ANALYSIS OF THE FINANCE BILL, 2022

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The Finance Bill, 2022 was published on 8 April 2022 and tabled in Parliament on 12 April 2022 for the first reading. The Bill captures proposals aimed at widening the revenue tax base.

The National Assembly has invited members of the public and stakeholders to express their views on the Bill which are required to be submitted before May 4 at 5.00pm. The Bill aims at amending the following tax laws: Income Tax Act, Cap 470, Value Added Tax Act, 2013, Tax Procedures Act, 2015, Excise Duty Act, 2015, Tax Appeals Tribunal Act, 2013 and Miscellaneous Fees and Levies Act, 2016.

We provide in this circular, an analysis of the changes introduced by the Finance Bill, 2022 (the Bill) that have direct impact on your business in Kenya and may come to effect by 1 July 2022 and 1 January 2023, upon enactment by Parliament ahead of the 30th June statutory deadline.

 

PROPOSED AMENDMENTS TO INCOME TAX ACT, CAP 470

  1. Increment of Capital Gains Tax from 5% to 15%

The Bill proposes to increase the rate of capital gains tax from 5 percent to 15 percent.  This is aimed at increasing revenue collections from the property sector and aligning the Kenyan capital gains tax rate with regional rates. The proposed rate change has however not considered inflation adjustment as is the case with regional practices.

Proposed effective date: 1 January 2023 

  1. Thin Capitalization

The thin capitalization provision in Section 16 (2) (j) of the Income Tax Act will be amended to exempt microfinance institutions licensed under the Microfinance Act, 2006 from thin capitalization rules.

Allowing of interest expense will come in handy for Microfinance Institutions since it is one of the major expenses for these entities.

Proposed effective date:  1 July 2022

  1. Increment of Digital Services Tax Rate from 1.5% to 3%

The Bill proposes to increase the digital service tax (DST) rate from the current 1.5% to 3%. Furthermore, in section 12 (E) of the Income Tax Act, the Bill proposes to exempt non-resident persons with permanent establishment in Kenya from DST obligation. The Kenya Revenue Authority (KRA) aims at increasing revenue collections from digital platforms.

Proposed effective date:  1 July 2022

  1. Ascertainment of Gains and Profits of Businesses in Non-preferential Tax Regimes

The Bill proposes to revoke section 18 (A) of the Income Tax Act and replace it with a new provision.

The new provision aims at widening the scope of transfer pricing transactions between resident persons and persons resident in a preferential regime to cover transactions between resident persons with:

  1. Non-resident person located in a preferential tax regime
  2. Related resident person
  • Permanent establishment of non-resident person based in Kenya where the non-resident person is located in a preferential tax regime

The Bill proposes to define “preferential tax regime” to mean any “Kenyan legislation or administrative practice which provides a preferential tax rate such as:

  • Foreign jurisdictions which do not tax income;
  • Special Economic Zone;
  • Foreign jurisdiction where income is taxed at a rate lower than 20%;
  • Bar access to banking information; or
  • Foreign jurisdiction which lacks transparency on corporate structure, ownership of legal entities, beneficial ownership of companies or income and mutual exchange of information.

Proposed effective date: 1 January 2023

  1. Taxation of Trusts

The Bill proposes to add registration of trusts as one of the transactions where tax personal identification number (PIN) will be required.

Furthermore, the Bill proposes to introduce the condition that trusts notify the Commissioner in the event of any changes on their particulars. The Bill proposes to revoke the exemption from tax of income derived from Kenya by a registered family trust. Consequently, income of a registered family trust will now be subject to tax.

Lastly, the Bill proposes to repeal exemptions from tax on the income of registered trusts where beneficiaries receive trust funds for educational, medical treatment or early adulthood purposes and on income paid to beneficiaries which is collectively below ten million in a year of income.

