Minimum tax based on turnover
The Finance Act, 2020 introduced a minimum tax of 1% on gross turnover. The minimum tax will not be applicable to exempt income, employment income, residential rental income, capital gains, persons undertaking mining or upstream oil and gas activities, persons subject to turnover tax, insurance business and any business whose retail price is regulated by the Government.
The minimum tax is intended for taxpayers who are carrying out business and thus earning revenue, but their tax payable is lower than 1% of their gross turnover. The minimum tax will be a final tax and is payable in instalments that are due on the same date as the current instalment tax obligations (i.e. on the 20th day of the fourth, sixth, ninth, and twelfth month of a company’s financial year).
On 19 April 2021, the High Court issued a temporary order suspending the implementation of the new minimum tax on business gross revenues pending the full hearing of court cases filed by certain taxpayers. Should the Kenya Revenue Authority win the case, minimum tax will be due on a retrospective basis.
The rate of turnover tax has been lowered from 3% to 1%. This is applicable to micro, small, and medium enterprises (MSMEs).
MSMEs earning below 1 million Kenya shillings (KES) are exempt from turnover tax to cushion them against the negative impact of the COVID-19 pandemic. However, MSMEs exempted from turnover tax will still be required to declare and file their corporate tax returns.
The upper threshold in respect of the turnover tax has increased from KES 5 million to KES 50 million.
Digital services tax
The Finance Act, 2019 amended the Income Tax Act to include taxation of income accruing from the digital marketplace. A digital marketplace has been defined as a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.
Effective 1 January 2021, The Finance Act, 2020 introduced a 1.5% tax on income from services accrued or derived in Kenya through a digital marketplace. The tax is applicable on the gross transaction value of the service provided and is due at the time of payment. The responsibility to account for the tax is on the owner of the digital marketplace or an agent appointed by the Commissioner.
The National Treasury issued Digital Service Tax ("DST”) regulations in December 2020 which appear to extend the application of the digital services tax to include;
- downloadable digital content such as mobile applications;
- over-the-top services including streaming television shows, music or podcasts;
- sale or licensing of, or any other form of monetising data collected about Kenyan users;
- provision of a digital marketplace;
- subscription-based media including news;
- electronic data management including website hosting and cloud storage services;
- electronic booking or ticketing services;
- provision of search engine services;
- online distance training or e-learning; and
- any other service provided through a digital marketplace.
Residents and non-residents with a permanent establishment (PE) will be entitled to offset the digital tax paid against their income tax payable for that year of income.
Proposed tax reforms
In 2018, the National Treasury of the Republic of Kenya released an 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.
Significant amendments proposed in the Finance Bill 2021
The Finance Bill, 2021 (“the Bill”) proposes to expand the definition of the term control. The new definition is quite broad and exhaustive and extends to shareholding structure, board composition and voting rights but also takes into account whether the entity is majorly financed by another person who is not a financial institution and whether the entity is solely reliant on know-how, patent, copyright, trade mark, licence, franchise which the other person is wholly dependent on to carry out his business. Further, the new definition considers whether an entity sells the majority of their supplies to one particular person or purchases its supplies from one particular person.
The Bill proposes to introduce a new filing requirement for the ultimate parent entity of a multinational enterprise group headquartered in Kenya. The ultimate parent company would be required to submit to the Commissioner a return describing the group’s financial activities in Kenya, where its gross turnover exceeds the prescribed threshold, and in all other jurisdictions where the group has a taxable presence. The filing requirement is similar to the Country-by-Country Reporting (“CbCR”) requirement for multinational enterprises (“MNEs”) initiated by the OECD in the Base Erosion and Profit Shifting (BEPS) Action 13 Report.
There is a proposal that the scope of digital service tax will be expanded to include income accruing from an ‘online business’ or an electronic network in addition to income accruing through a digital marketplace. Further, the Bill proposes to restrict the applicability of digital service tax to non-resident tax payers only.
The Bill proposes to replace the thin capitalisation provisions with the use of fixed profit ratios (i.e Earnings Before Interest Tax, Depreciation and Amortization( “EBITDA”)) to determine the permissible level of interest deductibility. The Bill proposes to limit the deduction of interest expenses to a maximum of 30% of EBITDA.
There is a proposal in the Bill to increase the period within which assessments may be amended by the Commissioner from five years to seven years.
Finally, the Bill seeks to introduce common reporting standards for the purpose of providing automatic exchange of financial banking information between the KRA and other tax authorities. Banks would be required to identify ‘Reportable Accounts’, collate information in a standard format and provide this information to the KRA.