Kenya

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 20 September 2021, the High Court declared the minimum tax to be unconstitutional.The Kenya Revenue Authority (KRA) appealed against the High Court’s decision to the Court of Appeal and on 2 December 2022, the Court of Appeal dismissed the appeal and upheld the decision of the High Court.The KRA has since appealed to Supreme Court.  

Turnover tax

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 (DST)

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 DST regulations in December 2020, which appear to extend the application of the DST 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.

DST is only applicable to non-resident persons whose income from provision of services is derived from or accrues in Kenya through a business carried out over the Internet or an electronic network, including through a digital marketplace.  

Persons subject to DST are required to submit a return and pay the tax due to the Commissioner on or before the 20th day of the month following the end of the month in which the digital service was offered.

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.

Further, 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. 

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

Significant amendments proposed in the Finance Act 2022

The Finance Act, 2022 ('the Act') amended the ITA to tax gains accruing to a non-resident from financial derivatives at a rate of 15%. Financial derivatives traded on the Nairobi Securities Exchange (NSE) have been exempted from this tax.

The Act has expanded the number of entities that are eligible for interest restriction exemption to include

• microfinance institutions licensed and non-deposit taking microfinance businesses under the Microfinance Act, 2006;
• entities licensed under the Hire Purchase Act;
• non-deposit taking institutions involved in lending and leasing business;
• companies undertaking the manufacture of human vaccines;
• companies engaged in manufacturing whose cumulative investment in the preceding five years from the commencement of this provision is at least KES 5 billion;
• companies engaged in manufacturing whose cumulative investment is at least KES 5 billion, provided that the investment shall have been made outside Nairobi City County and Mombasa County; and
• holding companies that are regulated under the Capital Markets Act.

Further, the Act has increased the scope of dealings subject to the arm's-length principle to include where a resident person carries on business with a non-resident person located in a preferential tax regime or an associated enterprise of a non-resident person in a preferential tax regime or permanent establishment (PE) of a non-resident person operating in Kenya where the non-resident person is located in a preferential tax regime.

The Act also has amended the definition of the term 'preferential tax regime' to include foreign jurisdictions that do not tax income, tax income at a rate less than 20%, do not have a framework for the exchange of information, do not allow access to banking information, or lack transparency on corporate structure, ownership of legal entities located therein, its beneficial owners of income or capital, financial disclosure, or regulatory supervision.

In addition, the Act has increased the capital gains tax (CGT) rate from 5% to 15% and exempted from withholding tax (WHT) dividends paid by special economic zone (SEZ) enterprises, developers, and operators licensed under the SEZ Act.

Finally, the Act imposed a lower corporate income tax (CIT) rate of 15% for the first ten years from the year of commencement in respect of companies operating a shipping business in Kenya and companies operating a carbon market exchange or emission trading system that is certified by the Nairobi International Financial Centre Authority.