Proposed effective date: 1 July 2022

  1. Deduction of Donations to Charitable Organizations

The Bill proposes to replace section 15 (2) (w) of the Income Tax Act, which guides on allowable deductions with a new provision that proposes to allow deduction of donations (cash or in kind) made to any tax-exempt charitable organization irrespective of registration status under the Societies Act or Non –Governmental Organization Coordination Act or for projects approved by the Cabinet Secretary for National Treasury.

Currently, allowed tax deductible donations are in the nature of cash made to tax exempt charitable organizations registered either under the Societies Act or Non-Governmental Organization Act or for projects approved by the Cabinet Secretary for National Treasury.

Proposed effective date:  1 July 2022

  1. Deferment of Realized Foreign Losses

The Bill proposes to align provisions on deferment of realized foreign losses arising from loans of a person in control of a company to comply with the new thin capitalization rules.  The Bill proposes for the deferment of realized foreign exchange loss for a company whose gross interest payable to related persons and third parties exceeds 30% of the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) in any financial year.

Proposed effective date: 1 July 2022

  1. Country-by-Country Reporting by Multinational Enterprises

The Bill proposes to compel ultimate parent entities and constituent entities to file a master file and local file with the Commissioner in the prescribed format within 6 months of the last reporting financial year of the multinational enterprise group. The master file should capture:

  1. Detailed overview of the group
  2. Description of the supply chain of key products and services
  • Group growths engines
  1. Group’s research and development policy
  2. Intangible assets
  3. Group intercompany agreements
  • Description of each related entity and their contribution to the value chain
  • Financial details of the group, tax rulings
  1. Details on any transfer of intangible assets within the group

The local file should feature on information on:

  1. Activities of the resident constituent entity
  2. Management hierarchy of the resident constituent entity
  • International transactions and dues paid to resident entity
  1. Business strategies and competitive environment of the resident constituent entity

The Bill seeks to introduce a condition for multinational enterprises or constituent entity resident in Kenya to notify the Commissioner as to whether they are:

  • Surrogate parent entity
  • Ultimate Parent Entity (UPE) of the group
  • The name and tax residency of the constituent entity (UPE or surrogate parent entity)

The notification should be submitted within 12 months of the group’s financial reporting. The Bill prescribes the turnover threshold amount of Kshs 95 billion for multinational enterprises resident in Kenya outlining the group’s financial services in Kenya as well as in other jurisdictions where the group has taxable presence. The Bill proposes to impose penalties for non-compliance to be computed under Section 83 as well as 93 (a) of the Tax Procedures Act, 2015.

Proposed effective date: 1 July 2022

  1. Taxation of Gains arising from Financial Derivatives to Non-residents

The Bill proposes to amend the Income Tax Act and subject gains and profits accruing to non-resident persons from financial derivative transactions to tax. The gains will attract withholding rate at a rate of 15% of the gains where the non-resident person has no permanent establishment in Kenya.

The Cabinet Secretary has been empowered to draft regulations to guide on the taxation of financial derivatives. Gains will be deemed to have accrued in Kenya where a resident person has entered into a financial derivatives contract with a non-resident person.

Proposed effective date: 1 January 2023

  1. Definition of Permanent Home

The Bill proposes to introduce the definition of the term permanent home as being:

A place where an individual resides or which is available to an individual for residential purposes in Kenya or where in the opinion of the Commissioner, the place where the individual’s personal or economic interests are closest.”

The Income Tax Act was silent on the definition of the term permanent home hence the definition captured in the Bill will provide clarity during determination of tax residency matters for tax purposes. The Income Tax provides that one of the tests of determining the tax residency of an individual is, whether he has a permanent home in Kenya or was present in Kenya in the year of income under consideration.

Proposed effective date: 1 July 2022

  1. Employment Share Ownership Plans

The Bill proposes to amend section 5 of the Income Tax Act on the computation of taxable value of benefits accruing under employment share ownership plans. The Bill proposes that computation of value of the benefit shall be the difference between market value per share as per the date the employee exercises the option and the offer price as on the date when the option is availed by the employer.

