Category Archives: KPMG

Kenya Tax Changes in 2022

A few weeks before Kenya’s August 2022 general election, Parliament is to debate and pass the Finance Bill which was published in April. Some measures it proposed will become effective in July 2022 and others in January 2023.

The tax proposals are to meet the country’s 2002/23 budget with a planned expenditure of Kshs 3.4 trillion which includes Kshs 2.14 trillion of ordinary revenue. The Finance Bill will need to be passed along with the Budget Estimates, Appropriations Bill and County Allocation of Revenue Bill. A recurring concern with investing in Kenya is the ever-evolving tax code that changes from year to year, adding, taking away or adjusting taxes and deductions.

Local tax advisory firms such as PWC, KPMG, and Deloitte have published summaries and interpretations of some of the tax proposals,

Excerpts

Agriculture: Removal of an exemption of clearing or planting on agricultural land.

Digital Economy: The digital service tax doubles from 1.5% to 3%. What impact will that have on e-commerce in Kenya?

Energy: Briquettes using sustainable fuel are exempted from VAT

Financial Markets Capital gains tax (CGT) goes up from 5% to 15%. Also, gains by foreign investors trading in derivatives will attract a withholding tax of 15%.

Foods: Excise duty of 15% on imported potatoes, excise duty goes up slightly on fruit juices, beer, other alcohol, wines, imported sugar, and white chocolate. Also, excise tax is added on electronic cigarettes, ice cream not containing cocoa, and liquid nicotine.

Local medicine manufacturing: in the recovery from covid-19, plants aiming to manufacture pharmaceutical products will be exempt from paying import declaration fee (3.5%) and railway development levy (2%). Also while a 25% excise duty on imported glass is imposed, it excludes those for pharmaceuticals.

Media: 15% excise tax added on advertisements by betting firms and alcohol companies.

NGOs: Trusts must now use taxpayer PINs to transact.

Sports Betting: Excise duty goes up from 7.5% to 20%.

Big Stick Enforcement: To appeal against a tax claim, someone must deposit 50% of the amount upfront in a special account at the CBK. Also, ships, planes, and motor vehicles can have a payment claim registered against their ownership by KRA, in case their owners have not paid other taxes. The law currently only applies to land & buildings. Also, multinationals with a turnover of Kshs 95 billion ($750 million) will be required to file Kenya-specific reports within a year of their financial year-ends.

Also, see a KPMG analysis in 2021.

KPMG on Kenya Taxes in 2021

KPMG East Africa has a summary of some tax proposals in the Finance Bill that will be used to plug the country’s ambitious Kshs 3.6 trillion 2021/22 budget.

Here are some excerpts

For investors

  • Depositories are to enhance the identity of investors i.e buyers and sellers of securities.
  • Creation of post-retirement medical funds in retirement benefits schemes.
  • Clarifies the definition of an infrastructure bond.
  • A capital markets tribunal shall deal with matters before it within 90 days.
  • Moving from 16% to exempt after July 1, 2021, are the transfer of assets into real estate investment trust (REIT’s) and asset-backed securities.

Competition

  • Opens up reinsurance to players other than Kenya Re to certify reinsurance contracts.
  • Opens the door to private electricity companies; no longer required to offer their supply to the national grid and they are eligible for investment deductions. Also, if government licenses them, they can compete with KPLC.

Prosecutions

  • Tax cases will not stop where there is an ongoing criminal or civil case.
  • Abolishes the amnesty on rental income tax before 2013 (which had since expired).
  • Rewards for informing on tax dodgers; The Kenya Revenue Authority (KRA) can reward up to Kshs 500,000 (up from 100,000) for information and up to 5% or Kshs 5 million of taxes recovered.
  • Taxpayers are to keep records for 7 years and KRA can assess claims of up to 7 years from the date of a taxpayer’s last return.

Digital Taxes and market

  • PIN’s required for digital marketplace transactions.
  • Digital service tax is removed from residents (only applies to non-residents).
  • Non-resident businesses can maintain records in convertible currencies (not necessarily Kenya shillings).

