LEGAL ALERT – TAX LAWS CHANGES

The Government has enacted fundamental changes to the tax regime in Kenya and it is important for individuals and companies to comply with the changes. In this e-alert, we provide an analysis of the most significant changes effective 1^st January 2021 or as unless specified otherwise in the sections below:

THE INCOME TAX ACT (ITA)

• Residential Rental Income Tax (RRIT)

The Act has increased the upper threshold for Residential Rental Income Tax from KES. 10 Million to 15 Million per annum. Further, the amendment increased the lower threshold from Kshs 144,000 to Kshs 288,000 per annum to align to the PAYE tax bands.

Effective Date – 1^st January 2021

• Minimum Tax

The Act has introduced a new tax known as “Minimum Tax” under Section 12D of the Income Tax Act. Minimum Tax is applicable at the rate of 1% on gross turnover and is payable in instalments by the 20^th day of each period ending on the fourth, sixth, ninth, and twelfth month of the year of income.

The following income will be exempt from Minimum Tax:

• Exempt Income under the Income Tax Act (ITA);
• Income earned from Employment (Sec 5), Residential rental income (Sec 6A), Capital gains under eighth schedule, extractive industries under the ninth schedule and Income Subject to turnover tax (Sec 12 C);
• Where Instalment tax payable is higher that the minimum tax payable;
• Persons engaged in business whose retail price is controlled by the government; and
• Persons engaged in Insurance business.

This is a new tax obligation and is meant to bring companies that have declared losses into the tax bracket noting that it is not a tax on the gain/profit. Unlike Instalment tax which is an advance tax, the law has not specified whether minimum tax will be considered as an advance tax or final tax.

Effective Date – 1^st January 2021

• Digital Service Tax (DST)

The Act also introduced another new tax known as “Digital Service Tax” under Section 12E of the Income Tax Act. Digital Service Tax (DST) will be applicable at the rate of 1.5% of the gross transactional value and is payable at the point of transferring payment to the service provider.

DST will be applicable to income derived or accrued in Kenya from provision of services through a digital marketplace.

The Income Tax act defines a digital marketplace as a platform that enables the interaction between buyers and sellers of goods and services through electronic means.

A resident person or a non-resident person with a permanent establishment in Kenya can offset the DST paid against the corporate tax liability for that year of income.

Effective Date – 1^st January 2021

• Dis-Allowable Business Expenses

The ITA has disallowed the following expenses previously allowed under section 15 of the ITA:

• Subscriptions payable to trade associations and club subscriptions paid by an employer on behalf of an employee. The subscriptions that were previously taxed on employees as benefit will now be taxed on the employer;
• Expenditure of a capital nature incurred by a corporate body on legal costs and other incidental expenses relating to authorization and issue of shares, debentures and similar securities offered for purchase by general public or for the purchases of listing on any securities exchange operating in Kenya, without raising additional capital; and
• Expenditure of a capital nature incurred by a corporate body on rating for the purposes of listing on any securities exchange operating in Kenya.

Effective Date – 1^st January 2021

• Amendments to the First Schedule on Exempt Income

The Act has reduced the current income tax exemptions listed in Part I of the 1^st Schedule of the ITA. The following incomes have been removed/excluded as tax exempt:

1. Home Ownership Savings Plan (HOSP) amendments – Effective Date – 1^st January 2021
   1. The Act has scrapped the provision that allowed depositors to enjoy a tax deduction on deposits placed with an approved HOSP institution. Previously contributions of up to KES. 96,000 per annum to HOSP was treated as an allowable deduction.
   2. Income of a registered Home Ownership Savings Plan is now taxable.
   3. Interest income earned on deposits to a registered HOSP will now be subject to tax. Previously, any interest income earned by a HOSP depositor on deposits of up to KES. 3 Million was exempt from tax.
2. Income from employment paid in form of bonuses, overtime, and retirement benefits payable to the employees in the lowest tax band. – Effective Date – 30^th June 2020

1. Payment of a lump sum pension to persons of 65 years or more will be subject to tax. The Act now only exempts monthly pensions paid to persons of 65 years or more. Effective Date – 1^st January 2021

PAYE Rates

Tax Laws (Amendment) Act No. 2 of 2020 introduced new tax rates on individual income as follows:

The new rates replace the rates introduced in April 2020 to mitigate the impact of Covid-19 pandemic.

The new tax rates are welcome as they result into a lower tax as compared to pre-covid rates. A person earning KES. 50,000 would pay PAYE of Kshs. 7,656.30 using the old rates but now will pay PAYE of KES.  7,383.35 under the new rates.

Effective Date – 1^st January 2021

TAX PROCEDURE ACT (TPA), 2015

Voluntary Tax Disclosure Programme

The Act introduced an amnesty programme under sec 37D of the TPA known as the Voluntary Tax Disclosure Programme (VTDP). The programme will run for a period of three (3) years effective 1^st January 2021.

The amnesty is applicable to tax liabilities accruing within the period of five (5) years prior to 1^st July 2020. This is a voluntary programme and the taxpayer should declare all material facts. The Commissioner shall grant relief upon satisfaction of the material facts disclosed.

A person granted relief under this section shall enjoy the following benefits:

• Exemption from prosecution with respect to the tax liability disclosed.
• Confidentiality of the tax liability disclosed.
• Flexible payment plan for the tax liability disclosed for a period not exceeding one year.
• Waiver of penalties and interest as follows:
  1. 100% if disclosure is made in the first year of programme ( in 2021)
  2. 50% if disclosure is made in the second year of programme ( in 2022)
  3. 25% if disclosure is made in the third year of programme ( in 2023)

Other provisions under the programme

1. The relief is subject to the Commissioner’s approval and not automatic.
2. A taxpayer cannot seek any other remedy including the right to appeal.
3. The programme does not apply to taxpayers currently under audit by the Commissioner or have been notified of a pending audit.

This programme seeks to encourage all residents – both companies and individuals to settle all outstanding tax dues in exchange for an amnesty on penalties and interests. It is imperative for taxpayers to disclose all material facts otherwise they risk non-approval or withdrawal of any relief granted by the Commissioner and prosecution.

Effective Date – 1^st January 2021

Conclusion

The changes to our tax laws are significant and will require immediate compliance. We also take this opportunity to notify you that MWC Legal has established a tax team to assist our clients comply with the various tax obligations. If you require any assistance with compliance with the tax laws or have any query touching on this alert, do not hesitate to contact our tax consultants – Richard Kongo and Catherine Ndolo at taxconsultant@mwc.legal.

Please note that this e-alert is meant for general information only and should not be relied on without seeking specific subject matter legal advice.