Category Archives: Kenya taxation

EABL: Beer, Taxes, Innovations, Tanzania.

EABL released their financial results for their 2018 year to June this week. It was a tale of two halves with flat growth in the first half of the year which coincided with Kenya ’s prolonged electioneering period and which affected sales of its products such as Senator lager, an affordable beer brand.  But the second half of the year (January to June 2018) saw a more business-friendly environment and more money in consumers pockets.

EABL ended the year with 5% revenue growth to Kshs 73.5 billion and the star of the show for the company in 2017 was Tanzania which saw 41% growth, mainly driven by Serengeti Lite beer. Also, special innovations that contributed 22% to the results is one of the best performances in the world. At EABL, Tanzania’ grew to account for 11% of revenue while Kenya’s was 73%, and Uganda was at 16%.  Capital expenditure was Kshs 13 billion, up from the 5 billion the year before and Kshs 7.8 billion was due to the Kisumu plant which is expected to be opened later in 2018. While overall profit before tax for EABL was Kshs 11.7 billion, a decline of 12% from the year, the company will pay out the same Kshs 7.50 per share dividend to shareholders.

The EABL managers spoke of innovating to reach the 1 million consumers who attain the legal drinking age (18) every year in Kenya – and investment in existing brands, and rolling out new brands to win over changing customers tastes. They also made some excise tax savings in Uganda by moving some  Tusker and Guinness production there while in Kenya, EABL’s profit was weighed down by a Kshs 2 billion one-off provision for taxes that significantly reduced their final result. They said a stable tax environment would enable the company to generate more taxes for governments without causing consumers to pay more.  

Also that by doing more local production of beer and spirits at Ruaraka in Nairobi, at Tanzania, Uganda and soon at the new line at Kisumu has allowed them to bring global brands into countries and produce and offer them at local prices. In the 2019 financial year, they will commercialise the Kisumu brewery which will also benefit 15,000 farmers and generate over 100,000 direct and indirect jobs in the production and distribution chain of Senator beer from Kisumu.

Urban Inflation Index July 2018

The running urban inflation Index compares prices of common goods In Nairobi to what they cost one year ago, five years and ten years ago when the index started.
The  July 2018 index comes at a time when there are sensational headlines about quality and counterfeits that was triggered by the drought of 2017 and subsequent importation of foods including sugar late last year.

It has also tricked into crackdowns, indictments, arrests, and parallel investigations by the Police, tax authorities,  parliamentary committees and food safety regulators that has seen queries about tons of goods including sugar, fertilizer, animal feed, building materials, alcoholic spirits, (refilled) LPG gas, auto spares, and sports shoes among other common items – with confiscations at the Mombasa Port, airports like Eldoret and bazaars and shops in Nairobi which have resulted in some demonstrations by business traders.

On to the index.

More expensive

Staple Food: A 2 Kg pack of Unga is Kshs 98 today. Last year, it was at a government-subsidized price of Kshs 90. In 2013 it was 104, and ten years ago, an Unga pack was Kshs 73.

Beer/Entertainment: A bottle of Tusker beer is Kshs 230 at the local pub. Five years ago a beer was 200, and ten years ago a beer was Kshs 130. Just a few months ago, during a tour of Kenya Breweries, the managers said that, based on the recommended retail price of Kshs 140 for a bottle of Tusker, Kshs 84 was tax, Kshs 23 goes to the distribution chain and just Kshs 33 was for them as a company to produce the beer at profit and to pay its shareholders.

Domestic electricity pricing over ten years of the inflation index.

Electricity: A chart of domestic prepaid electricity purchases shows that electricity was at its lowest in May 2015, and its highest in July 2015 and now in July 2018. One observation is that pre-paid power purchases no longer fluctuate. At the beginning of the month, one used to get 40 or even 50 units for Kshs 500 ($5), but now that amount only realizes 22 units and the pre-paid meters issue a (low-token )beep warning the whole month – and power tokens seems to exhaust a lot faster (because the units are less initially)

Other Food Item: Mumias, which used to be part of the index, was Kenya’s sugar industry bellwether – a diversified company that also produced ethanol and electricity and whose shares were once offered to the new investors at Kshs 49 per share. but which now trades at less than a shilling (Kshs 0.70) today. But Mumias now has no stocks on supermarket shelves as production was halted due to a lack of cane and long pending bills owed to farmers. A  2 kg pack of Mara, a competing sugar brand, is Kshs 298. A year ago, a bag of Chemelil sugar was 290, and five years ago Mumias sugar was 250, while ten years ago, a Mumias pack cost Kshs 145.

