cabinet Secretary has again promised that this will be shared "soon" with stakeholders for input.

There is no telling when this will happen, and it is difficult to predict the policy framework’s place within the context of the Constitution and existing tax laws. 

2. Tax administration procedures

No cash, no justice!

The Cabinet Secretary has proposed a radical amendment to the Tax Appeals Tribunal Act, 2013 which would require taxpayers who lose disputes before the Tax Appeals Tribunal (Tribunal) to deposit 50% of the tax in dispute before appealing to the High Court. The amounts deposited would only be refunded to taxpayers if the matter is ultimately determined by the superior courts in favour of the taxpayer. Given taxpayers’ recent experience in obtaining payment of refunds due to them, this does not inspire confidence.

This proposal raises several issues, key among them the constitutionality of restricting access to justice to only those taxpayers who can afford to pay for it. Furthermore, taxpayers have an unfettered right of appeal to the High Court, the Court of Appeal and in some instances the Supreme Court. Progressing a matter through the appeal process always takes several years, and having taxpayers tie up 50% of the disputed taxes will inevitably cause significant cashflow issues to businesses. It is also unclear at this stage if the amounts deposited will accrue interest. Additionally, if the amounts deposited will be refunded in every instance where a taxpayer is successful before the superior courts, what happens when a taxpayer loses before the Tribunal, succeeds on appeal at the High Court, loses at the Court of Appeal but is ultimately successful before the Supreme Court?

Currently, a taxpayer who is unsuccessful in a tax dispute and who intends to proceed on appeal is required to provide security for the taxes in dispute. This is often a percentage of the taxes in dispute. It is also unclear how the proposed provisions will interplay with this requirement to give security.

Bringing an end to limitless requests for information

Under existing legislation, once a taxpayer has filed a valid notice of objection, the Kenya Revenue Authority (KRA) has 60 days to make an objection decision, unless it requests the taxpayer to provide additional information. In this instance, the 60-day timeline to make an objection decision runs from the day the KRA receives the additional information requested. The KRA has abused this current law as a way of extending its timeline to make an objection decision. The Cabinet Secretary has proposed to close this loophole by requiring the KRA to issue an objection decision within one cycle of 60 days from the date of receipt of a valid notice of objection.

In our view, this is a positive move that will speed up the process leading to the KRA issuing an objection decision and matters proceeding to the Tribunal.

Additional forms of security for unpaid taxes

The existing law allows the KRA to use land or buildings owned by a taxpayer as security for unpaid taxes. The Cabinet Secretary has proposed to expand the nature of assets that may be used as security to include ships, aircrafts, motor vehicles and any other properties.

It remains to be seen what exactly the Cabinet Secretary meant by "any other properties", as this term is very wide.

Tax-related subsidiary legislation will not expire after 10 years

The Statutory Instruments Act, 2013 provides for the automatic expiry of statutory instruments after 10 years from the date of their publication. This directly affects tax-related subsidiary legislation. The Cabinet Secretary has proposed to amend the Statutory Instruments Act to exempt tax-related subsidiary legislation from the automatic expiry period.

This is a step in the right direction as it will allow for certainty and continuity of tax legislation.

3. Income Tax Act

Relaxation of deductibility rules with respect to cash donations made to unregistered charitable organisations

Currently, cash donations are tax deductible only if made to charitable organisations
registered under the Societies Act or the Non-governmental Organisations Co-ordination Act and pursuant to fulfilling the conditions set out under the Income Tax (Charitable Donations) Regulations, 2007. The Cabinet Secretary has proposed to expand the scope of allowable deductions to include cash donations made to charitable organisations that are not registered under the Societies Act or the Non-Governmental Organisations Co-ordination Act.

This is a welcome move for taxpayers who make donations to non-registered charitable organisations and who do not currently benefit from having these donations treated as tax deductible. 

New kid on the block – taxation of gains by non-residents on transactions involving financial derivatives

Following the launch of the Nairobi Securities Exchange Derivatives Market (NEXT) on 4 July 2019 and against a backdrop of increased use of financial derivatives, the Cabinet Secretary has proposed to tax the gains accruing to non-residents from transactions involving financial derivatives in Kenya including hedging, contract futures and contract options. The taxation of financial derivatives has posed a challenge to various revenue authorities, including those in more advanced jurisdictions, and it will be interesting to see how this pans out in Kenya, having regard to the fact that financial derivatives are fast evolving.

