Kenya

The Tax Laws Amendment Act, (TLAA) 2024, effected various corporate tax changes. These include; a revised definition on what constitutes a royalty, introduction of minimum top up tax, replacement of digital service tax (“DST”) with the significant economic presence (“SEP”) tax and imposition of withholding tax on payments to non-residents and residents in respect of supply of goods to a public entity at the rate of 5% and 0.5% respectively.

Turnover tax

The rate of turnover tax has been increased from 1% to 3%. This is applicable to micro, small, and medium enterprises (MSMEs) if their business turnover is between 1 million and 25 million Kenya shillings (KES).

MSMEs earning below KES 1 million are exempt from turnover tax. However, MSMEs exempted from turnover tax will still be required to declare and file their corporate tax returns.

The Finance Act, 2023 has decreased the upper threshold in respect of the turnover tax from KES 50 million to KES 25 million.

Significant Economic Presence

The Tax Laws (Amendment) Act, (TLAA) 2024, has repealed the Digital Services Tax (DST) which was applicable at the rate of 1.5% and replaced it with Significant Economic Presence (“SEP”) tax whose effective rate is 3%. 

Further, whilst the Act exempts non-residents with an annual turnover of less than 5million Kenya shillings (KES)  from SEP tax, it does not anticipate significant economic presence to arise from either the number of users in Kenya or the level of sales in Kenya and as such the SEP tax appears to be very similar to the DST.

Minimum Top-up Tax

The Tax Laws (Amendment) Act, (TLAA) 2024, introduced a domestic minimum top-up tax, allowing Kenya to impose an additional amount of tax on the profits of entities that are part of an in-scope multinational group. This ensures   the effective tax rate on those profits is 15%. 

The proposed domestic minimum top up tax is derived from  the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework, which seeks to ensure an effective tax rate of at least 15% in every jurisdiction where an in-scope multinational group operates.

For the purposes of the Kenya Income Tax Act, an in-scope multinational(s) is defined as  resident persons or a person with a permanent establishment in Kenya who are  members of a multinational group with a consolidated annual turnover of at least EUR 750 million in the consolidated financial statements of the ultimate parent entity in at least two of the four years  immediately preceding the tested year of income. 

¹The tax is applicable on deemed taxable profit which is deemed to be 10% of the gross turnover.

Proposed tax reforms

In 2018, the National Treasury of the Republic of Kenya released a draft Income Tax Bill (ITB) in efforts to overhaul the Income Tax Act (ITA), which was enacted in 1974. The ITA has undergone a number of piecemeal amendments that have, in some instances, resulted in inconsistencies and led to ambiguity in the legislation. The ITB is intended to do away with the confusion created by the previous piecemeal amendments, provide greater clarity, and make the legislation simple and easy to comprehend.

On 8 July 2022, the National Treasury developed a draft National Tax Policy for guiding tax administration and revenue collection. The policy sets out broad parameters on tax policy and related tax matters in Kenya, with the objectives of providing:

• policy guidance on the collection, enforcement, and administration of tax laws
• the basis for review and development of tax laws
• guidelines to stakeholders, including investors, on tax policy matters
• guiding principles for the Kenyan tax system, and
• a legal framework for granting tax incentives to various sectors of the economy. 

Further on 23 November 2023, the National Treasury tabled a National Tax Policy to the Parliament. The overall objective of this Policy is to guide progressive development and administration of the Kenya tax system.

The National Tax Policy is intended to bring certainty in the Kenya tax regime and congruence between the economic and tax policy.

In September 2023, the Government of Kenya published the draft Medium-Term Revenue Strategy (MTRS) for the financial years from 2024/25 to 2026/27. 

According to the MTRS for 2024/25 to 2026/27, tax expenditure in Kenya is estimated to be about 6% of gross domestic product (GDP), which is higher than the average of 5% for sub-Saharan Africa. The MTRS also noted a rise in the corporate tax revenue collection gap, which is attributed to low compliance and tax expenditures.

The MTRS outlines various tax policy and administrative measures to be implemented gradually over the strategy period, such as:

• Reviewing and rationalising exemptions and preferential rates on corporate income tax (CIT), personal income tax (PIT), VAT, excise duty, and customs duty. 
• Developing a Tax Expenditure Governance Framework to guide the introduction, monitoring, evaluation, and reporting of tax expenditure and to improve transparency and accountability. 
• Strengthening the capacity and coordination of the National Treasury, the Kenya Revenue Authority (KRA), and other stakeholders in tax expenditure management and analysis. 
• Aligning the tax expenditure regime with the regional and international commitments and best practises, such as the East African Community (EAC) Common External Tariff and the Organisation for Economic Co-operation and Development (OECD)/G20 Base Erosion and Profit Shifting (BEPS) framework. 

By implementing the above measures, the MTRS aims to raise the tax-revenue-to-GDP ratio from 13.5% in 2022/23 to 20% by 2026/27.

Significant amendments proposed in the Tax Laws (Amendment) Act (TLAA), 2024

The TLAA has repealed the Digital Service Tax (DST) which was applicable at the rate of 1.5% and replaced it with the Significant Economic Presence (SEP) tax whose tax rate is 3%. The Act exempts non-residents with an annual turnover of less than five million from SEP tax. 

The TLAA has introduced the Minimum top-up Tax in a move seen as alignment of the country’s landscape to the international tax developments led by the OECD under the Pillar Two solution.

The Act has exempted “transfer of a business as a going concern” from VAT which provides a relief to taxpayers pursuing business restructuring as they will not be required to charge VAT on the transaction.

The TLAA has also amended the Income Tax Act (ITA):

• To increase the tax-exempt threshold for non-cash benefits not prescribed elsewhere in the Act to KES 60,000 per annum from KES 36,000.
• To exempt from tax the first KES 60,000 of the value of meals provided to an employee annually up from KES 48,000.
• To increase the tax-free threshold for gratuity or similar payments received in respect of employment or services rendered and paid into a registered pension to KES 360,000 for each year of service up from KES 240,000 per annum, provided that the person was not eligible for pension contribution deductions during the period when such payment was accrued.