Furthermore, the Bill proposes to repeal the requirement compelling employee share ownership plans to register with the Commissioner as collective investment scheme.  Lastly, the Bill proposes that the accrual of benefits from employee share ownership plans shall be conferred as from the date the employee exercises the option and not the vesting date.

Proposed effective date: 1 July 2022

  1. Amendment of insurance relief provisions

The Bill proposes to replace the term wife with the term ‘spouse’.  The Bill aims at making insurance relief provisions being applicable to both spouses.  The effect of the amendment will be that individual taxpayers, both male and female, will be eligible for the insurance relief where they pay life insurance premiums on their lives, spouses and children’s lives.

Proposed effective date: 1 July 2022

  1. Capital Allowances

The Bill proposes to amend the Second Schedule of the Income Tax Act to allow an investment allowance at the rate of 100% for capital expenditure incurred on hotel buildings and buildings used for manufacture where:

  1. Investment has been incurred within a special economic zone;
  2. The investment value outside Nairobi and Mombasa County in that year of income is at least Kshs 250 million; or
  • The cumulative investment value in the preceding three years outside Nairobi and Mombasa County is at least Kshs 2 billion

The Bill proposes to exclude investments which due to the nature of their business have to be based in places outside Nairobi and Mombasa counties from benefiting from 100% of investment allowance.

Proposed effective date: 1 July 2022

  1. Voluntary Tax Disclosure Program (VTDP)

The Bill proposes to extend the voluntary tax disclosure programme to holders of unclaimed financial assets who have not disclosed the assets to the Unclaimed Financial Assets Authority. The Bill proposes the waiver of outstanding penalties, fines, audit fees and interest for a period of twelve months for assets held up to 30 June 2022. Furthermore, the Bill proposes to cap penalties and interest so as not to exceed the value of the asset. The proposal is aimed at encouraging disclosure to the Unclaimed Financial Assets Authority.

Proposed effective date: 1 July 2022

 

PROPOSED AMENDMENTS TO THE VALUE ADDED TAX (VAT) ACT, 2013

  1. Exemptions from Value Added Tax

The Bill proposes to exempt for Value Added Tax purposes the following:

  • Plant and Machinery for manufacture of pharmaceutical products upon recommendation of the Cabinet Secretary responsible for health matters
  • Medical oxygen supplied to registered hospitals
  • Urine bags, adult diapers, artificial breasts, colostomy and ileostomy bags
  • Inputs used in the manufacture of passenger motor vehicles
  • Locally manufactured passenger motor vehicles. Currently, only local assembled motor vehicles for tourist transportations enjoy VAT exemption
  • Fuel pellets

Furthermore, the Bill proposes to repeal section 30 of the Value Added Tax on refund of tax paid in error and align the provisions with the Tax Procedures Act, 2015.  Consequently, a person who has paid VAT in error will be compelled to make an application for refund within six months under the Tax Procedures Act, 2015.

The Bill proposes a departure from the penalty regime in relation to import VAT provided for under East Africa Community Customs Management Act, 2004 by amending section 22 of the Value Added Tax Act, 2013 and providing for the application of Tax Procedures Act, 2015 in computation of penalties and interests. As a result, late payment penalty on import VAT will be 5% under the Tax Procedures Act, 2015 instead of 2% under the EACCMA.

The Bill also seeks to empower the Commissioner to demand additional documentation that may be required to prove claims for input VAT.  The effect will be that the Commissioner will have the power to demand more documentation than would ordinarily be requested so as to verify claims for input VAT deduction by taxpayers.

