Key Changes Proposed By The Finance Bill, 2024

The Finance Bill, 2024 has now been published and as expected, the Bill proposes an array of changes. In this Article, we discuss the various amendments and their implications. 

1.Proposed changes to the Income Tax Act  

 a. Motor Vehicle Tax 

The Finance Bill 2024 introduces a Motor Vehicle Tax, set at 2.5% of a vehicle's value, with a minimum threshold of KShs. 5,000/- and a maximum cap of KShs. 100,000/-. However, this specific tax shall not be payable in respect of an ambulance, a motor vehicle owned by the national government, county government, Kenya Defence Forces, National Police Service, National Intelligence Service or a person exempt from tax under the Privileges and Immunities Act 

The calculation of this tax will be based on the make, model, engine capacity, and year of manufacture of the vehicle. 

Insurers are tasked with collecting and remitting this tax within five (5) working days after issuing a motor vehicle insurance cover.  A penalty, equivalent to fifty percent of the uncollected tax in addition to the actual amount of the tax will be applicable. 

Implication 

The introduction of the Motor Vehicle Tax carries significant implications for the cost of owning a vehicle. Set at a rate of 2.5% of a vehicle's value and with a minimum threshold of KShs. 5,000/-, this tax introduces heightened financial obligations for vehicle owners. 

It also leads to increased administrative tasks and potential operational costs for insurers  as  the collecting agents.

b. Registered Family Trusts 

The Bill seeks to Amend Paragraph 57 with a proposal that could lead to the income or principal sum of such trusts no longer being exempt from tax. 

Implication  

This proposed amendment raises serious concerns regarding its fairness and potential ramifications. Particularly troubling is the impact on estate planning, as family trusts serve as crucial vehicles for managing and preserving wealth across generations. The prospect of subjecting these trusts to taxation on their income or principal sums is particularly unfair, given their inherent purpose as estate planning tools.  

The introduction of taxation on the income of family trusts may have unintended consequences, including the potential resurgence of the use of offshore trusts, potentially leading to the erosion of domestic tax revenues.

c. Definition of Royalty Expanded  

The definition of Royalty has been expanded to include any software, proprietary or off-the-shelf, whether in the form of license, development, training, maintenance or support fees and includes the distribution of the software. 

The Bill therefore proposes to tax the purchase of software whether by licence or otherwise as acquisition of royalty. 

Implication  

This provision deviates from international standards and best practices. 

Article 12 paragraph 14.4 of the OECD, states that in transactions where a software copyright holder grants a distribution intermediary the right to distribute software copies without the right to reproduce the software, the distributor is paying only for the acquisition of the software copies and not to exploit any right in the software copyrights. Thus, the rights related to distribution should be disregarded when analyzing the transaction for tax purposes. 

This provision, if adopted will present divergence from the decision of the High Court in Seven Seas Technologies Limited vs the Commissioner of Domestic Taxes and The Tribunal’s decision in Dynasoft Limited vs. Commissioner Domestic Taxes where in both cases the courts held that in order for a software- related payment to amount to a royalty that is subject to withholding tax, the payer must have acquired any or all of the rights that enable them to commercially exploit the software.

d. Definition of Digital Marketplace  

The Bill proposes to define a digital marketplace to encompass any online or electronic platform that facilitates the sale and provision of goods and services which includes:- 

1. Ride-hailing services; 
2. Food delivery services; 
3. Freelance services; 
4. Professional services; 
5. Rental services; 
6. Task-based services; and 
7. Any other service that is not exempt from tax under this Act. 
8. Digital Monetization  

The Bill proposes that WHT paid in respect to digital content monetization be a final tax.  

Implication  

Currently, the tax is not a final tax. This is a welcome move as the earnings from digital content monetization  will not be subject to further tax after WHT is deducted at source.

e. Deferral of foreign exchange losses  

The bill aims to restrict the timeframe during which companies with foreign loans can carry forward excess losses, particularly when the interest exceeds 30% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). It proposes to shorten the period from five years to three years. 

