The Tax Laws (Amendment) (No. 2) Bill, 2020 was passed by Parliament on 22nd December 2020, assented by the Kenyan President to the Tax Laws (Amendment) (No. 2) Act, 2020 (the Act) on 23rd December 2020 and published on 24th December 2020, with respect to individual income tax rates, corporation tax rate, VAT and minimum tax.
We provide a summary and analysis of the changes introduced by the Tax Laws Amendment (No. 2) Act, 2020 and a recap of other notable tax and regulatory changes that became effective on 1st January 2021, that have a direct effect on your business in Kenya.
THE TAX LAWS (AMENDMENT) (NO. 2) ACT 2020
- Individual Income Tax Rates
The Act reinstated the highest individual income tax band to 30% from the 25%. The revised tax bands have eliminated two tax bands that were previously available, that is, 15% and 20%. The lowest tax band has been raised from Ksh 12,298 to Ksh 24,000 per month and the highest tax band lowered from Ksh 47,059 to Ksh 32,333 per month. However, the increase of the personal relief to Ksh 2,400 per month has a neutralizing effect on the highest tax band adjustment, resulting in an immaterial effect on the taxes payable by individuals and their net income as compared to the pre-Covid-19 individual income tax bands.
Individual Income Tax Bands and applicable tax rates
|On the First Ksh 24,000 per month or Ksh 288,000 per annum
|On the next Ksh 8,333 per month or Ksh 100,000 per annum
|On all income amounts in excess of Ksh 32,333 per month or Ksh 388,000 per annum
The applicable monthly personal relief is Ksh 2,400 per month or Ksh 28,800 per annum.
- Corporation Tax Rate
The Act reinstated the resident corporate income tax rate to 30% from 25% for the year of income 2021 and subsequent years.
The Tax Laws (Amendment) (No. 2) Bill, 2020 had a provision that the reduced corporation tax rate of 25% shall apply to the income earned from the 25th April 2020 to 31st December 2020; however, this provision was deleted by Parliament in the Act. This implies that the reduced corporation tax rate of 25% is applicable to all years of income 2020, including the non-December year-ends. The companies with January 2020 to June 2020, year-ends that had calculated their taxes using the corporate income tax rate of 30% as per the Return Form, need to amend their tax returns and apply the reduced tax rate of 25%.
- The Minimum Tax
The Finance Act, 2020 introduced a Minimum Tax, which is a base income tax, payable by all companies regardless of whether or not they make profit. The minimum tax rate is 1% of the gross turnover of the company and took effect on 1st January 2021. The minimum tax shall be payable by the 20th day of the 4th, 6th, 9th and 12th month of the accounting period.
The Act has rectified a drafting error in the Finance Act, 2020 which introduced the minimum tax by ascertaining that the minimum tax is payable when the installment tax is lower than 1% of the gross turnover of an entity. What this implies to businesses is that the 2021 quarterly corporation tax payments are supposed to be based on the higher of 2020 tax assessment increased by a margin of 10% (installment tax) or 1% of the current year’s turnover (minimum tax).
The Act also introduced the following new exemptions from minimum tax, in addition to the six exemptions communicated in our update of July 2020:
- Persons engaged in business whose retail price is controlled by government for example oil/fuel marketers whose prices are controlled by EPRA.
- Persons engaged in insurance business this will be mainly insurance companies and reinsurance companies (insurance brokers are not included);
The introduction of the minimum tax is aimed at expanding the tax base and ensuring that companies that make perennial losses contribute towards provision of services by the Government. The rationale for this tax is that even where companies are making losses, they are enjoying services, whose financing continue being serviced by the Government. The minimum tax has however received criticism from various quarters due to the likely negative impact on sectors that lead in job creation and provision of essential services.
- Value Added Tax
The VAT rate was reinstated to 16% from 14% through Legal Notice No. 206 of 2020 on Value Added Tax, in accordance with the VAT Act, 2013.