Proposed effective date: 1 July 2022

  1. Re-classification of Goods

The Bill proposes to subject to VAT at the rate of 16% the following:

  • Goods sold at duty free shops
  • Taxable goods for the direct and exclusive use in the construction and equipping of specialized hospitals
  • Taxable services for direct and exclusive use for the construction of hospitalized hospitals
  • The supply of maize flour, cassava flour, wheat flour and meslin flour
  • Apparel, clothing accessories and safety and protective equipment used in registered hospitals and clinics or by county government and local authorities in firefighting

Proposed effective date: 1 July 2022

  1. Digital Marketplace

The Bill proposes to review the definition of the term “digital marketplace” captured under section 5 (9) of the Value Added Tax Act, 2013 by repealing the term ‘other property”. Presently, the VAT Act defines a “digital marketplace” as referring to “an online platform which facilitates users to sell or provide services, goods or other property to other users.” Ambiguity arose as to the precise meaning of the term “other property”.

Furthermore, the Bill proposes to exempt internet, electronic network and digital marketplace supplies from reverse VAT upon importation of such services. The Bill proposes to exempt persons supplying imported digital services over the internet, or an electronic network or through digital market from registering from VAT.

Proposed effective date: 1 July 2022

 

PROPOSED AMENDMENTS TO THE EXCISE DUTY ACT, 2015

  1. Amendment of Second Schedule to Excise Duty Act

The Bill proposes to exempt from excise duty the following:

  • Locally manufactured passenger motor vehicles from current 20% to 35% depending on cc rating and fuel
  • Imported eggs for hatching by licensed hatcheries upon recommendation by the Cabinet Secretary in charge of livestock from current 25%
  • Neutral spirit imported or purchased locally by registered pharmaceutical manufacturers upon approval by the Commissioner General from current Kshs 278.70 per Liter

The Bill proposes to amend section 10 of the Excise Duty Act, 2015 so as to empower the Commissioner with the approval of the Cabinet Secretary of the National Treasury to exempt specified products from inflation adjustments after considering the prevailing economic circumstances in respect of the products. However, this proposal will be effective from 1 January 2023.

The Bill proposes a departure from the penalty regime provided under the East Africa Community Customs Management Act, 2004 for import excise duty by amending section 36 of the Excise Duty Act, 2015 and providing for the application of the Tax Procedure Act, 2015 in computation of penalties.

The Bill proposes to increase the excise duty rates on betting, gaming, price competition and lottery (excluding charitable organization) from 7.5% to 20%. The increase is aimed at reducing the harmful effects of these activities on vulnerable classes of the society such as the youth.

Furthermore, the Bill proposes to increase the excise duty rate levied on:

  • Imported sugar confectionary from Kshs 36.74 to Kshs 40.37 per kilogram
  • White chocolate, bloc chocolate and slabs from Kshs 220.31 to Kshs 242.29 per kilogram
  • Jewellery (local and imported) –The Bill proposes to raise excise duty rate from 10% to 15%
  • Nicotine products and nicotine substitutes intended for inhalation or oral application. The Bill proposes to increase excise duty from Kshs 1259.64 to Kshs 2500 per kilogram
  • Motorcycles of tariff no 8711 excluding locally assembled motorcycles and motorcycle ambulances – The Bill proposes to increase excise duty from Kshs 12,185.16 per unit to Kshs 13,403.64
  • Powdered beer from Kshs 121.85 to Kshs 131 per kilogram
  • Plain cigarettes from Kshs 2502.74 to Kshs 2752.97 per mile
  • Cigarette with filters from Kshs 3477.61 to Kshs 3825.99 per mile
  • Cigars, cheroots, cigarillos and tobacco substitutes from Kshs 13,906.04 to Kshs 13,296.6 per kilogram
  • Cosmetic and beauty products – The Bill proposes to increase excise duty rate from 10% to 15%
  • Fruit and vegetable juices from Kshs 12.17 to Kshs 13.30 per liter
  • Bottled, packaged waters and non – alcoholic beverages from Kshs 6.03 to Kshs 6.60 per liter
  • Beer and cider beverages from Kshs 121.85 to Kshs 134 per liter
  • Wines, fortified wines and alcoholic beverages obtained from fruit fermentation from Kshs 208.20 to Kshs 229 per liter