Large investors

  • To stop base erosion and profit shifting, multinationals / ultimate parent companies are required to file a report on their activities (revenue, profit, taxes paid, employees, assets, cash) in Kenya within 12 months of their financial year-end.
  • Ends group VAT registration for groups of companies; each entity will report its own VAT on transactions.
  • To encourage large investments, there is an exemption for import declaration fee (IDF) and railway development levy (RDL) for investments over Kshs 5 billion or with the approval of the Treasury Cabinet Secretary.

Value Added Tax

  • Introduces VAT on bread.
  • Several items move from 16% to exempt, which means the Treasury CS can exempt them on request. These include infants foods, medical ventilators, lab reagents, gas masks, x-ray equipment, anti-malaria kits and doses, and artificial body parts.
  • Also moving from 16% to exempt, are vehicles for oil & mining companies, and equipment for solar & wind generation.

Other

  • A 20% betting tax returns after being briefly for a year.
  • Bank loan fees no longer incur excise duty.
  • Remove a requirement for VAT regulations to be approved ahead by Parliament; instead they will be shared with legislators under the statutory instruments Act.
  • Withholding tax in oil and mining sectors will be 10%
  • Removes the 10 year limit on carrying tax losses
  • Excise tax goes up on motorcycles and is introduced on jewellery and nicotine substitutes.
  • Reintroduces excise duty on locally-manufactured sugar confectionery and white chocolate that was removed in 2019.

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.

KPMG on Geopolitical Risks and Opportunities

KPMG’s Audit Committee Institute series organized a breakfast session in Nairobi today that assessed the risks posed by global events & trends and the potential opportunities that could emerge. The session took place at a time when countries and industries around the world are gripped by concerns and efforts to contain the spread and impact of the Coronavirus.

Sophie Heading, KPMG Global’s Head of Geopolitics, who is on a tour to speak in different capitals around East Africa mentioned that geopolitics now affects the developed world as much as it does for developing countries. She said that US domestic governance is the number one political risk across the world, and that while there has been a shift in leadership away from the US & Europe (G-7 nation) towards China, currently we are in a G-Zero world in which there is no clear leader.

She referenced three distinct areas of technology, trade and trust in which geopolitics could be traced along, and the opportunities they presented for different African countries.

Excerpts

  • Technology: Advances bring geopolitical power and this is likely to spread to other markets – as seen in the battle between the US and China over spectrum (5G), data, and platforms. China is looking to reshape the Sub-Saharan Africa technological space while the US wants to protect its security interests and intellectual property.
  • Trade: The US and China have decided to decouple and go separate ways and other countries will have to choose who to align with. Both are seeking new alliances, investors, partners, suppliers, staff etc. but this is also at a time that other key markets are increasing their regulations in terms of capital, policies, taxes and data, etc. Foreign aid used to be a tool that Western states used to influence economic events in Africa, but with the Chinese model of financing infrastructure being so successful, she expected that there will be a drop in aid from the West as it is no longer seen as being effective.
  • Trust: There is social discontent across the world as young populations feel that government systems are not meeting their needs. This is different in developed nations versus it is in developing ones. But because of their debt levels, most nations now have less policy flexibility to address their internal issues. Also with global growth having slowed down to about 3%, and which may reduce further to as low as 1.5% with the Coronavirus outbreak, any such interventions may widen the social wealth divides within countries.

She said that there is more need to pay more attention to environmental, social, and governance (ESG) issues. This is something that Europe, and the private sector, have championed, but which other governments have not, while the US, China and India have all stepped back on the environmental front.

She cautioned that Nairobi, which is the second-biggest hub in the region for impact investing, but without the Kenya government signalling its interest in championing of ESG issues, may lose out on future investment and client opportunities.

Rethinking tax incentives in Kenya’s investment promotion efforts

A recent court ruling declaring the Kenya-Mauritius Double Taxation Avoidance Agreement (DTAA) void has sent Kenya back to the negotiating table with Mauritius. The court’s judgment is based on the fact that the DTAA was not properly ratified under Kenyan law. Kenya’s government argues that the treaty promotes investment and jobs; however, critics such as the Tax Justice Network Africa (TJNA), which filed this suit, argue that DTAAs rarely lead to any benefits for developing countries. TJNA argues that instead, they result in massive revenue leakage for African countries which outweighs incoming foreign direct investment (FDI).

Should countries, therefore, abandon the use of DTAAs? The answer more than likely lies in the middle: to bring real benefits to the economy and promote local market potential, countries should balance between the use DTAAs and other tax incentives such as special economic zones (SEZs).

