The Kenyan government, through the Finance Bill 2024, has proposed changes to its tax regime aimed at reforming the tax system, enhancing efficiency, and improving compliance. These changes, if enacted, will impact both corporate and individual taxpayers. This article delves into the major proposed amendments and their potential implications.
Introduction of the Significant Economic Presence Tax
One of the most impactful proposals is the introduction of a Significant Economic Presence (SEP) tax. This tax targets non-resident entities without a permanent establishment in Kenya that derive income from providing services through a digital marketplace. The SEP tax, set at 30%, will replace the existing Digital Service Tax (DST), which is currently charged at 1.5% of the gross transaction value. The taxable profit for SEP will be deemed to be 20% of the gross turnover, marking a shift in how digital economy revenues are taxed in Kenya.
Key Changes in Corporate and Individual Taxation
Minimum Top-Up Tax (MTT)
A notable proposal is the Minimum Top-Up Tax (MTT) of 15%. This tax applies to resident entities with a permanent establishment in Kenya that are part of a multinational enterprise (MNE) group with a consolidated annual turnover of EUR 750 million or more. The MTT ensures that these large MNEs contribute their fair share of tax, aligning with global trends towards ensuring minimum tax payments by large corporations.
Withholding Tax (WHT) Amendments
Several changes to the withholding tax regime are proposed:
- Supply of Goods to Public Entities: WHT of 5% for non-residents without permanent establishments and 3% for residents.
- Digital Content and Online Services: A 20% WHT for non-residents and 5% for residents on income derived from digital marketplaces.
- Bond and Note Interest: Introduction of a 5% WHT on interest from bonds and notes with a maturity of at least three years used for infrastructure funding.
- Shipping and Air Transport: Increased WHT rate from 2.5% to 3% on non-resident income from shipping or air transport, where no reciprocal arrangement or treaty exists.
Changes to Deductible Expenses and Reliefs
The bill proposes expanding deductible expenses to include contributions to the Social Health Insurance Fund (SHIF), affordable housing schemes, and post-retirement medical funds (up to KES 10,000). This change repeals the previous reliefs granted for these contributions, potentially simplifying the tax deduction process.
Indirect Taxation and Miscellaneous Fees
Motor Vehicle Tax
An annual motor vehicle tax of 2.5% on the value of the vehicle is proposed, payable at the time of insurance cover issuance. Exceptions include ambulances and vehicles owned by government bodies and certain exempt persons.
Capital Gains Tax Adjustments
The capital gains tax rate for firms certified by the Nairobi International Financial Centre Authority (NIFCA) is clarified at a reduced rate of 5%. Additionally, the investment threshold for qualifying for this reduced rate is lowered from KES 5 billion to KES 3 billion, over two years.
Digital Marketplace Expansion
The scope of services taxed through digital marketplaces is expanded to include ride-hailing, food delivery, freelance, professional, rental, and task-based services. This broadening reflects the growing digital economy and aims to capture a wider range of taxable activities.
Administrative and Compliance Enhancements
VAT Registration Threshold
The VAT registration threshold will be increased, though specific details were not provided in the summary. This change aims to reduce the administrative burden on smaller businesses and streamline VAT collection.
Extension of Objection Decision Period
The period for the Commissioner of the Kenya Revenue Authority (KRA) to issue an objection decision is extended from 60 days to 90 days. This extension allows for more thorough review and consideration of taxpayer objections.
Exemptions and Expansions in Taxable Income
The Finance Bill proposes several changes to exemptions and taxable income categories:
- Exempt Income: Income from registered pension and provident funds for individuals retiring early due to ill health or withdrawing after 20 years is exempt.
- New Taxable Income: Income from amateur sporting associations, registered trust schemes, the National Housing Development Fund, and individuals under the Ajira Digital Program, among others, will become taxable.
Conclusion
The Finance Bill 2024 introduces comprehensive tax reforms aimed at enhancing tax compliance and broadening the tax base in Kenya. From the introduction of the SEP tax to various changes in withholding taxes, deductible expenses, and administrative measures, these proposals reflect a strategic shift towards a more robust and equitable tax system. Tax professionals and investors should closely monitor these developments, as the proposed changes, pending parliamentary approval and presidential assent, will take effect between 1 July 2024 and 1 January 2025. These reforms represent a significant step in aligning Kenya’s tax system with international best practices and ensuring a fairer distribution of tax burdens, particularly in the rapidly evolving digital economy.
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