Proposed effective date: 1 July 2022

  1. Addition of New Excisable Goods

The Bill proposes to widen the scope of excisable goods and services to include:

  • Electronic cigarettes and other nicotine delivery services – Excise duty to be levied at the rate of 40%
  • Liquid nicotine for electronic cigarettes – Excise duty to be levied at Kshs 70 per milliliter
  • Ice cream and other edible ice irrespective of whether it contains cocoa of tariff no. 2105.00.00 – Excise duty to be levied at the rate of 15%
  • Advertisement fees for betting, gaming, lottery and prize competition and alcoholic beverages aired by radio and television stations. The excise duty will be levied at the rate of 15%
  • Imported potato, potato crisps and potato chips of tariff no 0710. 10.00, 2004.10.10, 2005.20.00
  • The Bill proposes to levy excise duty at the rate of 10% on plastics of tariff no 3923.90.90
  • All glass bottles irrespective of whether imported or local. The Bill proposes to subject excise duty on glass bottles at the rate of 25% including glass bottles imported from East Africa Community Partner States. However, glass bottles used in packaging of pharmaceutical products remain exempt.

Proposed effective date: 1 July 2022

 PROPOSED AMENDMENTS TO THE TAX PROCEDURES ACT, 2015

  1. Repeal of Section 47 of the Tax Procedure Act

The Bill proposes to repeal the current provisions of section 47 of the Tax Procedures Act, 2015 on refund of overpaid tax and replace them with a new provision. The proposed section 47 avails taxpayers who have overpaid tax with the option of either applying the overpaid tax against future tax liabilities or applying for a cash refund of the overpaid tax within five years for income tax.

The Bill further proposes that where a taxpayer has overpaid instalment tax, the overpaid tax will be applied to offset the taxpayer’s future instalment tax liability. Failure by KRA to refund the overpaid tax within 2 years of application will attract interest at a rate of 1% per month on the amount due.

Lastly, the Bill proposes refund of overpaid tax in the case of VAT where applications are made within 6 months of the date of application.

Proposed effective date: 1 July 2022

  1. Objection Decision

The Bill proposes to amend section 51(4) of the Tax Procedures Act, 2015 and compel the Commissioner to notify taxpayers on the validity of their notices of objection within fourteen days. Presently, the Tax Procedures Act, 2015 is silent on the period within which the Commissioner should notify taxpayers whether notices of objection have been validly lodged.

Furthermore, the Bill proposes to compel the Commissioner to notify taxpayers within fourteen days of its decision where an application for time extension to lodge a notice of objection has been made. Section 51(6) of the Tax Procedures Act is silent on the period within which application for extension of time should be determined.

Lastly, the Bill proposes to compel the Commissioner to make an objection decision within sixty days from the date of receipt of a valid notice of objection. The proposal aims at facilitating efficiency and fast resolution of tax disputes

Proposed effective date: 1 July 2022

  1. Securities for Unpaid Tax Arrears

The Bill proposes to repeal section 40 of the Tax Procedures Act, 2015 and enlarge the ambit of property that the Commissioner can use as collateral for unpaid tax. The Bill proposes land, buildings, aircraft, ship, motor vehicle or any other property may be considered sufficient collateral.

The Bill proposes to empower the Commissioner the right to dispose property used as collateral where the taxpayer fails to settle outstanding tax liabilities within two months of being notified by the government registrar. This proposal aims at increasing revenue collections by enhancing recovery of tax arrears.  Presently, only land and buildings are held as security.

Proposed effective date: 1 July 2022

  1. Amendment of Statutory Instruments Act

The Bill proposes to amend section 21 of the Statutory Instruments Act, 2013 which provides for automatic repeal of statutory instruments. The Bill proposes to add a new section that will provide for a perpetual term for tax-related regulations. The Bill proposes that tax-related statutory instruments will be exempt from automatic expiry of ten years.

