2015 Budget Statement

The Cabinet Secretary for Treasury in his budget statement proposed a number of amendments to the tax statutes. The tax measures are targeted to achieve four stated objectives;

  1. to facilitate private enterprise growth for job creation
  2. to promote equity and fairness
  3. to deepen tax administration reforms, and
  4. to encourage growth in the financial sector.

It is important to note that these are only proposals and have not yet been put into effect. We highlight below the proposed measures from his speech as well as key proposals contained in a draft Finance Bill 2015 to be introduced into the National Assembly.

Income Tax

Capital Gains Tax

Capital Gains Tax on the transfer of quoted shares to be at the rate of 0.3% of the transaction value of the shares.

Our view: This is a proposed remedy to challenges faced by stock brokers in implementing the law. The current provisions require stock brokers to seek and obtain information relating to the cost of shares sold, compute the gain and account for the taxes arising from the transfer of shares. The proposed rate to be applied on the transaction value (no deduction of costs will be permitted) will simplify the process for the stockbrokers.

We note however from proposals contained in the draft Finance Bill that the withholding tax rate of 0.3% will only apply to payments made by stockbrokers to non-resident customers as no rate has been provided for payments to resident customers. It appears to have been an omission but this would need to be rectified before the Finance Bill is passed otherwise, in our interpretation, as currently drafted, stockbrokers would have no basis for deducting any withholding taxes on payments to resident customers.

The proposed changes are also scheduled to take effect on 1st January, 2016. This means that stock brokers will continue to struggle with the current challenges they face until the end of the year if the proposal is adopted by Parliament. They may therefore want to lobby for an earlier date of commencement to be included by Parliament.

Capital Gains Tax on the transfer of all other applicable assets including gains on the transfer of shares in private companies will still be applied at the rate of 5%.

Effective date: 01/01/2016

Tax Point For Payment Of Capital Gains Tax

The due date for payment of Capital Gains Tax to be on or before the date of application for transfer of the property at the relevant lands office.

Our view: The reference to tax being due at the time of transfer at the lands office, infers that this will only apply to the transfer of land and buildings as they are the only items of property that are transferable at the lands office. Tax on all other assets (apart from shares quoted on the stock exchange which will be subject to withholding tax) will therefore, in our view, remain due and payable by way of instalment with the last instalment being due on the 30th day of April of the following year.

Effective date: 01/01/2016

Taxation Of Rental Income

Rental income from residential property to be taxed at 12% of the gross rental income below KES 10 million per annum.

Our view: The lower rate is designed to encourage more taxpayers to declare taxes on rental income. We note that whereas the rate of 12% was mentioned in the budget speech, this rate is not reflected in the draft Finance Bill. This is also an omission that needs to be rectified to give legal effect to the lower rate.

To ensure compliance, the draft Finance Bill proposes that tenants and other agents appointed in writing by the Commissioner are to withhold the taxes on the rent payable on a monthly basis. The draft Finance Bill does not however provide the rate at which the tax will be withheld and this too would need to be included before it is passed.

This is indeed a surprising development as it places the administrative burden of accounting for the taxes on tenants as well as the risk of suffering penalties for failing to withhold. This will be difficult to enforce as tenants are prone to moving homes and moreso, neither the Kenya Revenue Authority nor the landlords can easily verify that the tenants are actually remitting the taxes that are withheld. In our opinion, the easier solution is to deal only with the Landlords.

Landlords will be permitted to elect to remain under the current regime that allows them to deduct the costs incurred in generating the rental income but subject to tax at a higher rate of 30%.

It appears therefore that all landlords will automatically shift to the new taxing regime unless they notify the Commissioner of their intention to remain under the current system. Taxpayers must therefore carefully consider the impact of either regime to their business when deciding on a preferred method as switching back may not be easily permitted.

What is unclear though is whether withholding tax would still be deductible if the landlord elects to remain under the current regime.

The draft Finance Bill provides that the Minister may by notice in the Gazette, prescribe rules for the better carrying out of this new provision. Additional guidance on how the rental income will be taxed will hopefully be provided.

