Turn over tax
The Finance Act, 2019 reintroduced Turn over tax that was removed with Finance Act 2018. Effective 1 January 20120 businesses with an annual turnover not exceeding KES 5 million shall be subject to monthly turnover tax at the rate of 3% on the gross income earned. A person liable to pay turnover tax may elect in writing to the Commissioner not to be subject to turnover tax. Turnover tax shall not apply to rental income, management or professional fees, training fees, income of incorporated companies or any income subject to final withholding tax.
In addition to the turnover tax, the businesses are also be required to pay presumptive tax at the rate of 15% of the amount payable for a business permit or a trading license issued by a county government on an annual basis. The presumptive tax paid can be off set against the turnover tax payable.
Reprieve from Capital Gains Tax for internal re-organisation
Under the Finance Act, 2019 companies have been granted reprieve from Capital gains tax (CGT) for internal re-organisation that is triggered by either a change in law, government directive, internal restructuring (with the exclusion of a transfer to a third party), or a transfer made in public interest (the latter being subject to the CS’s approval) from CGT.
Proposed tax reforms
The National Treasury of the Republic of Kenya released the draft Income Tax Bill, 2018 (ITB) for comments by stakeholders. The ITA was enacted in 1974 and has undergone a lot of piecemeal amendments that have, in some instances, resulted in inconsistencies and led to ambiguity in the legislation. The ITB has done away with the confusion created by the previous piecemeal amendments, provided greater clarity, and made the legislation simple and easy to comprehend.
The ITB’s primary focus appears is to be the increase income tax revenue through the increase of various tax rates and the removal of tax of exemptions, the tightening of restrictions on expense deductions for the determination of taxable income, and the broadening of provisions that deem income derived by a non-resident from Kenya to be taxable in Kenya.
Specific changes introduced
Incentives to plastic recycling businesses
The Finance Act, 2019 amends the ITA to provide that companies operating plastics recycling plants will pay corporate income tax (“CIT”) at a reduced rate of 15% for the first five years of commencing operations.
Tax amnesty to Small and Medium Enterprises (SME) upon listing on the Growth and Enterprise Market Segment (GEMS)
The Finance Act, 2019 amends the ITA to provide that SME’s listed on GEMS will enjoy a two-year tax amnesty on penalties and interest accruing prior to the listing. The companies will be required to make a full disclosure of its past income, asset and liabilities for the two years immediately preceding the date of listing in order for the amnesty to apply. The tax amnesty however does not extend to principal taxes payable and is lost if the company delists before the lapse of five years.
Taxation of the digital economy
The Finance Act, 2019 has amended section 3(2) of the Income Tax Act to include taxation of income accruing from the digital market place. A digital market place has been defined as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.
The Act empowers the Cabinet Secretary to the National Treasury (“CS”) to issue regulations to provide the mechanism of implementing taxation of digital economy.
Income Tax exemptions
The Finance Act, 2019 extends income tax exemptions to the investee companies of the Real Estate Investment Trusts. The income of the National Housing Development Fund is also now exempt from tax. Interest income accruing from listed bonds, notes or similar securities with a maturity of at least three years, used to raise funds for assets defined under Green Bond Standards and Guidelines shall be exempt from tax.