The Kenya government, through the National Treasury, is proposing some long overdue changes to the country’s income tax laws, which are contained in a draft bill that will be submitted to Parliament.
The bill has new clauses that affect transfer pricing, new extractive (oil & gas) industries, phase out of turnover tax, and an apparent tax cuts. It comes after other recent changes to the tax code. Kenya also has an ongoing waiver and amnesty program for income tax and assets held outside Kenya to be declared and repatriated to the Kenya Revenue Authority (KRA) by June 30.
Leading accounting and audit firms such as KPMG, PWC, and Deloitte have looked deep into the clauses, and these are some of their findings:
Companies are to produce and maintain transfer pricing documentation and policies in place for the year of income.
The withholding tax threshold of Kshs 24,000 had been deleted.
Payments to non-resident petroleum contractors will be 20% (up rom the current 12.5%)
Developers who build over 400 houses to pay taxes of 15% on gains.
Micro-finance institutions (MFI’s) interest will be exempt from withholding tax.
Sports clubs & associations will get taxed on entrance fees and subscriptions.
Farms, warehouses or doing consultancy work for more than 91 days in a year are now considered permanent establishments. KPMG comment – This will require non-resident persons doing business in Kenya to re-think their operational models.
A listed company will pay 25% taxes for five years if 40% of its shares are floated. KPMG comment – this will reduce the impact of taxation as an incentive to list.
Income tax rate of 35% on more than Kshs 750,000 (~$7,500) per month
Non-residents’ who receive their pensions in Kenya will pay a tax of 10% on transfers (up from 5%)
A higher corporate tax of 35% for large companies with taxable income over Kshs 500 million (~$5 million).
Real-estate capital gains tax of 20% (up from the current 5%). Deloitte comment – Though the increment is quite steep, it enhances equity considering that CGT is regarded as a tax on wealth.
Equality: Each person in a marriage is now required to file their own tax returns: no more cases of wives having their incomes filed under husband’s income tax returns.
Mining & Oil: Losses can be carried forward for a maximum of 14 years (There is no current cap)
EPZ holiday removed: Now EPZ’s will pay 10% tax for the first 10 years, and 15% for the next ten years (other companies pay 30% corporate tax).
SACCO’s: Cooperative societies to pay a withholding tax on dividends and bonuses of 10% (up from the current 5%)
Subsidiaries in Kenya to pay 10% tax on dividends remitted to the parent companies.
E-commerce: The Treasury Cabinet Secretary will be allowed to introduce taxes on digital platforms.
Capital allowances reduced: The 150% allowance for investments outside cities has been removed, those for filming equipment reduced from 100% to 50%, and educational institutions from 50% to 10%.
Small businesses, that are licensed by counties, will pay a presumptive tax of 15% of the business permit fee. Deloitte comment – (this) replace the turnover tax, currently at the rate of 3% of a person’s turnover (KRA has faced challenges collecting) .. will require collaboration with the county governments.
All medical insurance paid by employers for employees is now tax-exempt (even for expatriate staff) and age limits for children covered goes up from 21 to 24 years.
A withholding tax of 5% will be levied on payments to foreign insurance companies. PWC comment – this is aimed at promoting local insurance companies.
Income tax exemptions that have been dropped include income of the Export-Import Bank of the USA (relates to Kenya Airways?). Also on the income of stockbrokers from trading in listed shares. PWC comment – this may have a negative impact on the growth of the capital markets in Kenya;
20% withholding tax on payment to non-Kenyan companies for horticultural exports.
20% withholding tax on payment of air-tickets to non-resident agents. PWC comment – may lead to increase in airline ticket prices in Kenya which may affect competitiveness of local airlines.
They also looked at other recent tax adjustments which PWC notes will mainly alleviate the government from paying VAT refunds.
Milk, maize, bread, bottled water, will all cost more after moving from “0%” VAT to “exempt” VAT as importers will pass on non-recoverable VAT to consumers.
Same for LPG gas, some medicines and agricultural pest control inputs.
Making housing affordable. PWC comment – the Government is also proposing a stamp duty exemption for the purchase of a house by a first time home owner under an affordable housing scheme
Betting/Gambling: For winnings, a 20% tax will be deducted at source i.e the betting company) on any prizes (this is up from the current 5%)
Other Clauses in the Income Tax bill
Parent companies are to file country-by-country reports with KRA within 12 months of year-end.
No capital gains tax is due on land if it is compulsorily acquired by the government.
No capital gains on listed securities.
While there is a new 35% tax for the rich, the income tax bill appears to lower taxes for the low-income. e.g. someone earning Kshs 40,000 (~$400) per month, who pays 5,932 in tax per month now after personal relief, will have a lower tax burden. Income tax bands are expanded in the 10% range (now up to 13,000 from the previous 10,000) and there is also a higher relief of Kshs 1,408 versus the current 1,162) and the resulting net tax for the person will now be Kshs 5,009 for the month – a 15% income tax cut?.