Implication  

The proposed change could indeed have adverse effects on companies that made decisions regarding foreign loans based on the expectation of a five-year period for carrying forward excess losses. Shortening this timeframe to three years could disrupt their financial planning and potentially increase their tax burden. 

f. 15% Tax Rebate for Real Estate Developers  

The Bill proposes the removal of the 15% tax rebate enjoyed by companies that construct  100 Residential units annually.  

Implication  

This rebate was initially introduced as a measure to incentivize and support the construction of residential housing units. By offering developers a 15% rebate on taxes, the intention was to enable developers to sell houses at lower prices, thereby increasing affordability for potential  buyers. The removal of the rebate could potentially lead to the price of residential units going up. 

g. Digital Service Tax to be replaced by an Economic Presence Tax 

The Bill seeks to introduce  a tax known as Significant  Economic Presence Tax  payable by a  non-resident  person whose income from the provision of services  is derived from or accrues in Kenya  through a business carried out over a digital marketplace.  

Taxable profits are  deemed to be 20% of the gross turnover . 

The tax is to be paid before the 20th day subsequent to  the month the  service was provided.  

The Bill excludes the following non-resident persons from the liability to account for significant economic tax:- 

1. a non-resident person who offers services through a permanent establishment; 
2. a non-resident person who carries on in Kenya the business of transmitting messages by cables, radio, optical fibre, television broadcasting, internet, satellite, or other similar methods of communication; and  
3. income subject to withholding taxes. 

Implication  

The proposed significant economic presence tax is largely similar in its application to the digital service tax that it seeks to replace. This is because the significant economic presence tax still seeks to tax the income accruing from the provision of services through a digital marketplace. 

It is however not a new concept as it already operational in Nigeria where it was introduced in 2020 and India where it was introduced in 2021.   

h. Taxation of Investment Securities  

The Bill suggests imposing taxes on incomes generated from specific investment securities. These include interest income derived from listed bonds, notes, or similar securities utilized for infrastructure projects and assets as defined under Green Bonds Standards and Guidelines, as well as other social services. However, the Bill  stipulates that these bonds, notes, or securities must have a minimum maturity period of three years to be subject to taxation. 

Implication  

Subjecting income from these investment securities to taxation could potentially reduce their attractiveness to investors. The taxation could diminish the return on investment (ROI), making them less appealing compared to alternative investment options. 

i. Minimum top up tax 

Multinational groups with significant business in Kenya and whose consolidated turnover is EUR 750+  will face a new minimum top up tax if their effective rate is below 15%. 

Exemptions  

1. A pension fund and its assets. 
2. A real estate investment vehicle that acts as an ultimate parent entity. 
3. A non-operating investment holding company. 
4. An investment fund that serves as an ultimate parent entity. 
5. A sovereign wealth fund. 
6. Intergovernmental or supranational organizations, along with wholly owned agencies or organs of these entities. 

Implication  

This proposal is based on the Global Anti-Base Erosion (GloBE) rules designed to ensure that Multinationals pay a minimum level of tax in each jurisdiction that they operate. 

j. Advance Pricing Agreement (APAs) 

The Bill proposes the introduction of a Section 18G, where the KRA may enter into an advance pricing agreement with any person to arrive at an arm’s length price. The advance pricing agreement entered into shall be valid for a period that does not exceed five consecutive years. 

Implication  

This provision aims to mitigate the risk of disputes related to Transfer Pricing (TP) methods used by multinational corporations, providing greater clarity and certainty in tax compliance for both taxpayers and tax authorities. By facilitating proactive dialogue between taxpayers and tax authorities, this provision seeks to foster a cooperative approach to TP compliance, ultimately benefiting both parties and promoting a more transparent and efficient tax environment in Kenya. 

k. PAYE Provisions  

The Bill seeks to increase the non-taxable benefits of employment as follows:- 

1. Amend the non-taxable daily limit of an allowance paid to an employee working outside his usual place of work. The Bill proposes that employers should have a policy on the payment and accounting for subsistence, travelling, entertainment or other allowance with an amount not exceeding five percent (5%) of the monthly gross earnings of the employee. The current non - taxable daily limit of the allowance is capped at two thousand shillings; 
2. Amend the limit of non-taxable benefits granted with respect to employment from thirty-six thousand shillings to forty-eight thousand shillings.  
3. Review the value of meals provided to employees in a canteen or cafeteria operated or established by an employer from KShs. 48,000/- to KShs. 60,000/-. 