About the same

Fuel: Earlier this month, the ERC raised the price of petrol by 3 shillings – so in Nairobi a litre of petrol now costs Kshs 112.2 (approximately $5 per gallon). Last year a litre of petrol was Kshs 97.1, five years ago it was Kshs 109.52, and ten years ago it was Kshs 101.50 per litre. But from September 1 2018, Value Added Tax (VAT) which is 16% is expected to be added back to the cost of fuel.

Finance: Bank loans are 14.%, and have remained so ever since the introduction of interest capping in 2016. But the law is set to be adjusted this year by the government, in spite of opposition from parliamentarians who had passed the cap law. Also, average bank rates were 17% in July 2013.

Communication: Not much has changed in terms of phone rates over the last few years. At Safaricom which had (March) 2018 revenue of Kshs 224 billion, 40% of that was from voice, 28% from payments (such as M-Pesa), and 16% from data while SMS accounted for 8% of revenue. The cost of making mobile payments went up slightly in this year’s budget with a tweak in the excise tax on money transfers, and a charge on large bank transfers that has since been temporarily suspended by a Court.

Foreign Exchange: 1 US $ equals Kshs 100,75, while a year ago it was Kshs. 103.9. Five years ago it was 87.15 and ten years ago the dollar exchanged at Kshs 67.4. Also ten years ago the Euro was at 101, the Rand 8.9 and the Sterling Pound 125, while today the Euro is at Kshs 117, the Rand at Kshs 7.4 and the Pound at Kshs 133.

Other Energy Source: An LPG gas cylinder at Kenol is Kshs 2,250 this month. A year ago (in March) it was 2,030 and six years ago (2012) it was 3,000.

Less Expensive

Nothing really

Share this inflation index if you agree with the perceptions about what has become more or less expensive over the years.

If it were all left up to you, how would you improve the urban inflation index?

Kenya 2018 Budget Breakdown from Barclays

Barclays Bank has released a detailed budget breakdown of Kenya’s estimates for the year 2018/19. This was at an event for corporate investment banking clients of Barclays with a theme of “demystifying the national budget.” and which came a few days after Kenya’s Cabinet Secretary (CS) for Treasury, Henry Rotich had delivered his budget speech and estimates for the year to the country’s parliament.

The Barclays budget breakdown team featured Samantha Singh a Senior Analyst – Macro Research, Barclays Africa Group, Anthony Mulisa (Regional Treasurer East Africa), Peter Mungai (Head of Tax, Barclays Kenya) and James Agin, (Corporate Investment Banking Director). Anthony Kirui the Barclays Director of Markets said that while other accountants and audits had done budget analysis that mainly looked at the tax implications, the Barclays budget breakdown would focus on macroeconomic issues that affect their clients.

Some Highlights 

Revenue Targets:  The Kenya revenue estimates for 2018/19 are very bold, aiming for Kshs 1.9 trillion of domestic revenue, which is 40% more than last year. This is premised on a projected GDP growth for Kenya this year of 5,8%, but which Barclays expects will be at 5.5%

Tax Increases: Some new measure include import duties on iron, steel, oils, excise duties on money transfers sugar, private vehicles, and revised capital gains taxes, withholding taxes and business permit taxes. The Barclays team said that the income tax bill 2018 replaces some 1974 legislation that has not kept pace with time also changes the VAT act, and stamp duty acts.

The budget also moves several items from being zero-rated to be exempt, which means that suppliers are prohibited from claiming refunds and this will result in higher costs of products will be passed on to consumers. Also value added tax (VAT) on fuel products kick in from September 2018, while Kerosene taxes will also go up to match those of petrol.

While the CS mentioned reconsidering the 35% income tax on individuals, he was silent on that of corporations which are now likely to go to 35%, the highest in East Africa. The Barclays team said that Parliament needs to critically look at this, as the average corporate income tax rate across Africa is at 28%, while globally it is 25%. Also, the modalities of a new 0.05% excise duty on financial transfers of more than Kshs 500,000 ($5,000) need to be clarified.

Managing Deficits: Kenya’s deficits have been widening and this is due to lower revenues and higher expenditure, especially of recurrent items. Still, the government targets to reduce the fiscal deficit from 7.2% to 5.7% of GDP. The fiscal deficit is about Kshs 600 billion for 2018-19 is quite large; which the government plans to finance it with a mix of domestic and external finance, but Singh said it will be more difficult for Kenya and other African economies to get Euro Bonds as US interest rates are rising.

She said debt was not necessarily bad, but it was more about where the money went, which should be towards development, but not for recurrent expenditure or to defend currencies. The team was also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget while development expenditure is 25% of the budget.