Kenya’s DTAA with Mauritius was signed in 2014 with the hope of boosting foreign direct investment, but the benefits of the agreement were poorly defined from the outset. Similar to any policy, DTAAs must be rooted in clear and measurable objectives supported by equally clear policy levers to ensure that revenue generated from the resident country is not leaked through tax avoidance schemes like profit-shifting. Studies show that DTAAs signed between countries with asymmetric investment positions are less likely to lead to any benefits for developing countries. In the Netherlands, for example, DTAAs led to forgone revenue of at least USD 863 million for developing countries in 2011.

Given Kenya’s current budget deficit of USD 3.75 billion, it is critical that efforts to attract FDI such as DTAAs do not cannibalise local efforts to improve tax revenue. Numerous studies show that countries rarely achieve substantive FDI levels to make up for the revenue losses these DTAAs cause. The failed Kenya-Mauritius DTAA is not the first time a tax agreement with the island nation has been subject to controversy: in 2017, India reviewed its DTAA with Mauritius after reports showed that it had opened room for tax avoidance resulting in revenue leakage of about USD 600 million annually. In 2016 alone, Mauritian firms injected more than USD 50 million into the Kenyan economy, a 72 percent increase from 5 years prior. If the Dutch and Indian examples are any indication, Kenya could be losing far more. Lost corporate revenue is income that Kenya urgently needs to meet its development objectives. A shift to other tax incentives whose impact is more ascertainable may be more effective for many developing countries.

If the goal of DTAAs is to increase foreign investment in Kenya, they must be considered in conjunction with the broader ecosystem of policy instruments that can be used to increase tax revenues to achieve Kenya’s four priority pillars for economic growth. The government hopes to raise the manufacturing sector’s share of the GDP from 9% to 15%, and create 1.3 million jobs in this sector by 2022. To achieve this, governments should explore specific tax incentives that can provide direct benefits to these areas, such as special economic zones, which aim to maximise the “cluster effects” of activities through knowledge and supply chain integration, centralised access to critical infrastructure like roads and electricity, as well as enhanced support from local government.

Kenya, in making strides to use other tax incentives such as Special Economic Zones, should borrow lessons from its neighbours on reaping full benefits from SEZs. Rwanda, for example, has successfully leveraged SEZs to promote growth. In 2016, the Kigali Special Economic Zone (KSEZ) employed 2% of the country’s permanent employees, and accounted for 2.5% of all VAT reported sales. In Kenya, the government has already designated Mombasa, Kisumu, and Lamu as the future SEZs but to maximise their impact and avoid the development of enclaves, it is essential that firms in these SEZs interact with firms outside the zones and that the government ensures knowledge and best practices developed are shared across the economy.

Tax incentives alone will never be the sole factor attracting investors — to increase FDI, Kenya must continue to demonstrate strong market potential by providing business support and trade facilitation services. KPMG finds that Kenyan products are among the top four countries in Africa that score above the global average in terms of competitiveness on the international market; however, it still takes an average of 22 days to start a business — compared to 6.5 days in Egypt and 14 in Ghana — and poor availability of market data can complicate efforts at local expansion. To improve the country’s competitiveness, the Kenya Investment Authority should improve the availability of data for investors by working more closely with the Kenya Bureau of Statistics. Reducing business costs, for example, by bringing down the cost of imports for required goods or improving data quality to support manufacturing and value-added services will always outweigh lowering taxes.

The DTAA ruling prompts a careful re-examination of how to increase FDI without incurring unintended knock-on effects like tax avoidance. To do this, Kenya must enhance its capacity when negotiating bilateral agreements, and enact policies to support proper implementation of these agreements. In its use of tax incentives, it is critical that the scales are always tipped in Kenya’s favour. The impact of each incentive employed must be clear and measurable to ascertain that its benefits outweigh any associated costs.

A guest post by Bathsheba Asati and Faith Nyabuto of the Botho Emerging Markets Group. 

See also: The Kenyan Guide to Mauritius for business travelers.

EDIT: In July 2020, Kenya and Mauritius entered a new five-year agreement for the avoidance of double-taxation and to prevent fiscal evasion of income taxes. It also binds the two nations to exchange information and to assist each other in collecting taxes due.