Category Archives: Kenya taxation

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 Ethiopian government merged its 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.

https://twitter.com/bankelele/status/976336709284605954

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 involved in route approval and protect 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 of 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) 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.

A newspaper report (Business Daily) mentions that the proposed partnership 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). 

EDIT Sept 3, 2019: Kenya Airways formally withdrew the Privately Initiated Investment Proposal (PIIP) following a quarterly meeting of its board of directors on August 27 2019.

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.
  • A 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.

Visiting the Home of Tusker Beer and KBL

Last Friday, the management of Kenya Breweries (KBL) offered a media tour of their plant at Ruaraka, Nairobi. One of the oldest companies in Kenya, KBL is now part of East African Breweries (EABL) that is controlled by Diageo. The tour was a chance to walk see their production lines for different products like Tusker beers, Senator, and spirits like Kenya Cane. It was also a chance to meet and hear the top management of including Managing Director of Kenya Breweries, Jane Karuku, and heads of some divisions including bottled beer (Janice Kemoli), Spirits (Annjoy Muhoro) Sustainability (Jean Kiarie), and Innovations (Fred Otieno)

EABL has 2017 net sales of Kshs 70 billion (~$700 million) and Kshs 8.5 billion ($85 million) profit. Their financial year ended just before the election season in Kenya which saw nationwide general elections held on August 8 and a surprise repeat Presidential one on October 26. and the KBL Managing Director said that the prolonged elections period had resulted in a slow first half of their new year, including the Christmas season which is usually a peak. EABL gets 72% of its revenue from Kenya, 17% from Uganda, and 11% from Tanzania, and they also serve South Sudan, Rwanda, and Burundi.

Beer is still the cornerstone of the company, accounting for 80% of their revenue. This is led by Tusker, then Guinness (second by volume). Premium and lite beers are growing around the world and KBL has Tusker malt and Tusker Lite. There is also Senator Lager that was introduced in Kenya to combat the illicit alcohol trade. Senator is distributed by kegs and sold by pitcher or glass, And as part of a Kshs 15 billion Senator investments, a  new Senator line was commissioned in Kisumu, and MD Karuku said that the old plant has a great location to serve Uganda, Tanzania, South Sudan, is next to Lake Victoria, and it is modular in design which will allow more product lines to be added on in future. She said beer would continue to be the main part of their future as beer keeps up with GDP (growing at about 5% a year) and grows as young people reach the legal drinking age.

They also have spirits which contribute about 20% of the revenue of the company, and they control half the spirits market in Kenya. They have three segments of spirits; Reserve (luxury) in which they have  Singleton whiskey, Ciroc, and Tanqueray gin. Then they have a Premium segment that includes Johnnie Walker (Kenya was the fastest growing Scotch market for Diageo in 2017) & liquours (Baileys which is marketed for ladies). Finally, they have a Mainstream segment, which is 80% of their spirits business in Kenya. Their main products here are Kenya Cane, a forty-year-old sugar cane blend, and also Chrome vodka. The company invested Kshs 900 million in a line that will double their spirits production capability, and they aim to grow spirits contribution from 20% to 30% of revenue. They also invested in tamper-proof plastic seals to combat a wave of counterfeiting of popular alcohol brand products in Kenya and 50% of the alcohol purchased is illicit.

In life, tastes and consumer preferences are constantly shifting, and the company has an innovation division that tries to anticipate what consumers will like in the future.  New products rolled out include a citrus fusion variant of Kenya Cane, non-alcoholic Álvaro (which is being revamped), a craft premium beer called Hop House 13, Tusker Cider, Tusker draft beer )that is predominantly at all-inclusive hotels at the Kenya coast), and Zinga a new beer brand being piloted that is priced between Senator and their other bottled beers. With the new citrus fusion introduction, sales of Kenya Cane grew 46% last year, and overall innovation contributed 18% to turnover in Kenya and 33% in Tanzania.

Last year EABL contributed Kshs 52 billion in taxes (it was the third largest taxpayer after Safaricom and the Teachers Service Commission) equivalent to  4% of government revenue.   Besides with the Senator beer, KBL also works with the government to explain that importance of a stable tax regime and business environment, and have pushed a caution that alcohol is not price-sensitive to the sin-taxes that seem to be a favourite add-on in the national budget every year. Already, while a Tusker bottler has a recommended retail price of Kshs 140, Kshs 84 shillings will go out as tax, Kshs 23 goes to the distribution chain and the company gets Kshs 33.