Barclays expect foreign exchange reserves to remain adequate but that with an IMF facility ending in September, Singh said that international investors would want to see Kenya affiliated with IMF and have some standby assistance (even though the IMF is not popular), or it will be hard for them to continue to finance the fiscal deficit.

Debt & Development: The Barclays team was concerned that 4 out of every 10 shillings raised this year will go to pay for debt, and they were also concerned about recurrent expenditure which makes up 16% of GDP and 60% of the budget. They noted that two years ago, 33% of the budget was going to development; now it is down to 25% and that is still going to come under more pressure as public salaries and recurrent expenditure goes up unless the government strengthens its public finance management, ensure efficiency in the collection of taxes, cut waste & corruption, and ropes in a large part of the population who are not making a fair contribution – and the team opined that if these three measures were achieved, the budget’s ambitious targets would be met and this could even enable future tax cuts.

Local Industry & Manufacturing Support: The Kenya government plans to grow manufacturing’s share of GDP from 9% to 15%. This will be enabled by raising customs taxes on iron, steel, textiles, footwear in order to promote local industries by protecting them from cheap imports. The government has also come up with offer off-peak electrical energy schemes at lower tariff’s to encourage businesses to manufacture over 24-hours.

Interest Rate Caps: In his budget speech last week, the CS Treasury requested a repeal of interest rate caps and the Barclays team was hopeful that would be approved by Parliament, saying that the cap had resulted in unintended consequences that were detrimental to the credit sector – with small businesses being unable to access bank credit and that t had also complicated monetary policy decision making.

Financial Behaviour: The team also discussed a draft financial markets conduct bill that was recently introduced as one of the alternative solutions to the interest caps and which is now going through public participation. They said that Barclays had given feedback on the bill which is likely to increase the cost of regulation through double licensing, and which is unclear on who it protects.  They said that the bill borrows from Western countries where there was aggressive credit expansion to people who should not have been borrowing, whereas here it is the opposite situation of there being too little credit.

Conclusion: The budget breakdown is a part of a series of sessions that Barclays will have on topical issues that impact their corporate clients, and another session will take place in Mombasa.

KQ KAA Partnership at JKIA

This week, Kenya Airways and the Kenya Airports Authority – (KAA) published a joint notice about discussions towards collaboration in the management of Nairobi’s Jomo Kenyatta International Airport (JKIA).

This is not new or unique. Last year the Ethiopia government merged it’s airline, the largest airline in Africa, making it the centerpiece of a hub-strategy for Addis that incorporates the airport, passengers, logistics, training, catering and tourism). In Rwanda there is also a similar management arrangement, another soon at Tanzania, while the latest results from Emirates, in its 30th year of profit announced last month, show 14% of their revenue was from cargo and 15% was from D-nata which does ground handling and logistics for other airlines around the world including from extensive investments in Europe, Asia, and North America.

At a previous shareholders meeting (AGM), KQ Chairman Michael Joseph spoke of closer ties with the government, and the need for the airline to get in involved in route approval, and protecting Nairobi as its hub. He said that whenever a foreign leader visited or the President of Kenya went overseas, a “win” from such trips was the granting of more rights to foreign airlines to fly into Kenya, which was to the detriment to KQ, in which the government had a significant investment.

According to its latest results (June 2016 from the Auditor General of Kenya), KAA which constructs, operates and maintains aerodromes around Kenya (including 16 airports)  had Kshs 13.5 billion revenue and a Kshs 2.6 billion profit (in the previous year, this was Kshs 4.4 billion).

The revenue includes Kshs 6.7 B (billion) in passenger service charges, Kshs 1.7B from concessions and Kshs 3 B from landing and parking fees – half of which are probably paid for by Kenya Airways. JKIA handled 100,000 aircraft takeoffs/landings and processed 6.7 million passengers (out of the 9.6 million KAA handled in total) and 235 million tons of cargo.

But KAA also comes with it a lot of politics such as tussles over the composition of its board and top management and project disputes such as the Greenfield terminal at JKIA, and with private developers such as World Duty Free at JKIA and other land disputes at various airports around the country.

The newspaper report (Business Daily) also mentions that the proposed partnership with will also see Kenya Airways exempted from payments of some Value Added Tax (VAT) and the Railway Development Levy, a 1.5% tax on all imports into Kenya that is meant to finance ongoing development of the Standard Gauge Railway (SGR). 

Kenya Income Tax Cuts, Increases, and Other changes 2018

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: 

KPMG:

  • 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.

Deloitte:

  • 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. 

PWC

  • 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.
  • 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.