The Act also amended section 17 of the VAT Act, 2013 which focuses on the deduction of input tax, by introducing a new provision as outlined below;
(8) Notwithstanding the provisions of this section, a registered person who is a manufacturer may make a deduction for input tax with respect to taxable supplies made to an official aid funded project as may be approved by the Cabinet Secretary in accordance with the First Schedule.
The amendment seeks to encourage local manufacturers to make supplies to official aid funded projects by allowing them to claim input tax, which they were previously not able to claim since the supplies to official aid funded projects are specified as VAT exempt and as such, the supplies were not entitled to claim related input tax. This is a welcome provision that is in line with the President’s Big Four Agenda, to stimulate the nation’s manufacturing sector. However, any tax change should be fair and this provision should have been availed to all sectors supplying to official aid funded projects.
OTHER NOTABLE CHANGES THAT BECAME EFFECTIVE IN JANUARY 2021
The year 2020 had far-reaching tax changes in Kenya, characterized by the introduction of three taxation legislations, the Tax Laws (Amendment) Act, 2020, the Finance Act, 2020 and the Tax Laws (Amendment) (No. 2) Act, 2020. There were other regulations and compliance requirements introduced in 2020 such as the Unified Payroll Return, the Business Laws (Amendment) (No. 2) Bill, 2020 and the Companies (Beneficial Ownership Information) Regulations, 2020 taking effect in January 2021.
Below is a glimpse of the other changes that became effective in January 2021.
- Digital Service Tax
Kenya has introduced tax on digital services from two perspectives; an income tax perspective and VAT perspective. The Finance Act, 2020 introduced a digital services tax (DST) on income from services provided through a digital marketplace in Kenya at the rate of 1.5% on the gross transactional value, which became effective on 1st January 2021. This was followed by the issuance of the Income Tax (Digital Service Tax) Regulations, 2020 that became effective on 2nd January 2021.
The DST shall be payable by the digital service providers, the digital marketplace providers or their tax representative. DST paid by a non-resident person without a permanent establishment in Kenya is a final tax. On the other hand, DST paid under this regime by a resident person or a permanent establishment of a non-resident person, shall be offset against the income tax payable for that year of income.
It is noteworthy that online services, which facilitate payments, lending or trading of financial instruments, commodities or foreign exchange carried out by licensed financial institutions or approved financial service providers are exempt from DST.
From a VAT perspective, Value Added Tax (Digital Marketplace Supply) Regulations, 2020 were issued in September 2020 with suppliers of digital services expected to register within six months of the publication of the Regulations. The Regulations stipulate that VAT is chargeable on taxable services supplied in Kenya through a digital marketplace under a Business-to-Customer (B2C) transaction. Business-to-Business (B2B) supplies are treated as imported services, which are subject to reverse charge VAT. Taxpayers who operate in the digital space and those who render services digitally should review how the introduction of DST will impact their operations.
- Voluntary Tax Disclosure Programme
The Finance Act, 2020 introduced a Voluntary Tax Disclosure Program (VTDP). The program, which will run for a three-year period with effect from 1st January 2021, will cover all tax heads; income taxes, PAYE, VAT and excise duty. Under the VTDP:
- A taxpayer will need to make an application (in the prescribed form) to the KRA, disclose all related material facts and pay the principal tax due;
- A waiver of penalties and interest will be granted to taxpayers at a rate of 100%, 50% and 25% for disclosures made in 2021, 2022 and 2023 respectively;
- Income of a taxpayer under audit (or in receipt of a notice of intention to audit) by the KRA will not be eligible for the VTDP;
- Upon granting of the relief, the taxpayer and KRA will enter into an agreement setting out the terms of the payment;
- KRA will also have a right to withdraw the relief if they establish that not all material facts were disclosed and this could lead to additional tax assessment and prosecution.
The program will give taxpayers an opportunity to review and correct any tax compliance oversights that may have occurred over the past tax periods of up to five years prior to 1st July 2020, that is from 1st July 2015 to 30th June 2020. Taxpayers are encouraged to participate in this program.
