Category Archives: KRA

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.

Mombasa and Tax Collection

There was an interesting screen shot of the amount of customs tax collected by the Kenya Revenue Authority (KRA) on 16 December 2016.

It showed a total of Kshs 1.57 billion collected that day. Of that, Kshs 1.24 billion (79%) was recorded at Mombasa, and Kshs 139 million (9%) at Nairobi. Other top collection points were 6% at Nairobi’s  JKIA airport, 2% at Mombasa Airport and at Pepe Containers each, and 1% (Kshs 15 million) at Busia town.

Other centers listed include Eldoret and Wilson airports, and border towns of Moyale (Kshs 640,000), Isabanya, Namanga and Malaba which all recorded small collections. Other centres were Lamu with Kshs 21,000 and Kshs Kisumu 10,000. Mombasa had 1,887 transactions, JKIA had 1,205 transactions, Busia had 141, as Lamu had just 3 on that day.

In 2016, KRA collected Kshs 1.2 trillion of revenue for the government, which included Kshs 386 billion of customs tax – which works out to almost Kshs 1 billion per day. So Friday, December 16, was an exceptional collection day that came just before the Christmas break.

It’s worth noting that landlocked countries in East Africa are also able to pay tax and clear goods at Mombasa before transportation to the countries. This is done to prevent dumping of untaxed cargo during transit through Kenya.

KRA’s strategic corporate plan calls for clearing more cargo at Internal Container Depots (ICD’s) and this may have implications for Customs’ deployment of staff in the coast region. KRA’s 6th corporate plan also noted that the perception of corruption is highest at Customs service area at 66%.

Kenya Tax Changes in 2017

Tax changes that become effective on January 1, 2017, as a result of the finance bill signed  by the president on 13 September 2016

  • PAYE brackets have been expanded by 10% and the relief also increased by 10%. (now Kshs 15,360)
  • VAT on service charge has been removed, provided that the service charge does not exceed 10% of the price of the service
  • A taxpayer can apply for a refund of overpaid tax within a period of 5 years from the date which the tax was paid. Any amount not refunded within 2 years will accrue interest rate of 1% per month.
  • Withholding tax on winnings from betting and gaming has now been abolished and replaced by a betting tax of 7.5% on the gaming revenue,  lottery tax at 5% on the lottery turnover, a gaming tax at 12% on gaming revenue and a prize competition tax at 15% on the cost of entry to a competition

Extracts from a report by the Grant Thornton Kenya team.

Nairobi Mall and Supermarket Moment

A research report by Knight Frank notes that Nairobi has about 470,000 square meters of shopping center space under  development underway and is one of the five largest cities in Africa (excluding south africa) in that regard (it currently has 391,000 square meters of shop space).

Knight Frank Shop Africa Nairobi spotlight

Knight Frank Shop Africa Nairobi spotlight

Knight Frank notes that, aside from Actis (the pioneering UK investor), most of the developers and landlords of Nairobi’s shopping centres are local Kenyan property owners.

A second Buffalo Mall is  to be built in Eldoret. This comes after the Pivotal Fund acquired 50% of Buffalo Mall Naivasha.

Carrefour: This week opened their first store in East Africa. a 60,000 square foot hypermarket at the Hub in Karen, one of 57 stores that have opened there. Carrefour will be the anchor tenant and are run under franchise of Majid Al Futtaim Retail of Dubai.   EdIt – Carrefour Kenya have an app for shoppers 

(The) Game operated by Massamart. in which Walmart has a majority stake, opened at Garden City Mall as the anchor tenant. 

Khetia:  are in the midst of a Kshs 1  billion expansion in western Kenya. They plan to open up stores in Kisii, Busia and Kericho, each of which requires Kshs  200 million.

Nakumatt: Just launched their 59th branch in Kakamega – the Nakumatt Midtown Supermarket. It was remodeled after nakumatt acquired three supermarket stores in Western Kenay (Kakamega, Bungoma, Busia) from Yako Supermarkets in a Kshs 260 million investment program. They have also added new stores like  Sports Planet departmental  at the reopened Westgate mall. 

Naivas The ownership of widely admired chain is subject to an inheritance court case. 

Sarit Center: Nairobi’s first formal mall is undergoing an expansion program to add more stores.  

Society Stores: An offshoot of a Khetia family member  – Trushar Khetia, hopes to grow the store brand. He says that they had the first chance to buy out Ukwala, but it wasn’t backed by the board and the deal fell through.

Two Rivers backed by Centum and built by Avic will also house a Carrefour store at the 62,000 square meter site in Ruaka that sits on 100 acres.

Tuskys: is focusing this year on staff welfare and streamlining customer service delivery through deployment of  digital platforms for e-commerce. Shareholders are also trying to settle issues in readiness for a listing at the NSE by 2018.

Uchumi:  Is under new management and, once again, in search of a restructuring deal that involves working with suppliers, sale of assets (such as Ngong Road and Langata branches) and a share sale to a new anchor investor for about Kshs 5 billion. This has been complicated by some suppliers who sued to wind up the company, but talks are ongoing with the government, and it  appears that majority of the  suppliers will agree to convert Kshs 1.8 billion of the dent owed to them into equity at Uchumi.

Ukwala was bought by Choppies of South Africa. The deal was completed after an tax agreement deal  was reached with the Kenya Revenue Authority who were demanding back taxes from Ukwala.  Ukwala had admitted to owing the taxman Kshs 101 million, but appealed the additional Kshs 845 million that KRA was demanding. 

Finally, suppliers,  have complained about delayed payments by supermarkets retail chains. This was highlighted in letter from the Kenya Association of Manufacturers (KAM) to Tuskys, Nakumatt and Naivas.

$1 = Kshs 100

Capital Gains Tax Redone

A few months after the re-introduction of the capital gains tax in Kenya, that is now headed for some tweaking.

Even as they have tried to do their part, stockbrokers have challenged their role in the assessment and collection of the tax that was vaguely defined. E.g. some investors have had shares for years before they were immobilized (automated) and the tax was introduced, while others have bought shares at many different prices through the years.

A stockbroker tries to estimate a Kenyan investors capital gains

A stockbroker tries to estimate a Kenyan investors capital gains

In his statement (PDF) on the 2015/16 Kenya budget last week, the Cabinet Secretary for The National Treasury noted that ..the implementation of the law has faced some challenges in some sectors of the economy. In order to address these challenges and ensure enforceability and compliance, I propose to remove the 5% on capital gains arising from sale of shares and introduce a 0.3% withholding tax on the transaction value of the shares..”