Effective date: 01/01/2016

Tax Amnesty For Landlords

Amnesty is proposed to encourage landlords to declare any tax arrears arising from rental income.

Under the amnesty the KRA will be prohibited from assessing any taxes in respect of rental income for any period before 1st January, 2014. Amnesty is also proposed in respect of penalties or interest arising out of the 2014 and 2015 years of income. The amnesty will however only be available to landlords who will have submitted their returns or amended returns and paid any outstanding taxes in relation to 2014 and 2015 years of income on or before 30th June, 2016. This amnesty will not also extend to persons who have already been assessed in respect of unpaid tax from rental income or are undergoing audit or investigation for the same.

There is also a proposal to permit landlords who have no documentation to support expenditure to deduct 40% of the expenditure.

Our view: This is an excellent opportunity for landlords who have been in default to declare and account for taxes without incurring significant back taxes and penalties and we would recommend to landlords to take advantage of this opportunity.

The amnesty should in our opinion have been extended to also cover those landlords who have been assessed or who are undergoing audit or investigation. This exclusion from the tax amnesty is manifestly unfair and potentially in breach of Section 201 of the constitution which provides that the burden of taxation shall be shared fairly. The proposal ought to therefore be amended to include all landlords.

The Finance Bill also mentions that 40% of the expenditure would be deductible by landlords who do not have any documentation. This may have been intended to mean 40% of the income but hopefully this will be clarified.

Effective date: 01/01/2016

Carry Forward Of Losses

The period that tax losses can be carried forward and made available for offset against taxable income has been increased from 5 years to 10 years.

Our view: This will allow taxpayers sufficient time to take advantage of capital allowances before the tax losses are due to expire. Currently taxpayers can only carry forward tax losses for 5 years unless an extension is granted by the Cabinet Secretary.

We are happy to note that the provision allowing a taxpayer to seek a further extension has been retained to cater for those exceptional circumstances where a taxpayer would need a longer period than 10 years to utilise their tax losses.

Removal Of Enhanced Investment Deduction Allowance

The Draft Finance Bill proposes to remove the enhanced 150% Investment Deduction Allowance that applies to the construction of buildings or purchase and installation of machinery outside Nairobi, Mombasa and Kisumu where the value is not less than two hundred million shillings.

Our view: The incentive was initially introduced to encourage investment outside the three Kenyan cities. Its removal signifies that it may have already achieved its intended purpose or the Government feels that it is losing too much tax revenue through this scheme.

It is an unfortunate development for those taxpayers who will have made investments hoping to take advantage of this incentive. For those taxpayers who can still take advantage of this enhanced rate, they should do so before the end of the year.

Effective date: 01/01/2016

Tax Rebates For Employers Offering Apprenticeships

Employers who engage at least ten university graduates as apprentices for a period of six to twelve months during any year of income shall be eligible for tax rebate in the year subsequent to the year of such engagement.

Our view: It is important that the mechanics of how the rebate will be obtained is clearly spelt out to ensure that employers will not face challenges when claiming these rebates. The scale of the rebate has also not been specified.

The Draft Finance Bill provides that the Cabinet Secretary may by notice in the Gazette make regulations for the better carrying out of this provision. It is important that he does so soon to encourage employers to take advantage of the rebates and ensure the success of the proposed measure.

Effective date: 01/01/2016

Other Income Tax Measures

Listing of shares via introduction

The Finance Bill proposes a lower corporation tax rate for a company introducing its shares through listing or any securities exchange via introduction. What is interesting to note though is that no time limit for the expiration of the preferential tax rate is proposed.

Effective date: 01/01/2016

Tax on the gaming industry

A simplified tax, similar to turnover tax is proposed at the rate of 5% of gross revenue for gaming revenues and revenue from public lotteries and 7.5% on gross betting revenue of bookmakers.

Investment Deduction Allowance in the Shipping Sector

Ships that will qualify for investment deduction to include those that weigh a minimum of 125 tons, down from the current 495 tons and investment deduction rates to be increased to 100% from the current 40%.

