Category Archives: Kenya taxation

KPMG on Kenya Taxes in 2020

Last month, Kenya’s President announced proposals to cushion residents from impacts of the Coronavirus that has affected many industries and companies by disrupting supply chains and reducing consumer spending. He cited measures such as reduction of income taxes, and Value-Added Tax (VAT goes down from 16% to 14%), that have now taken root in April 2020.

But the details of the proposal are now clear with the publication of the tax laws amendments. They are contained in a 97-page bill that is to be tabled at and debated at a special session of Kenya’s National Assembly (Parliament) on Wednesday, April 8, for their approval.

KPMG East Africa has nicely summarized some of the proposals in the bill, picking through the details. Some notable items are:

  • VAT: Items that were previously exempt including bread, milk cream, vaccines, and medicaments, move from the zero list to the VAT exempt list, and this may push up their costs.
  • Items that previously did not incur VAT but which will now be charged 14% include agricultural pest control products, tourism park fees, LPG, helicopters, mosquito nets, equipment for solar & wind energy, museum exhibits & specimens, tractors, clean cookstoves, insurance services, and helicopter leasing which previously did not attract VAT.
  • For investors: VAT is now charged on the transfer of a business as a going concern, as well as on assets transfers to real estate investment trusts (REIT’s) and asset-backed securities.
  • Income tax: Is reduced across different bands with those earning below Kshs 24,000 per month exempted from paying income tax, while the tax rate for top earners goes down from 30% to 25%.
  • Non-residents will pay 15% withholding tax on dividends they receive, an increase from the current 10%.
  • Corporate tax: This reduces from 30% to 25%.
  • Businesses earning between Kshs 500,000 to Kshs 50 million a year are to pay turnover tax, which will now be reduced from 3% to 1% of income, monthly. The previous upper limit was Kshs 5 million.
    It is now mandatory for businesses to keep records of all their transaction for 5 years
  • Anti-industry moves?: An electricity rebate for manufacturers has been ended, VAT has been introduced on goods used to build large industrial parks, and there will also be reductions of building investment allowances.
  • Kenya Revenue Authority: When KRA appoints banks as revenue collection agents, they are to remit collections to the Central Bank of Kenya within two days.
  • Removes a requirement that KRA publishes tax rulings in newspapers.
  • KRA may pay rewards of up to Kshs 500,000 for people who give information leading to tax law enforcement (i.e whistleblowers). 

The National Assembly will also consider regulations of a new Covid-19 Emergency Response Fund that the President announced on March 30. They will also dispense with appointments to the CDF board and the Teachers Service Commission, and consider any bills from the Senate.

So while Parliament debates this under the rush of emergency provisions, most of the clauses are financial items unrelated to Coronavirus.

Stanbic economic briefing for Kenya 2020

Standard Bank (Stanbic) Group Kenya released their Macroeconomic update in which they are cautiously optimistic about Kenya’s growth through the private sector. The presentation in Nairobi was done by Jibran Qureishi, the Regional Economist – Africa at Stanbic.

Highlights:

  • Stanbic economists believe that global growth will fall in 2020 and 2021 as central banks in advanced economies are tapped out and their ability to stimulate economies is limited. Chinese growth will slow to sub 6% in 2020 and be about 5.5% in 2021. Meanwhile, the US cut its rates three times last year but investments are still falling as the trade war with China has hurt growth.  
  • For Kenya, Stanbic expects 5.9% GDP growth in 2020, up from 5.6% in 2019. Three things that held back private sector over the last two years were interest rate caps, delayed payments by government and congestion at the Inland Container Depot (ICD) Nairobi.
  • Government policies should focus on private-sector driven economic growth.
    There is growth but where are jobs? Growth in the wrong place.  90% of new jobs are the informal sector and also in the service sector but these will not create a middle-income economy.
  • Tourism was resilient, earning $1.5 billion last year, but the potential is much larger and this depends on how much private investment the sector can attract. Kenya gets 2 million arrivals but Mauritius, Morocco, Egypt and South Africa get about 10 million in bad years.
  • Ambitious tax revenue targets embolden the government to spend more and tax revenue targets are still much larger than average collections.
  • If the government does not fix fiscal issues, this will lead to unpredictable tax rules which could hamper productive sectors
  • A move back to concessionary loans and away from commercial loans for the first time since the (President) Kibaki years is a welcome step.
  • The Standard Gauge Railway (SGR) may still get extended to Uganda but the government will have to build new ICD. It is not that China does not have money, but they are asking questions they should have asked 7-8 years ago.
  • Kenya traditional manufacturing has been an import-substitution model which has not really worked around the world. Better to shift from being protectionist and instead work towards growing exports which (excluding tea and remittances) have been stagnant – at $6 billion a year
  • Don’t focus on manufacturing too much and neglect agriculture, as a big part of that will come from agro-processing and adding value to agricultural produce.