For the long-term, EABL which contributes 0.8% to Kenya’s GDP plans to source 100% of their inputs locally by 2020 (up from the current 80%). They work with 31,000 farmers through their East Africa Maltings and pay Barley farmers Kshs 1.7 billion and sorghum ones Kshs 660 million every year, with the new Senator line expected to see 15,000 more farmers contracted, and 5,000 new Senator outlets. The company has 102 distributors (57 main ones, 45 senator ones) and 22,000 main outlets and 19,000 senator ones and they handle distribution to get products to customers at the lowest price possible.  The outlets have benefitted through getting access to management systems and electronic tax receipt (ETR) systems, and the next step is to harness all the data they have collected to enable better decision-making. Other initiatives of KBL include ‘Utado’ (which encourages responsible enjoyment of their products by advising consumers to take taxis, drink water, eat food) and Heshima (through which the recruited illicit alcohol sellers and trained and turned them into entrepreneurs and sellers of a legal affordable product).

A Tusker Beer remains part of the urban inflation index for tracking changes in the cost of living in Nairobi over time.

Kenya Tax Amnesty 2018

During a funding session for entrepreneurs last year it was revealed that Kenya has an amnesty for people to declare offshore wealth and repatriate this and that the country expected $3 billion in extra collections from this initiative in 2018. The Kenya government currently collects tax revenue of about $14 billion a year and there was a question on if the additional funding generated could become a source of competition for local private equity funds.

Tax amnesty

The actual notice was first published in July 2017 by the Commissioner of Domestic Taxes at the Kenya Revenue Authority (KRA) and read “The amnesty under Section 27B of the tax procedures act is meant to provide a one-off opportunity for Kenyan residents to declare assets and income and voluntarily repatriate the foreign-held assets to Kenya and invest in development of the country”

Applications, filings, and returns are to be made on the online KRA “itax” system before June 30, 2018. If funds are not brought in by that date, there is a five-year window (up to June 2023) to bring the funds back, but with an additional 10% of the amount repatriated as a penalty.

Married couples may file for the amnesty jointly, while assets and income that are in the name of minors can be declared by their parents or guardians. But anyone who had been assessed by KRA or was under investigation or audit over their income and assets prior to the amnesty is not eligible.

Kenya Eurobond 2018 A to Z (Part II)

Excerpts from reading the prospectus for Kenya’s 2018 Eurobond issues totaling $2 billion (~Kshs 202 billion). 

Advisors:  joint lead managers were Citigroup Global Markets, J.P. Morgan Securities, Standard Bank of South Africa and Standard Chartered Bank. The fiscal/paying agent was Citibank (London), Registrar was Citigroup Global Markets (Deutschland), legal advisors were White & Case LLP and Allen & Overy LLP (English and US law), and Coulson Harney LLP and Kaplan & Stratton Advocates (Kenya Law) and the listing agent was Arthur Cox (Dublin).

Citigroup, J.P. Morgan Securities, Standard Bank of South Africa and Standard Chartered Bank each committed to subscribe for $250 million of the 2028 and $250 million of the 2048 bond issues

Codes: for the 2028 Notes: 491798 AG9 / US491798AG90 / 178426192 XS1781710543 / 178171054 and for the 2048 Notes: 491798 AH7 / US491798AH73 / 178426478 XS1781710626 / 178171062

Debt Rescheduling: Kenya has approached the Paris Club three times to seek debt relief and rescheduling; in January 1994 for $535 million, in November 2000 over $301 million and in January 2004 over $353 million. Also to the London Club 1998 over $70 million and in 2003 over $23 million.

Default (defined as): Failure to pay 15 days after due date, or issuer (Kenya government) ceases to be a member of the IMF.

Denomination: The Notes are issued in registered form in denominations of US$200,000 and integral multiples of US$1,000.

Disclosure: The Issuer will publish all notices and other matters required to be published (regarding Condition 14, 10, 13: on the website of the National Treasury.

