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).
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.
Specific changes introduced
Income tax exemptions reduced
The Finance Act, 2020 and the Tax Laws Amendment Act, 2020 have reduced the current income tax exemptions. Notable tax exemptions that have been repealed include:
- The income of a registered home ownership savings plan.
- Income of various government parastatals and boards, such as the Tea Board of Kenya,Kenya Dairy Board, and Horticultural Crops Development Authority, amongst others.
- Dividends received by a registered venture capital company, special economic zone (SEZ) enterprises, developers, and operators licensed under the SEZ Act.
- Gains arising from trade in shares of a venture company earned by a registered venture capital company within the first 10 years from the date of first investment in that venture company by the venture capital company.
- Interest income generated from cash flows passed to the investor in the form of asset-backed securities.
- Interest earned on contributions paid into the deposit protection fund established under the Banking Act.
- Income from employment paid in the form of bonuses, overtime, and retirement benefits payable to the employees in the lowest tax band.
- Dividends paid by an SEZ enterprise, developers, or operators to any non-resident person.
- Compensating tax accruing to a power producer under a power purchase agreement.
- Income of the Export-Import Bank of the United States of America.
Reinstatement of pre-COVID-19 Income Tax and Value Added Tax rates
Following on from the COVID-19 conference, where the President directed the National Treasury to relook at the preferential tax rates that had been enacted in 2020 in a bid to cushion the public from the adverse effects of COVID-19, the National Assembly debated the Tax Laws (Amendment)(No.2) Bill, 2020 (“the Bill) and passed it with several amendments. The Bill was assented into law by the President on 23 December 2020 and is now in force. The Tax Laws (Amendment) (No.2) Act, 2020 provides that effective 1 January 2021:
- the Value Added Tax rate will revert to 16% from 14%;
- the top band rate for Pay-As-You-Earn will revert to 30% from 25%; and
- the corporation tax for resident companies will revert to 30% from 25%.