Effective date: 01/01/2016

Tax Incentives for Filming Industry

Payments by film producers approved by the Kenya Film Commission to foreign actors and crew to be exempt from withholding tax.

Capital Expenditure incurred on the construction of buildings for use for the training of film producers, actors or crew will enjoy Investment Deduction allowance of 100%.

Effective date: 01/01/2016

Withholding agents

Technology providers to be appointed agents to collect and remit withholding tax on revenue raised through lotteries.

Effective date: 01/01/2016

Withholding tax on training and contractual fees in Mining and Petroleum Sector

Withholding tax on training and contractual fee payments to be harmonised. The proposed rates are 12.5% and 5.625% respectively.

Effective date: 01/01/2016

Value Added Tax

Taxable Services In Respect Of Goods In Transit

Taxable services provided in respect of goods in transit to become zero rated.

Our view: This is a corrective measure to ensure that the services provided in respect of goods in transit do not include any VAT incurred in Kenya thereby increasing the costs of such services. The Finance Act 2014 had attempted to address this by making these services exempt. When services are exempted from VAT however, they still contain an element of non-recoverable VAT that is included in the price. Making them zero rated will remove all VAT from the cost of the services.

Effective date: 12/06/2015

Vat Exemption On Construction Of Industrial And Recreational Parks

VAT exemptions will be granted to goods and services for use in the construction of industrial and recreational parks that are located in Nairobi, Kisumu, Nakuru, Mombasa or Eldoret, and which are at least 100 acres in size.

Our view: This measure is designed to attract foreign and local investors to set up large scale parks by reducing the costs of construction. VAT exemption however, means that the persons supplying these goods and services may be unable to claim VAT and will therefore load this cost onto the price of the goods to recover their VAT expense. A more effective measure would be to treat these supplies as zero rated.

Effective date: 12/06/2015

VAT Refunds

Time limit within which a VAT refund claim may be lodged is to be set at 12 months from the date the tax became due and payable.

Our view: This was an oversight when the VAT Act 2013 was enacted and this measure reintroduces the time limit that existed before the VAT Act 2013 was enacted. It is however a missed opportunity to also set a time limit within which VAT refunds must be processed and settled.

Effective date: 12/06/2015

Imports By Returning Kenyans

Kenyans who have owned left hand drive vehicles for at least 12 months to sell their vehicle and import a right hand drive vehicle of a similar value zero rated.

To qualify for zero rated status, the person must provide proof of ownership in the foreign country for at least 12 months, and proof of disposal of the vehicle before changing residence.

Our view: This allows Kenyans returning from countries where vehicles are driven on the right to benefit from the tax exemptions available for the importation of vehicles.

Other Vat Measures

Withholding VAT Agents

In addition to Government Ministries, Departments and agencies appointed by the Commissioner will be required, on purchasing taxable supplies, to withhold 6% of the tax payable thereon at the time of paying for the supplies and remit the same directly to the Commissioner.

Goods to be exempt from VAT

1. Parts imported or purchased locally for the assembly of primary school laptops and tablets, subject to approval by the Cabinet Secretary for the National Treasury, on recommendation by the Cabinet Secretary responsible for matters relating to information technology.

2. imported and locally purchased goods for use by the Kenya Film Commission.

3. plastic bag biogas digesters

4. aircraft engines, marine propulsion engines, pneumatic rubber tyres used on aircraft, aircraft propellers and rotors and parts, under-carriage parts, and other parts of aeroplanes or helicopters.

5. Taxable goods, excluding motor vehicles, imported or purchased for direct and exclusive use in the implementation of official aid funded projects upon approval by the Cabinet Secretary responsible for the National Treasury.

Effective date: 12/06/2015

Goods to be Zero rated

Goods purchased from duty free shops by passengers departing to places outside Kenya have been zero rated.

Effective date: 12/06/2015

Custom Duties

Paper And Paperboard Products

The importation of paper and paper board products has enjoyed a stay of the application of duty at 25%. The duty rate is to be revised to 10%.

Our view: Although the rate has been reduced, this measure is likely to increase the cost of these products since the stay of application will now be lifted.