Charles Mudiwa the CEO of Stanbic Kenya spoke of how the bank has aligned to the government’s agenda. They are a shareholder in the Kenya Mortgage Refinance Company, and 20% of their lending goes to manufacturing with another 9% going to agriculture & food security.

Stanbic was the lead arranger for the Acorn green bond that was listed on London’s LSE today. The bank also has a DADA program to promote women financially (with a goal to lend Kshs 20 billion) and is also supporting financial literacy training to musicians and Uber drivers.

Kenya Tax Changes in 2020

A look at some of the Tax changes that become effective on January 1, 2020, as a result of the Finance Bill 2019 that was signed by the President on 7 November 2019.

The highlight was the repeal of Section 33B of the Banking Act which had put an interest rate cap on commercial bank loans, but there are also other taxation clauses of note.

  • Import Declaration Fee levy has been increased from 2% to 3.5%. Also, the Railway Development Levy, which is an important component of paying for the SGR, has been increased from 1.5% to 2%.
  • Companies that list under the Nairobi Securities Exchange’s GEMS program for the next three years can be forgiven tax penalties and interest, provided they pay the principal amount. This move to encourage listing at the NSE became effective in November 2019. But if they delist within five years, that window lapses and all taxes due before listing will again become payable.
  • Taxes also go up for cigarettes, electronic cigarettes, fruit wines and spirits.
  • Motor vehicle excise taxes go up from 20 to 25% for cars over 1500 cc, and that for station wagons and race cars go up from 30 to 35%, but for electric-powered motor vehicles, that goes down from 20 to 10%.
  • Sports betting companies take another hit with a 20% tax lopped on to each bet amount, regardless of the outcome of the wager.
  • New economy taxes: The new year ushers in taxes on the digital economy market place – this encompasses “platforms that enable interaction between buyers and sellers of goods & services through electronic means” who are now liable for income tax and value-added tax (VAT). Along with that, a taxpayer PIN is mandatory when one is registering for a paybill and till numbers (to process mobile payments) through a telephone company
  • Real Estate Investment Trusts (REIT’s), which were exempt from corporate tax are now also exempt from income tax.
  • There is an income tax exemption for people who register under the Government’s Ajira Digital (online work) program from January 2020 to December 2022.
  • Green bonds: Interest income on all listed infrastructure bonds, or green bonds,that are a minimum three years to maturity will be exempt from income tax as will income on the National Housing Development Fund.
  • Turnover tax of 3% has been reintroduced and will be payable monthly by any business whose turnover does not exceed Kshs 5 million (~$50,000) in any year. EDIT – does not apply to companies already registered for VAT or those earning employment income rental income, engaged in management & professional services and limited liability companies. There is also a Presumptive Tax, a new tax that is 15% of the annual fee paid for a license e.g. to operate in Nairobi County and that can be offset when paying the turnover tax.
  • Environmental stuff: Plastic recycling companies will get a preferential corporate tax rate of 15% for five years and machinery and equipment used for plastic recycling plants are now VAT exempt. But, going the other way, equipment for the development of solar and wind energy, including batteries, which were previously exempt from VAT, now require the Cabinet Secretary for Energy to approve any such exemptions.
  • A taxpayer PIN is now mandatory when one is renewing membership in a professional body or with any licensing agency.
  • Mitumba and shipment consolidators are now recognized – if they have warehouses in the country of origin and Kenya, and have no history of dealing with substandard or counterfeit goods.

Meanwhile, the President said at the Jamhuri Day celebrations (on December 12) that a mortgage scheme he had previously proposed, and which entailed a deduction of 1.5% of salaries, would not be mandatory. Parliament resumes in February 2020 and we shall see if they amend that.

Extracts from reports done by KPMG East Africa, RSM Eastern Africa LLP and KN Law LLP .

Inside Kenya’s BBI (Building Bridges Initiative) Report.

Last week saw the release of a report from the Presidential Taskforce on the Building Bridges Initiative (BBI), that was the result of a March 2018 ‘handshake’ between President Uhuru Kenyatta and former Prime Minister Raila Odinga who had led different parties into the 2017 Kenya general elections.