Tax rate of 15% for five years for local vehicle assemblers. This can be extended by another 5 years if the company achieves 50% local content value in the vehicles.
Taxes waived on the income of disabled persons, amateur sports associations, and NGO’s (relief, poverty, religion, distress) whose regional headquarters are located in Kenya.
Finally, other stakeholders are invited to review the proposed changes to the 103-page income tax bill and submit comments via email to ITReview2017_at_treasury.go.ke by May 24.
Companies: Last November, KPMG and H2 Ventures released a report listing their fourth annual fintech innovators (‘Fintech100’) comprising 50 established companies and 50 emerging companies to watch in Fintech. The companies are innovation across sector like banking, payments, remittances, spending, artificial intelligence, data management, and insurance.
They noted that China continues to dominate the fintech landscape, with 5 of the top 10 companies on the list. Digital or new banks in the list include Solaris Bank, Nu Bank, and Atom Bank.
Some notable companies on the list;
ZhongAn (online property insurance)
Stripe (frictionless financial transactions)
OurCrowd provides an equity crowdfunding platform for accredited investors to access and invest in Israeli companies)
Circle (free international remittance via email)
Xapo allows users to utilize their bitcoins while Xapo safely stores them)
Future Finance (gives students loans of 2,000 to 40,000 pound, within 24 hours that can be paid over 5 years)
Coinbase (enables digital currency transactions)
AfterPay Touch (from Australia gives online shopping users an option to spread purchases across four equal installments)
Robinhood (free stock trading of US stock and ETF’s)
Alan (Europe’s first digital health insurance company)
Bud (enables users to combine bank accounts and get personalised insights from a single source)
Capital Float (from India provides collateral-free working capital loans to small businesses within 3 days)
Cuvva (provides short-term, flexible car insurance to consumer groups, including taxi- drivers that range from 1 hour to 28 days)
Flutterwave (from Nigeria, is in over 36 African countries, enables individuals and businesses to accept online and offline payments)
GrassRoots Bima (from Kenya matches customers with micro-insurance products – known as WazInsure)
KredX (from India matches SMEs seeking working capital with investors looking for above-average yield on short-term investments)
Leveris (banking platform for digital retail banks)
Riby (Nigeria cooperatives enabler)
Sensibill (allows bank customers to get their receipts in a few different ways)
SoCash (addresses cash logistics issues for banks)
Token (an API banking platform)
Valiant Finance (an online broking platform for SME’s)
Influencers: Also, Jay Palter has a list of 195 fintech influencers for the year 2018; have only heard of a few – Brett King (who visited and spoke in Nairobi in January 2017), Yann Ranchere, Elon Musk and Vinod Khosla, but will check out the rest.
Also, the new CB Insights report on fintech observations and trends to watch in 2018 cites:
No billion-dollar fintech M&A in 2017
Chinese firms drove fintech IPOs in 2017
Europe saw record for fintech investing in 2017, as Asia and the US saw fintech funding recede
Amazon gets more aggressive in fintech — outside of the US, but Amazon’s US efforts are a far cry from Tencent and Ant Financial’s global fintech forays in China
The largest deals in 2017 went to companies providing insurance…
Startups are allowing Chinese investors to access overseas securities and In 2017, Ant Financial’s Yu’e Bao became the largest money market fund in the world
Banks forgo partnering in favor of fighting fintech with fintech
Kenyan banks have been given more time to implement increased provisions as part of the capital compliance in new accounting rules IFRS9.
According to KPMG IFRS9 is still effective as at 1 January 2018 for all entities reporting under International Financial Reporting Standards (IFRS), which includes companies in Kenya. However, because IFRS 9 is likely to have a significant negative impact on banks’ capital adequacy ratios, CBK has given banks a 5 year period in this regard to meet the resulting capital requirements from implementation of IFRS 9. In practice, this means that CBK will allow Banks to stagger the effect of the increase in provisions on capital adequacy ratios over 5 years.
Last year, KPMG joined Barclays Kenya in unveiling IFRS 9 by giving the perspective from the auditor’s side on how they were assisting banks to prepare for the change over including reconciling the enormous amounts of data called for by IFRS9 rules and working with banks to develop models including for better management decision-making and provisions.
See the KPMG IFRS page with stories on how “All corporates need to assess the impact of IFRS 9” and “How corporates might be affected” as well as the recently issued guidelines from the Institute of Certified Public Accountants of Kenya (ICPAK) on the requirements of IFRS 9.
Barclays Kenya held a workshop session in Nairobi today to explain about the coming of IFRS9, a set of new accounting standards that will replace IAS 39 on January 1, 2018. which will have a great impact on banks, their capital, customer assessment and ultimately their profits.
All institutions will adopt the impairment standard in 2018.
One challenge will be on how to report for impairment: Banks will have to do three sets of accounts, one for impairment according to Central Bank of Kenya (CBK) rules, one for the Kenya Revenue Authority to calculate taxes on profit after impairment, and another for Impairment according to IFRS9. This makes compliance a costly affair.