Implications  

The proposed amendments intend to elevate non-taxable benefits for employees, aiming to better align with contemporary economic circumstances and enhance employee well-being within the tax framework. 

l. Scraping off the Affordable Housing  relief  

The Bill proposes to repeal Section 30A of the Income Tax Act which provides for Affordable Housing Relief at 15% capped at KES 9,000 per month or 108,000 per annum. 

Implication  

The removal of this relief from the bill is indeed unfortunate. This relief, being a cornerstone of the Affordable Housing Act, was a major selling point. Its inclusion served as a tangible incentive. 

m. Taxation of Pension Income  

Pension income will be exempt from tax under the following circumstances:- 

1. for payments of a pension or withdrawals made after fifteen years from joining the fund,  
2. upon reaching the age of fifty years, or 
3. upon early retirement due to health reasons. 

This exemption applies to pension funds, provident funds, the National Social Security Fund, or individual retirement funds registered under the law. 

Implications 

Offering tax exemptions for pension income under certain conditions such as in the case of early retirement serve as a significant incentive for individuals to save for their retirement.  

n. Capital Gains Tax (CGT) Changes  

The Bill proposes that the transfer from an individual to a company where the individual holds 100% shareholding be CGT exempt. 

The Bill proposes that the transfer to a company where a spouse holds 100% shareholding be CGT exempt. 

Implication  

This is a welcome move. The logic behind this is that  in this circumstances there is no new beneficial owner. 

Revised Conditions for Reduced CGT Rate 

The Bill seeks to introduce  revised conditions  for an entity to qualify for a reduced CGT rate of 5% and provides that where the Nairobi International  Financial Centre Authority (NIFC) certifies that a firm  has invested at least KShs 3 billion in at least one entity incorporated in Kenya  within a period of five years, the firm will enjoy a preferential CGT rate of 5% 

The transfer of the investment is to be made after five years of the date of investment. 

Implication  

This provision is passed  will reduce the amount that a firm needs to invest  to qualify for the 5% rate  from the current 5 billion  to 3 million. This is a welcome move as it cushions against the 15% rate    

p. Application for change in accounting  period 

Where a taxpayer requests a change in their accounting period and the commissioner doesn't respond within six months, the application will be considered as approved by default.

(2) Proposed changes to the Value Added Tax (VAT)  Act    

1. Increase of the VAT registration threshold from KShs. 5,000,000/- to KShs. 8,000,000/-  

The Bill proposes to increase the threshold for mandatory VAT registration from Kenya Shillings Five Million (KShs. 5,000,000/-) to Kenya Shillings Eight Million (KShs. 8,000,000/-).  

Implication  

This is a welcome move as this was last revised in 2007. It will  alleviate the burden on small businesses while accounting for inflation.   

(b) Minimum  Requirements for all Invoices  

The bill outlines that an electronic tax invoice must include the following details 

1. The name, address, and PIN of the supplier; 
2. The name, address, and PIN (if available) of the purchaser; 
3. The serial number of the tax invoice; 
4. The date and time the tax invoice was issued, along with the date and time the supply was made, if different; 
5. A description of the supply, including quantity for goods or type for services; 
6. Details of any discounts applied at the time of supply; 
7. The consideration (price) for the supply; and 
8. The tax rate applied and the total tax amount charged. 

(c) Apportionment of  input VAT of Mixed Supplies  

The Act currently states that a person dealing in mixed supplies, with at least 90% being taxable, can claim 100% of the input VAT. Conversely, someone making less than 10% taxable supplies cannot claim any input VAT. However, the bill proposes to revoke this provision, suggesting that input VAT apportionment will be based on actual percentages rather than fixed thresholds.

(d) Transfer of business as a going concern  to be  reinstated to the exempt category   

The Bill proposes to make the transfer of business as a going concern exempt from VAT. Currently, VAT is applicable on such transfers at the standard rate of sixteen percent (16%). 