Raw Hides And Skins

The export duty rates for raw hides and skins has been harmonised with other EAC partner states to 80% of FOB or 0.52 USD per kg whichever is higher.

Our view: This is a measure is designed to deter smuggling activities within the region.

Tax Exemption On Goods Imported By Kenya Prisons

Prisons authorities to import goods, materials and other supplies duty free

Our view: This has been introduced in order to give equal application of the law and to allow the Kenya Prisons Services to enjoy the exemptions that their peers in the Kenya Defence Forces and National Police Service enjoy.

Import Duty On Gas Cylinders

Importation of gas cylinders, which are currently exempted from duty to be taxed at 25%

Our view: This is good news for Kenyan manufacturers of gas cylinders since imported cylinders will retail at much higher prices.

Other Customs Measures

Promoting the fishing Industry

The importation of nylon yarn and synthetic twine used in the manufacture of fishing nets under the duty remission scheme reduced to 0% from the current rate of 10%.

The importation of complete fishing nets will attract duty at 25% up from the current 10%.

Sugar industry

To protect the local sugar industry, the specific duty rate on imported sugar has been increased from USD 200 to USD 460 per metric tonne.

Plastic Tubes

To protect local manufacturers, the import duty rate for the importation of plastic tubes for the packaging of toothpaste and cosmetics to be increased from 10% to 25%.

Raw material for manufacture of pasta

The import duty for semolina to reduce from 25% to 0% in order to encourage the local manufacture of pasta.

Tax on import of aluminium milk cans

To protect local manufacturers, the importation of aluminium milk cans to suffer import duty at 25% up from the current 10%.

Reduction in the Import Declaration Fee

To reduce the cost of conducting business in East Africa, the IDF fee is to be reduced from 2.25% to 2.0%.

Excise Duty

Excise Duty Bill

The Excise Duty Bill has been tabled before Parliament and is aimed at modernising the administration of Excise Duty. Proposed measures include the following:

Measures To Curb Production Of Illicit Brews

The Excise Duty Bill contains a provision empowering the Cabinet Secretary to grant remission from excise duty in respect of beer or wine made from sorghum, millet, or cassava or any other agricultural product (excluding barley) that is grown in Kenya.

Our view: The measure is intended to create new markets for agricultural produce and to encourage brewers to make alcoholic beverages from produce which is less harmful for consumption.

New Methods Of Taxation

New methods of taxing based on units of quantity only is proposed. Excise duty will be based on:

  • sticks of cigarettes and tobacco;
  • volumes of harmful alcoholic beverage and sugar sweetened beverage consumed;
  • volume of polluting fossil fuels;
  • age of motor vehicle purchased; and
  • weight of environmentally damaging plastic bags.

Our view: The measure is intended to impose excise duty on the items that have harmful impact in a manner that is directly reflected in their prices.

Other Excise Duty Measures

Fossil Fuels

All Fossil fuels to be subject to excise duty.

Alcoholic beverages

Marginal increase in excise duty rate on alcoholic beverages is proposed.

Excise to be removed from non-harmful products

Excise duty on bottled water and all other goods that have no harmful effects to be removed.

Cigarettes

The current hybrid tax regime for cigarettes to be substituted for a specific one.

Non-biodegradable plastic

Excise duty on non-biodegradable plastic increased to KES 120 per kg.

Other Tax Measures

Tax Procedures Bill

A bill to be introduced which contains uniform procedures to apply across the three tax legislations-Income Tax, VAT and Excise

Our view: This is aimed at consolidating general tax procedure rules into one statute in order to harmonise the procedures and reduce the cost of compliance.

Review Of Income Tax Act

The review of the Income Tax Act is projected to be completed by September 2015

Our view: This is a continuation of an exercise that commenced last year with the aim of updating and simplifying the Income Tax Act.

Stamp Duty Exemption

Stamp duty exemption to apply to transfer of assets into Real Estate Investment Trusts and Asset Backed Securities.

Miscellaneous Fee And Charges Bill

A Miscellaneous Fee and Charges Bill to be tabled to provide a legal basis for levies that were anchored in the Customs and Excise Duties Act.