The document is sub-titled Building Bridges to a United Kenya: from a nation of blood ties to a nation of ideals and its authors claim to have incorporated the views of about 7,000 Kenyans from all 47 counties.

One of the summarized findings was that elections are too divisive – and the country’s economy gets three good years that are interrupted by two-year blocks of intense electioneering campaigns.

Anyway, on to an alphabetical look at some of the Building Bridges Initiative (BBI) Report clauses.

Anti-Money Laundering: A bank involved in corrupt transactions should be made to repay all the money laundered through it, with interest.

Audits: Devolve the Office of the Auditor-General to the counties. Also, projects initiated in the final year of an electoral cycle should receive extra scrutiny from the Controller of Budget and all oversight authorities.

Capitalism: We have confused value extraction with capitalism (and) we as a people must build an economy that is dominated by value creation and not value extraction.

CCTV: Link private CCTV of hotels, shopping centres, and other highly trafficked sites to the National Police Service to deter terrorism and crime.

Cyclists: Every new road in an urban area should be legally required to also have a sidewalk for pedestrians and specified lanes for cyclists, with clear signage.

Doing Business Rankings (not the World Bank ones): Develop and launch a measure of ease of doing business for small Kenyan businesses and not just foreign investors. This should be a comparative assessment published annually by the Kenya National Bureau of Statistics and broken down by counties, cities, and towns.

(Fighting) Corruption: One of the summarized findings was a need to reverse the Ndegwa Commission and ban all public officers from doing business with the government. Another is that no procurement officer should be at a post for more than two years.

e-Government: Make Kenya a 100% e-services nation by digitizing all government services, processes, payment systems, and record-keeping. This should include the ability to offer Kenyans digital identities, e-health records and Kenyans should be able to vote digitally.

(Attitude to) Free Money: When money is known as ‘pesa ya serikali’ (Government money), it is something to plunder not respect; indeed, people who try to save public money are dismissed and even rebuked.

(Use of) Government Services: dubbed “skin in the game of leadership” – all ministers and county executives and leaders should use the services that they manage on behalf of all Kenyans. E.g. the children of the education minister should attend public schools and the health minister should use public health facilities.

History (of Kenya): President Uhuru Kenyatta should commission an official accurate History of Kenya, going back 1,000 years, whose production will be led by an Office of the Historian resident in the National Archives.

(Digitization of) Land Records: Complete the digitization of land ownership and give the public access to the database. Also, map and publicize government-owned land open for commercial leasing under simple and enforceable terms.

Loan Apps: Properly regulate loan apps which are driving up indebtedness of poor Kenyans to destructive effect with their shylock-level interest rates and borrowing from multiple platforms.

Marginalization: The marginalized should not marginalize others – strong evidence was presented that some communities that complained about marginalization at the national level were themselves guilty of marginalizing minorities in their respective counties.

Media: Kenya needs media that uplifts through investing in quality local content (and) should build programming around Kenyan histories and showing what is exceptional.

Mining: Concessional agreements, policies and regulations in mining and oil should be made public in an accessible manner, including clear accounting for the public participation and environmental impact assessments.

New bodies proposed in the BBI Report:
• A Health Service Commission to look at the human resourcing in the counties.
• A unified and assertive food safety and regulatory body to ensure Kenyan food becomes safe.
• Nairobi be accorded a special status as a capital city that allows the National Government to maintain it as a capital city and as a diplomatic hub.
• A commission to address current boundary conflicts until they are solved.
• (Compel the) Private sector to form a national, non-profit foundation, chaired by the President, that provides mentoring and support to aspiring business owners aged 18–35. It should match the young entrepreneurs with a business development advisor and a nationwide network of volunteer mentors.
• A Government-run national lottery to replace the private betting industry (which is leading to hopelessness and greater poverty)
• A Sovereign Fund that allows for savings in case of emergencies or extraordinary circumstances.
• An Office of the Public Participation Rapporteur mandated to conduct all public participation on behalf of governmental entities at the national and devolved units.
• A Prime Minister, appointed by the President, from the majority party in Parliament.
• A Department of Happiness, Wellness, and Mental Health in the Ministry of Health.
• Baraza la Washauri: The President should benefit from the private advice of eminent, experienced, and honourable citizens serving as a Council of Advisors on a non-salaried basis.

NHIF: The National Hospital Insurance Fund administrative costs should be cut down to 5%-10%. Currently, this is at about 18%.

