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.

S&P ranks top banks in MEA (Middle East & Africa)

Qatar National Bank (QNB) with $229 billion of assets is the largest bank in the Middle East and Africa (MEA) zone according to S&P Global Market Intelligence. It is followed by First Abu Dhabi with  $182 billion and then the top African bank, which is the Standard Bank of South Africa (Stanbic) with $164 billion of assets. Fourth and fifth are banks from Israel which S&P notes rose on the list due to the appreciation of the country’s Shekel currency versus the US dollar.

S&P MEA top bank origins

South Africa has the most African banks on the list with First Rand (ranked 8), Barclays Africa with $94 billion of assets and which is rebranding to Absa is ninth, while Nedbank and Investec are in 13th and 27th place respectively on the S&P list.

Other African banks are the National Bank of Egypt (14)  and Attijariwafa of Morocco (23 ). QNB, which has been publishing quarterly results in Kenyan newspapers alongside other commercial banks, is also the second largest shareholder of Ecobank of Togo, but there are no Nigeria banks or any Sub-Saharan ones from the East or West blocks of the continent on the MEA list. Kenya’s largest bank group – KCB has about $6.5 billion of assets.

QNB and the banks on the MEA list are ranked according to IFRS accounting principles but certain banks use local accounting measures e.g Israeli GAAP, Eqyptian GAAP and Qatari GAAP.

The MEA banks are a sub-set of S&P’s list ranking the largest banks in the world. The list was topped by four banks from China, led by the Industrial & Commercial Bank of China with $4 trillion of assets, followed by China Construction Bank, Agricultural Bank of China and the Bank of China. There is more diversity after that with Mitsubishi UFJ of Japan in 5th place with $2.8 trillion of assets, followed by  JPMorgan Chase (USA), the UK’s HSBC and in 8th place is BNP Paribas of France with $2.3 trillion of assets. Eighteen of the top 100 banks are from China, with $24 trillion of assets, the US had eleven banks and Japan has eight banks, but none from the MEA.

Cellulant investment megal deal

Yesterday Cellulant announced a new deal record Series C financing round to grow the digital payments company into markets on the African continent where two-thirds of the population remains unbanked.
The investment deal for $47.5 million (Kshs 4.8) billion was led by the TPG Rise Fund alongside Endeavor Catalyst and Satya Capital. The company is now in 11 countries in Africa and reaching 40 million customers. These include 7 million farmers on Agrikore an agri-business platform in Nigeria.
A recent report on the financing of fintech companies released by the East Africa Venture Capital Association (EAVCA) noted that there were trends towards the financing of non-traditional companies, who were involved in decentralized networks and enabling the use of alternative data to develop new scoring models. Also that once such companies enabled customers to have mobile wallets, their usage can be more frequent and the platforms can be extended towards government, utilities and other payments. The report noted other recent large financing deals included $80 million (of debt) to M-Kopa, the pay-as-you-go-solar firm and $65 million to Branch, the lending app.

The team at the signing go the Cellulant financing deal.

Part of the new funding will go towards building a world-class payments team,  according to Ken Njoroge, the co-founder and Group CEO of Cellulant.  The new investors join the other shareholders at Celluant who are Velocity Capital, Progression Capital Africa, and TBL Mirror Fund while representatives of the TPG Rise Fund will join the board of Cellulant. Other TPG Growth investments in Africa include Gro Intelligence (an agricultural data business firm), Frontier (a platform which powers Cars45, a second-hand car-sale site in Nigeria) and Ecoles Yassamine (a Moroccan private school network).
Read more on this at the Cellulant blog.

SheTrades Commonwealth Launches

The International Trade Center (ITC) has launched a women-economic empowerment program for female entrepreneurs to be able to trade across borders.

“SheTrades” aims to grow one million female entrepreneurs, and is starting with Kenya, Ghana, Nigeria and Bangladesh, in export-ready fields of apparel (textiles), agriculture (tea, coffee, avocado) and services (ICT, tourism). The program will offer training, capacity building and support to enable women, entrepreneurs to be more competitive, and prepare their companies for export markets such as through obtaining certifications, connecting to buyers and being able to talk they way into deals.

The SheTrades program is based on seven principle of quality data, fair policies, public procurement, striking business deals, enabling market access, unlocking financial services, and securing ownership rights. Kenya is acknowledging for having female supportive laws such as setting aside 30% of government procurement for women, youth and persons with disabilities, though the uptake of this has lagged. It also has some women-focused funding initiatives while Barclays Kenya has a program with ITC  to increase women’s access to international trade opportunities.

SheTrades is funded by the UK’S DFID and the SheTrades Commonwealth Kenya initiative is open to companies that are at least 30% female-owned and female-managed are eligible for sign up on the SheTrades website.

Emirates Airlines, 30th Year of Profit

In its recently released annual reports, Emirates Group had revenue of US$ 27.2 billion, and it’s 30th straight year of profits at $1.1 billion and will pay $545 million as a dividend to the Dubai Investment Corporation.

Emirates Airlines revenue increased 9% to US$ 25.2 billion, while its profit increased to $762 million and this was attributed to strong performance in cargo which offset fuel price increases of 15% during the year. Fuel now accounts for 28% of their operating costs, while staff expenses are 15%. The Emirates Group has 80 subsidiaries and 103,000 employees, a number which declined by 2% in the year. The report notes that there was a 2.2% reduction in flight handled at Dubai’s two airports due to termination of flights between Dubai and Qatar, from the, still ongoing, dispute with Qatar.

Emirates carried 58.5 million passengers and received 17 new aircraft, in the year taking its fleet to 268. It is the world’s largest operator of the Boeing 777 and A380 planes and announced new orders for 36 A380’s and 40 B787-10’s. Emirates revenue was from six regions topped by Europe with $7.3 billion revenue, followed by East Asia/Australasia $6.9 billion, the Americas $3.7 billion, and revenue from African routes was $2.6 billion (an increase 8%).  In Africa, they fly to 27 destinations and the report notes that their results in Africa were achieved in spite of political instability and currency volatility including massive devaluation in some countries. Revenue from the Gulf & Middle East was $2.3 billion, and West Asia/ Indian Ocean was $2.1 billion. During the year Emirates signed partnerships with Fly Dubai and Cargo Lux and extend one with Qantas.

Emirates SkyCargo revenue was US$ 3.4 billion (14% of the airline’s revenue) from its freighter fleet of 13 777’s, while Emirates’ hotel’s revenue was US$ 203 million, Emirates also tested the use of blockchain to streamline cargo delivery, digitize their supply chain and eliminate paper usage.

Dnata, a separate entity in the Emirates Group, had its best year yet with $3.6 billion of revenue and $359 million profit. Dnata serves 300 airlines in 35 countries and its international business which included handling 3. 8 million tons of cargo and serving 55 million meals during the year, now accounts for 68% of its revenue. Dnata acquired AirLogistics in the US, signed deals to do ground handling in New York,  and maintenance in Singapore and had other expansions in Europe while creating two new travel reservation systems.