Implication  

Before July 1, 2018, Transfer of Going Concerns (TOGCs) enjoyed zero-rated status, enabling sellers to reclaim VAT credits. However, the Finance Act of 2020 reclassified TOGCs to the exempt category, resulting in sellers losing the ability to recover VAT credits. Subsequently, after April 25, 2020, TOGCs became subject to a 16% VAT rate. This meant that VAT was now included in the TOGC value, and sellers were obligated to remit collected VAT to the Kenya Revenue Authority (KRA). 

While a zero percent rate would have been more attractive, the VAT exemption is a positive development. It has the potential to facilitate smoother transitions in business ownership and could potentially stimulate investment activity.

(e) The supply of ordinary bread to be removed from the zero-rated category 

The Bill proposes to remove the supply of bread from the zero-rated category to standard rate at 16%.  

Implication  

The VAT system operates on an input-output mechanism, allowing manufacturers to deduct VAT paid on inputs from the VAT collected on outputs. Consequently, products classified as zero-rated result in manufacturers being able to deduct VAT at a rate of 0%, making them the most affordable. Thus, with the proposed changes in VAT treatment, prices are expected to rise.

(f) Financial Services  

The Bill proposes to delete VAT exemptions for the following financial services, which will would then be chargeable to VAT at the standard rate,-  

Implication  

The cost of these financial services will go up  

E mobility/ Clean energy Sector   

Implication  

The Government of Kenya has an ambitious target of achieving 100% universal access to modern cooking solutions by 2028 as part of its commitment to attaining the SDG 7. Kenya is also a signatory to the Paris Agreement on Climate Change (2015), whose main goal is to limit global warming to less than 2 degrees Celsius, preferably 1.5 degrees Celsius. 

The proposals to  subject clean solutions  to VAT at the standard rate deters the uptake of the same and will prove counterproductive. 

(g) Other Sectors  

Excise duty  

Increase in Excise Duty rates  

Alcoholic Beverage manufactures  window for  remitting excise duty  is to be revised from the current 24 hours to  5 working days 

(3) Tax Procedures Act  
(a) Tax Refunds  

The proposed Act aims to amend tax refund application timelines, setting a uniform standard across various tax categories. Specifically, it suggests a 5-year timeframe for lodging income tax refund applications and a 6-month period for all other cases. 

Implication  

This amendment seeks to streamline and clarify the process, providing taxpayers with clear guidelines for submitting refund claims within reasonable timeframes. 

Increase of timeframe for issuance of objection decisions by the KRA  

The Bill proposes to increase the timeframe for issue of objection decisions by the KRA from 60 days to 90 days. 

Implication  

The extension of the KRA's objection decision period from 60 days to 90 days seems unfair considering the existing 30-day window for responding to assessments. 

Computation of time for submission of returns and payment of taxes  

As it stands, if a deadline for submitting a document, tax return, notice, or tax payment falls on a Saturday, Sunday, or public holiday, it is due on the previous working day unless submitted electronically. However, the Bill proposes amending this so that time will only include working days. 

PIN Requirements for Remote Employees of Kenyan Employers  

Currently, employees working remotely outside Kenya for Kenyan employers are not required to acquire a KRA PIN. If passed this proposal will make it easier for the employers of such persons to deduct and remit PAYE furthermore it will widen the tax net.  

KRA not subject to Data Protection  laws  

The Bill proposes to exempt the KRA  from constraints in access  to personal data where such access is  deemed necessary for an assessment, enforcement or collection  of any tax or duty under a written tax law  

Affordable Housing Act  

The Bill proposes to amend the Act buy deleting the requirement for  approval by the  Affordable Housing Board  before  the sale of Affordable housing units.  

This will give homeowners the leeway to sell their units when the need arises.  

The Bill will soon be open for public input. Your active participation as a taxpayer is crucial in influencing policies that impact you directly. We urge you to use this chance to share your thoughts by submitting comments to Parliament. Rest assured, we are dedicated to keeping you updated on any new developments regarding the Bill.