Finance Management: Kenya’s law provides that: over the medium term, a minimum of 30% of the national budget shall be allocated to development expenditure and the national government’s expenditure on wages and benefits for its public officers must not exceed 35%  per cent. of total national government revenue and over the medium term, the national government’s borrowings should be used only for the purpose of financing development expenditure and not for recurrent expenditure. .

IMF: The second and third reviews of the IMF programme due in June 2017 and December 2017 could not be completed on time due to the prolonged election period. Accordingly, no funds under the SBA-SCF 2 facility are available to Kenya until it has reached certain targets to the satisfaction of the IMF, which will be assessed at the next review. But, even if the IMF agrees to make this or another programme available upon conclusion of their review, the government intends to continue to treat the arrangements as precautionary and does not intend to draw on the facility unless exogenous shocks lead to an actual balance of payments need.

Income tax (enhancement of): A review of the Income Tax Act is ongoing and is targeted to be completed by mid-2018. In an effort to boost domestic revenue mobilisation, the government is undertaking reforms to bolster revenue yields  including roll out of the integrated customs management system, implementation of the regional electronic cargo tracking (RECTS) to tackle transit diversion; data matching and use of third-party data to enhance compliance, integration of iTax with IFMIS to ensure timely collection of withholding VAT and other withholding taxes; expansion of tax base by targeting the informal sector, betting, lotteries and gaming; pursuit non-filers and increased focus on taxation of international transactions and transfer pricing and enhance investigations and intelligence capacity to support revenue collection.

Informal economy: A significant portion of the Kenyan economy is not recorded and is only partially taxed, resulting in a lack of revenue for the government, ineffective regulation, unreliability of statistical information (including the understatement of GDP and the contribution to GDP of various sectors) and inability to monitor or otherwise regulate a large portion of the economy.

Interest Rates: The yield of the 2028 Notes is 7.25% and the yield of the 2048 Notes is 8.25% in each case on an annual basis. The yields were calculated at the issue date.

Listing: The Eurobond Notes will not be issued, offered or sold in Kenya, and the notes may not be offered or sold in the United States. Applications have been made to the Irish Stock Exchange at a cost of 5,500 euros and the London Stock Exchange for GBP 4,200.

Litigation:  The Issuer has appointed the High Commissioner of the Republic of Kenya in London, presently located at 45 Portland Place, London W1B 1AS as its agent for service of process in relation to any proceedings (“Proceedings”) before the English courts permitted by

Indebtedness:  Total national government debt stood at US$41.2 billion as at 30 June 2017, representing a 17% increase from June 2016. The government is permitted under the terms of the PFMA to incur debt within the limits set by Parliament, currently set at 50% of GDP in net present value terms. Following the issue of the (Eurobond) Notes, the total net present value of debt as a percentage of GDP is expected to nearly reach the 50% limit. Although the government may be restricted from incurring further public debt under such circumstances, the Government will be seeking to refinance or repay near-term maturities, and therefore expects to maintain the ratios within the set limits.

Total multilateral debt increased by 15.8% to stand at US $8.0 billion at 30 June 2016 while total bilateral debt increased to US $5.3 billion at 30 June 2016, mainly driven by a rise in stock of debt from the People’s Republic of China, which increased by 21.2%. Also, as at 30 June 2017, the national government guaranteed approximately KES135.1 billion of the indebtedness of the non-financial public sector include Kshs 77 billion to Kenya Airways last year.

Purpose Kenya expects the net proceeds of the issue of the Eurobond Notes, before expenses, to amount to approximately US$1,999,600,000 which it intends to use for financing development expenditures and to refinance part of its obligations outstanding under certain syndicated loan agreements. According to the “Plan of Distribution”, Kenya syndicated loans of from October 2015 (debt now $646 million) and March 2017 ($1 billion)  and proceed from the new February 2018 issue will be used to pay all of the 2015 loan and part of the 2017 loan and  to “manage the maturity profile of the government’s debt.”

Repayments: (for both issues) payable semi-annually in arrears on 28 February and 28 August in each year commencing on 28 August 2018. The Eurobond Notes are not redeemable prior to maturity.

Withholding Taxes: All payments in respect of the Eurobond Notes by or on behalf of the Issuer shall be made without withholding or deduction of any present or future taxes,

See Part I about the 2014 Eurobond issue. 

1USD  = Kshs 101, 1 GBP = Kshs  139, 1 Euro = Kshs 123