IFRS9 is data intensive, so auditors will be concerned with the quality of data and reconciling it to bank financial statements. They will have to trust that management is providing the right data to make decisions, and if not, they will engage with the bank board, then the bank regulator (CBK).
Banks need systems that are able to capture a lot of this customer data and products and come up with impairment models.
Banks will use predictive analytics, and big data to manage risk in customer lending.
IFRS9 brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them
Expect a change from the current practice of using credit reference more from the negative perspective (a blacklist of borrowers) to a good one (banks will check to see who has been paying on time and offer them better rates)
Collection strategies will become very important, given the financial impact of IFRS9 for defaults over 30 days and 90 days.
Kenyan bankers are working to enable customers to get access to their own data and shop for products that will be easy to compare across different banks. This will be an enhancement of the loan calculatorthat the bankers association rolled out earlier.
IFRS9 seems to give an incentive for banks to lend shorter duration loans.
IFRS9 gives incentive to shorter loans
With IFRS9 banks estimate the credit risk of an instrument, at the point of origination – so losses are recognized earlier.
Previously, under IAS 39. banks only recognized a loss once an event occurred e.g customer does not pay a loan for many months. Now banks will have to expect and estimate some defaults and recognize the loss upfront.
Under IFRS9, accounting provisions are expected to be higher than the current regulatory provisions.
Financial Statement Changes
From day one of IFRS9, there will be an impact on retained earnings and a reduction in Tier 1 capital at all banks
Under IFRS9, letter of credit, financial guarantees, performance guarantees, unused credit cards, non-traded government bonds will also be used to calculate impairment.
Studies show that IFRS9 running concurrently with IAS 39 can impact on the capital of a bank by between 25 to 100 basis points.
Are government securities still risk-free for local traders and investors? Not so under IFRS9. But since Kenya has never defaulted on debt so IFRS9, provisioning will be minimal compared to bonds of some other nations
On 1 Jan 2018, international accounting standard IFRS9 will replace IAS 39.
Kenyans banks are at a fairly satisfactory stage in terms of getting ready for IFRS9 with Tier I banks, and those with global parentage at an advanced stage compared to local indigenous banks e.g. Barclays has been working on IFRS9 for two years
ICPAK (Institute of Certified Public Accountants of Kenya) is working on. rules for the consistent and uniform application of the IFRS9 standard and these will be ready by the end of October.
ICPAK will have other forums to further explain IFRS9 as will the Central Bank.
CBK will come up with new classification of loans to replace the current measures of normal, watch, sub-standard, loss etc..
Last week brought news that Co-Operative Bank had a new Chairman – John Murugu, who has previously worked at Treasury and CBK, is to take over as chairman on October 1, 2017, replacing Stanley Muchiri who is retiring after attaining the mandatory age of 70.
The age of seventy as a cap for directors to serve on corporate boards has been paid lip service, until recently. But this year has seen prominent septuagenarians (70+ years) exit from financial firm boards including Peter Munga as Chairman at Equity Bank Group, Francis Muthaura as Chairman of Britam Holdings and now Mr. Muchiri who joined the board of Cooperative in 1986 and became Chairman in 2002. There could even be one more at Centum Investments with regard to top shareholder and director, Dr. Chris Kirubi who is also a former Chairman of the firm.
Dr. Kirubi was re-elected to the board in 2015, but the Centum AGM next week, where three other directors – Dr. Jim McFie, Henry Njoroge, Imtiaz Khan, all retire from the board, has an oddly-worded resolution – “Director above the age of 70 Years” Pursuant to paragraph 2.5.1 of the Code of Corporate Governance Practices for Issuers of Securities to the Public 2015, to approve the continuation in office as a Director by Dr. Christopher John Kirubi, who has attained the age of seventy (70) years, until he next comes up for retirement by rotation.
Section 2.5.1 of the Capital Markets Authority (CMA)Code of Corporate Governance Practices for Issuers of Securities states that it is desirable for board members to retire at the age of seventy years. Other changes in the code which are now been enforced more strictly include:
The Board shall rotate independent auditors every six to nine years (this is now happening at some banks that have had the same auditors for more than a decade),
Auditors now narrate in the annual report to shareholders on key audit matters they encountered the company.
The status of Independent directors shall be checked annually, and they must not be associated by way of being an advisor to the company, or having a relationship – business or personal, with major shareholders or have cross-directorships with other directors.
A director of a listed company (except a corporate director) shall not hold such position in more than three public listed companies at any one time.
Independent directors can’t serve for more than nine years.
That a comprehensive independent legal audit is carried out at least once every two years by a legal professional in good standing with the Law Society of Kenya.
The Chairperson must be non-executive and not involved in day-to-day running of the business ( e.g. there wide expectations that Michael Joseph would play such a role as Kenya Airways chairman).
Publication of director resignations in the newspaper.
More engagement with institutional investors and media.