Privatization: Expedite the privatization of Government shareholding in assets not delivering value to the public and undertake parastatal reforms.
The findings are further summarized to include “parastatals carrying out County functions should be either wound up or restructured.”

Revenue allocation: Public resources should follow people not land mass. Health, agriculture, and service delivery are also most important than land mass.

Taxation: Have a “flat tax” for every income category above a living wage/income of Kshs 30,000 (~$300) – to reduce tax fraud, encourage compliance, and cut down on corruption in the assessment of taxes.

Tax-cuts:
• Minimize taxation of new and small businesses by giving them a tax holiday of at least seven years as a support to youth entrepreneurship and job creation.
• Cut taxes in relation to Auditor-General audits .. money should remain in Kenyans’ pockets until there is more accountability and governance on its use at the National and County levels
• Also no double taxation and double regulation at the National and County level.

Wealth Declarations: These should be made public and all senior leaders should publish written statements on how they acquired wealth over Kshs 50 million (~$500,000) and have this available on government websites, along with details of shareholdings, partnerships, directorships etc.

(Reward) Whistleblowers: Offer a 5% share of proceeds recovered from anti-corruption prosecutions or actions to the whistleblower whose information is necessary to the success of the asset seizure or successful prosecution.

White-elephants: To stop the abandonment of incomplete projects with each change of administration, the Treasury should not release monies to the new Governor before obtaining a list of incomplete projects and a plan for their completion.

Way forward: In the BBI report, there is no mention about a public referendum, the TJRC report, and very little about land and historical injustices. It also does not address much on legislative issues such as the two-thirds gender rule, and disputes between the Senate and the National Assembly. Parliament breaks for a two-month Christmas holiday this week, during which the BBI debate is sure to be a topic of much discussion up to February 2020 and beyond.

Kenya Political Party Financing in 2019

What’s to be learnt about the state of political party finance in Kenya? Some parties have published their unofficial financial results for the year 2019.

Jubilee: The ruling party has income of  Kshs 339 million, that includes 240 million from the Political Parties Fund (PPF) and 98 million from members. They spent 80 million on rent, down from 90 million, 173M on general  expenses and 81 million on secretariat staff and executives.  They have 16 million of property.

ODM: The main opposition party received Kshs 112 million from the Political Parties Fund, same as last year, and donations of 78M. They have also booked an astronomical accrued amount from the government of Kshs 6.47 billion. They spent 170 million on administrative expenses, 19M on campaigns, 11M on party policy, 10M on conferences, 3M on branch coordination and just 712,000 on civic education. The amount they are claiming from the government is also listed as a current asset and bumps up their balance sheet from 119 million last year, to 6.5 billion.

Other Parties: Meanwhile other parties have been silent on their finances, but are active in other areas. These include the former ruling party – Party of National Unity, which has changed its officials. New parties have been formed this year  include  Transformation National Alliance Party of Kenya (TNAP) with “money bills” as its party symbol, the Democratic Action Party Kenya and the National Ordinary People Empowerment Union (NOPEU).

Summary of results:

1. Party coalitions are dead:  The party coalitions put together for elections appear to have fallen apart. ODM has stopped making payments to its coalition partners and no longer provides for them as they did in their earlier accounts.

2 Expensive secretariats: The amount at Jubilee of 81M  is down from 141M last year and which was a sharp rise from 28M in the previous year. That may coincide with hiring for the 2017 election period. Usually, party activities go into a lull after elections, until the next election cycle. In Kenya, this is set for 2022 unless another constitutional referendum is engineered to happen before that by political leaders.  At ODM, their property assets went up from 8M to 185M. in September 2019 they relocated their headquarters from Orange house to Chungwa House ay Loiyangalani  Drive in Lavington.

Old Pic from the State House FB page

3. Parties IPO: ODM has sued the government for not paying it the amount of Kshs 6.4 billion which it says dates back to when parliament came up with the  political parties act.   

But the National Treasury has been saying it cannot afford  to fund the political parties to the tune of 0.3% of the budget as parliamentarians had their parties, without impeding their constitutional requirement  to also fund the county governments.  Treasury has been allocating Kshs 300 million instead of 3.6 billion a year to the Political Parties Fund.

4. If that payment ever materializes, ODM’s coalition partners, have stated that they will stake a claim for a slice of that windfall. 

EDIT – September 2020: For the first quarter of 2020/2021, the Political Parties Fund to pay the Jubilee Party Kshs 161 million and the Orange Democratic Movement party, Kshs 75 million.