Proposed effective date:  1 July 2022 

  1. Refund of Tax Paid in Error

The Bill proposes to introduce a new section 47A in the Tax Procedures Act, 2015 to govern refund of tax paid in error.  The Bill defines tax paid in error as any tax paid which the Commissioner is satisfied ought not to have been paid.

Furthermore, it proposes to introduce a new section 47B in the Tax Procedures Act to govern refund of tax paid on exempted and zero-rated supplies. The Bill proposes to empower the Commissioner upon approval by the Cabinet Secretary of National Treasury to refund any tax paid in error in any circumstance where the supply is exempt or zero rated under the Act but such exemption or zero rating has not been approved within the specified period due to circumstances beyond the taxpayer’s control.

Proposed effective date:  1 July 2022

 

PROPOSED AMENDMENTS TO THE TAX APPEALS TRIBUNAL ACT, 2013

  1. Requirement to pay 50% upfront of the Disputed Tax as Deposit on Appeal

The Bill proposes to effect amendments on the Tax Appeals Tribunal Act, 2013 in a bid to introduce a condition that taxpayers pay the Commissioner a deposit of 50 % of the disputed tax to a special account at the Central Bank of Kenya prior to appeal to the High Court of Tribunal decision made in favour of the Commissioner. The requirement will be inapplicable where the appeal is filed by the Commissioner.

The Bill further proposes that the Commissioner will be required to reimburse successful taxpayers where the High Court rules in their favor within 30 days after issuance of a judgement. This new requirement has the potential of adversely affecting taxpayers’ right to access to justice enshrined under Article 48 of the 2010 Constitution. Consequently, the requirement will negatively affect cash flow of taxpayers’ businesses since tax disputes can extend for several years.

Proposed effective date:  1 July 2022

PROPOSED AMENDMENTS TO THE MISCELLANEOUS FEES AND LEVIES ACT

  1. Exemption from Railway Development Levy and Import Declaration Fee

The Bill proposes to exempt inputs and raw materials imported by licensed manufacturers of pharmaceutical companies from import declaration fee and railway development levy upon the recommendation of the Cabinet Secretary responsible for health.

Proposed effective date: 1 July 2022

  1. Inflationary Adjustments Timelines

The Bill proposes to alter the inflationary adjustments of export levy to a date not beyond 1 October of every financial year. Currently, the inflation adjustment of export levy takes place at the beginning of every financial year.

Proposed effective date:  1 July 2022

  1. Export Levy

The Bill proposes to reduce the export levy rate on raw animal hides and skins from 80% or USD 0.52 per kilogram to 50% or USD 0.32 per kilogram in a bid to stimulate exportation of hides and skins to foreign markets. Furthermore, the Bill proposes to subject iron ores and concentrates, including roasted iron pyrites of tariff number 2601 to export levy charges.

Proposed effective date:  1 July 2022

CONCLUSION

The Finance Bill, 2022 is currently under the public participation process where members of the public and stakeholders have been invited to submit their comments, opinions and suggestions on the bill via memoranda through email or hand delivery, to the National Assembly by 4 May 2022. Thereafter, the revised Bill will be enacted into a Finance Act by 30 June 2022 as provided for in the Public Finance Management Act, 2012.

Please do not hesitate to contact us, should you require further clarification on the circular and the proposed changes through any of our members below:

Moses Mwendwa Managing Director mmwendwa@czmkenya.com
     
Benson Njiru Director, Advisory & Tax benson.njiru@czmkenya.com
     
Betty Komen Tax Senior bettykomen@czmkenya.com
     
Kelvin Mwangi Tax Officer kmwangi@czmkenya.com
     
Martin Mugo Tax/ Legal edwinmugo165@gmail.com

 

 

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