- Implementation of the Unified Payroll Return (NITA, PAYE, NHIF and NSSF)
The Kenya Revenue Authority (KRA) and the National Industrial Training Authority (NITA) have developed a Unified Payroll Return (UPR) for joint declaration of PAYE and Industrial Training Levy contributions via iTax system effective January 2021.
This is one of the initiatives under the Government of Kenya “Ease of Doing Business” agenda aimed at simplifying the process of paying NITA training levy by making it a one-off annual payment and reducing employer’s compliance efforts and costs. While this is the aim, the real driving force is the low level of compliance, since NITA is the statutory contribution most affected by non-remittance because it is a direct cost to employers as opposed to PAYE, which is borne by employees.
The Industrial Training (Training Levy) (Amendment) Order, 2020 amended the principal order, the Industrial Training (Training Levy) Order, 2007. The amendment provides that the Industrial Training Levy Contributions be paid annually, by the 9th day of the subsequent month following the end of the employer’s accounting period/financial year at the rate of Ksh 600 per employee per annum or pro rata for the period of service (Ksh 50 per month per employee in the payroll).
Employers whose accounting period ended in December 2020, who had already filed the PAYE return without declaring the NITA details in sheet M1 are required to amend their PAYE returns and declare the Industrial Training Levy Contributions in sheet M1 of the PAYE return, in addition to other PAYE details already declared in the original return. They shall then make payments for the Contributions.
Employers who had paid part of the Industrial Training Levy Contributions to NITA directly for part of the accounting period 2020, are required to pay the outstanding months through the unified payroll return at the rate of Ksh 50 per month per employee by the 9th of the subsequent month following the end of the accounting period or financial year.
Late payments of the Industrial Training Levy Contributions are subject to late payment penalty of 5% per annum on a pro rata basis.
The Business Laws (Amendment) (No. 2) Bill, 2020 proposes to amend the National Social Security Fund (NSSF) Act and the National Hospital Insurance Fund (NHIF) Act, to provide for contributions under the Acts to be collected on the 9th day of the month for the purposes of harmonizing payroll deductions through the Unified Payroll Return. In near future, all the statutory deductions shall be declared jointly via the iTax system. These collaborations for joint declarations are a welcome move for they shall be instrumental in reducing employers’ compliance efforts and costs.
- Disclosure of Beneficial Ownership Information of Companies in Kenya
Kenya introduced section 93A of the Companies Act, 2015 in July 2019, through the Statute Law (Miscellaneous Amendments) Act, 2019. Section 93A provides that companies incorporated or registered in Kenya should keep a register of beneficial owners with the relevant information relating to such owners. Further, through a Legal Notice dated 18th February 2020, the Attorney General published the Companies (Beneficial Ownership Information) Regulations, 2020 (the Regulations) which gave effect to section 93A of the Companies Act.
The latest development in this area of the companies’ law is a public notice issued by the Registrar of Companies advising that the beneficial ownership e-register is operational as from 13th October 2020. As such, companies are required to update their beneficial ownership e-register by 31st January 2021. The disclosure of beneficial ownership information is expected to promote greater transparency within corporates in Kenya, by shedding light on true ownership structures within companies.
Under section 93A of the Companies Act, failure by a company to comply with the disclosure requirements is an offence which, on conviction, attracts a fine not exceeding Kenya Shillings Five Hundred Thousand (Ksh 500,000) payable by the company and each officer of the company in default. Further, if the non-compliance continues, the company and the officers shall be liable to an additional fine not exceeding Kenya Shillings Fifty Thousand (Ksh 50,000) per day. Therefore, company officers are required to take attendant steps to ensure compliance with the provisions of the Companies Act and the regulations.
Please do not hesitate to contact us at firstname.lastname@example.org, should you require further clarification on the circular and on the tax and regulatory changes.