Kenya - Recent tax developments - The outbreak and rapid spread of the COVID-19 pandemic in March 2020 resulted in an unprecedented decline of the Kenyan economy and the world over. In addition, during 2020, various parts of Kenya were plagued by desert locusts and floods which among other things, displaced individuals and destroyed infrastructure in the country. Against this background and various initiatives to support the plunging economy, the Government of Kenya took swift fiscal and financial measures to mitigate against the adverse effects to the Kenyan economy and cushion individuals and businesses by introduction of various tax reliefs and other measures.
Tax Reliefs and Fiscal Measures in response to COVID pandemic125. In the wake of the COVID -19 pandemic the Government introduced various fiscal measures which included:
- The reduction of the rate of Value Added Tax (VAT) from 16% to 14%.
- The reduction of the rate of Corporation Tax from 30% to 25%.
- Relief from tax for taxable individuals earning up to a monthly income of KShs.24,000.
- The reduction of the rate of the top income tax band for individuals from 30% to 25%.
- The reduction of the rate of Turnover Tax (ToT) from 3% to 1%. In addition, the bracket for persons subject to ToT was widened to include incorporated companies. The threshold for income subject to ToT was also increased to KShs.50 Million.
The above tax measures provided relief in the nature of cash injections for businesses and additional disposable income to individuals and Kenyan businesses. The tax reliefs led to a significant reduction in revenue potential, a factor that necessitated the concurrent removal of various tax incentives and exemptions, previously provided for in the Income Tax Act (ITA) with a view of creating a balance. Some of the exemptions and incentives that were removed alongside the new measures include: -
- Interest income generated from cashflows passed to the investor in the form of asset backed securities.
- Monthly or lumpsum pension granted to a person who is 65 years of age or more.
- Dividends paid to any non-resident person by enterprises, developers or operators registered in a Special Economic Zone.
Further to these exemptions, provisions relating to capital allowances previously extended under the ITA, including up to 150% worth of investment deductions on the construction of buildings and installation of machinery were repealed.
126. In addition to the above, a number of supplies which were previously considered as exempt from VAT under the Value Added Tax Act, 2013 became standard rated therefore subject to VAT. These included:
- The transfer of business as a going concern by a person registered for VAT to another registered person.
- Taxable supplies procured locally or imported for the construction of liquefied petroleum gas storage facilities.
- Biogas and the leasing of biogas producing equipment.
Reversal of COVID 19 tax relief measures and introduction of new taxes in 2021127. As of 1st January 2021, the various tax provisions providing relief and introduced in response to the COVID 19 pandemic were repealed. In this regard, the rate of VAT was reinstated to 16% whereas the rate of Corporation Tax and personal income rates of tax were reinstated to 30%. The tax exemptions/incentives earlier removed were however not reinstated.
In addition, and with a view of increasing revenue collection, the government introduced a Digital Service Tax, VAT on supply of digital services, a Minimum Tax and the Voluntary Tax Disclosure Programme.
We discuss these tax developments in detail below.
128. Digital Service Tax - Digital Service Tax (DST) is a form of tax which is chargeable on income derived from the provision of digital services (which includes the provision of a digital marketplace) through a digital marketplace. It became effective on 1st January 2021 and is chargeable at the rate of 1.5% on the gross transaction value (gross transaction value in the case of digital services refers to the consideration paid to the service providers for the digital services whereas in the case of a digital marketplace, is the commission or fee paid for the use of the platform).
DST operates as an advance income tax for resident persons and non-resident persons with a permanent establishment (PE) and may therefore be offset against the income tax payable in a year of income. It is, however, a final tax for non-resident persons without a PE in Kenya. Further, a non-resident person without a PE who provides services to a user in Kenya will be required to register under the simplified tax registration framework or appoint a tax representative.
129. Value Added Tax on Supply of Digital Services - Further to DST, which is an income tax, the taxation of supplies of digital services was formalised through the introduction of regulations governing the charge of VAT on the supply of digital services through a digital marketplace.
These regulations provide clarity on the imposition of VAT in business to consumer (B2C) supplies where the business is registered in a country other than Kenya (an export country). In such a case, the person providing the digital services from an export country will be required to register for tax in Kenya through the simplified tax registration framework or alternatively, appoint a tax representative for purposes of declaring and remitting the VAT payable.
With regards to business to business (B2B) supplies where the supplier is from an export country, reverse VAT will be applicable. Therefore, the recipient business will be deemed to have made the supply to themselves and be required to account for the VAT payable on the supply.
130.Minimum Tax - As of 1 January 2021, the government introduced a Minimum Tax which is chargeable on the income of all taxpayers where the Instalment Tax that would otherwise be payable by the taxpayer is lower than the Minimum Tax.
The Minimum Tax is chargeable at the rate of 1% on the gross turnover (which means gross receipts, gross earnings, revenue, takings, yield, proceeds, sales, etc) of a taxable person.
The Minimum Tax is not applicable to income exempt from tax under the Income Tax Act, employment income, income subject to Residential Rental Income Tax, income subject Turnover Tax, income subject to Capital Gains Tax, income of the extractive sector, persons engaged in business whose retail price is controlled by the Government and persons engaged in insurance business.
It is interesting to note that on 19th April 2021, the eve of the deadline for the first payment of Minimum Tax in Kenya, the High Court of Kenya issued interim orders suspending the enforcement of Section 12D of the Income Tax Act which relates to Minimum Tax. The orders were issued pursuant to a Constitutional Petition filed challenging the introduction of the Minimum Tax.
In accordance with the orders, the Kenya Revenue Authority (KRA) cannot collect or demand payment of Minimum Tax until the petition is heard and determined.
131. Voluntary Tax Disclosure Programme - Finally, the Government introduced a tax amnesty programme, the Voluntary Tax Disclosure Programme (VTDP) that provides relief against penalties and interest where a taxpayer voluntarily discloses past failures of compliance and outstanding tax liabilities. The relief applies to all tax liabilities that accrued between 1st July 2015 to 30th June 2020.
The VTDP became effective on 1st January 2021 and will remain effective until 31st December 2023.
To take advantage of the programme, a taxpayer is required to make an application to the KRA disclosing their tax liabilities and all material facts relating thereto.
Upon the decision to grant relief under VTDP, the KRA will enter into an agreement setting out the terms for payment of the tax liability and the period for payment. The extent of relief from penalties and interest as granted to taxpayers will depend on when the disclosure and full payment of the outstanding tax liability is made. In this regard:
- If the disclosure is made and tax liability paid in the first year of the programme, that is, between 1st January 2021 and 31st December 2021, the taxpayer will be granted full remission of the interest and penalty that would otherwise be payable.
- If the disclosure is made and the tax liability paid in the second year, that is, between 1st January 2022 and 31st December 2022, the taxpayer will be granted remission of 50% of the interest and penalty.
- If the disclosure is made and tax liability paid in the third year, that is, between 1st January 2023 and 31st December 2023, the taxpayer will be granted remission of 25% of the interest and penalty.
It should be noted that relief under the VTDP will not result in the payment of a refund to a taxpayer.
Conclusion 132. It is worth emphasising that the tax developments, particularly DST and Minimum Tax have somewhat posed certain challenges due to the practical nuances in their implementation across different sectors in Kenya.
Regardless, it is anticipated that the various tax measures will increase revenue collection in the country and boost economic growth in Kenya despite the current situation that has seen a decrease in the rate of economic growth. In the meantime, taxpayers have adopted a wait and see approach on the effectiveness of these taxes even as the Kenya Revenue Authority continues to provide support in their implementation and clarity on various areas.