Exclusion of microfinance institutions from the scope of thin capitalisation provisions

The Cabinet Secretary has proposed to exclude microfinance institutions licensed under the Micro-Finance Act from thin capitalisation provisions. Microfinance institutions join the list of entities, including banks and other financial institutions that are excluded from thin capitalisation provisions. This will allow microfinance institutions greater flexibility in their financing structures.

Increased reporting requirements for multinationals

The Cabinet Secretary has proposed amendments to require multinational enterprises which have operations in Kenya to report their activities within Kenya, and in other jurisdictions, to the KRA. This move is aimed at facilitating implementation of the Multilateral Convention for Mutual Administrative Assistance in Tax Matters, which was ratified by Kenya in July 2020. The move will facilitate automatic exchange of tax information between the KRA and agencies in other jurisdictions. It is anticipated that this will result in increased data-driven audits and KRA compliance checks of multinational enterprises.

4. Excise Duty

Limitations to annual inflationary adjustments

The Cabinet Secretary has correctly acknowledged that the annual inflationary adjustment may not be appropriate in all instances, especially where prevailing economic and social factors are considered. The Cabinet Secretary has, however, sought to remedy this by empowering the KRA to exclude products from the inflationary adjustment after considering the prevailing economic circumstances.

The Cabinet Secretary appears to have identified a valid issue but has sought to address it through the wrong means. Giving the KRA wide discretionary powers to effectively decide tax rates does not inspire confidence.

Increased excise duty exemptions

The Cabinet Secretary has proposed to expand the scope of products that are exempt from excise duty to include:

• Eggs for hatching imported by licensed hatcheries, upon recommendation by the Cabinet Secretary responsible for Agriculture, Livestock, Fisheries and Co-operatives.
• Neutral spirit, used by registered pharmaceutical manufacturers, upon approval by the KRA.
• Locally manufactured passenger motor vehicles. This should encourage investment in the local motor vehicle assembly industry. 

Advertising alcoholic beverages and betting set to cost more

In a move to discourage alcohol consumption, gambling and gaming, the Cabinet Secretary has proposed a 15% excise duty on fees charged by television stations, print media, billboards and radio stations for advertisements related to these activities.

High-cost vapes

Tobacco products have taken a hit in almost every budget in living memory. This year’s budget was no exception. The Cabinet Secretary has proposed to change the excise duty regime for liquid nicotine from the current shillings per unit to KES 70 per millilitre.

Applicable rate of excise duty to go up 10% on undisclosed products 

The Cabinet Secretary indicated an intent to increase rates of excise duty for specific products by 10% to generate additional revenue. However, he did not disclose what these products are. The Cabinet Secretary only indicated one product that would not be subject to the increase, that being petroleum products.

The Cabinet Secretary’s reluctance to state which specific products will be subject to the increased rates is telling. Expect pain. Alcohol, other fees charged by banks and telecom products are all standing in line.

5. Value Added Tax

Increased scope of VAT exemptions

The Cabinet Secretary has proposed to expand the list of VAT exempt supplies to include:

• Plant and machinery for use by manufacturers of pharmaceutical products.
• Medical oxygen supplied to registered hospitals, urine bags, adult diapers, artificial breasts, and colostomy or ileostomy bags for medical use.
• Inputs and raw materials used in the manufacture of passenger motor vehicles and locally manufactured passenger motor vehicles. 

6. Miscellaneous fees and levies

The Cabinet Secretary has proposed the following:

• The exemption of inputs and raw materials imported by manufacturers of pharmaceutical products from payment of Import Declaration Fees and Railway Development Levy to encourage investment in the health sector and improve access to affordable healthcare services.
• The reduction of export levy on raw hides and skins from 80% or US$ 0.5 per Kg to 50% or US$ 0.32 per Kg. 

7. Exit Kenya Revenue Authority, enter Kenya Revenue Service

The Cabinet Secretary has proposed to change the name of the "Kenya Revenue Authority" to the "Kenya Revenue Service". Apparently, this rebranding will "transform its public image and enhance tax compliance through public relations and maintain a clear focus on taxpayers’ needs".

Really? What is in a name?

What next?

For the proposals to take effect, they must be passed into law. Once the Finance Bill is published, there will be an opportunity for taxpayers to give their input as part of public participation. This will be crucial considering some of the more controversial proposals.

Look out for more updates from us!