Hits and misses of Budget 2021/22 amid taxing times

Kenya's Treasury CS Ukur Yatani (PHOTO: FILE)

The Covid-19 pandemic has wreaked havoc across the globe and Kenya has been no exception.

In March 2020, when the World Health Organisation announced the world was in a pandemic, no one believed it would last this long and indeed that the virus would shut down economies virtually everywhere. Many countries have gone into recession, which some say has been worse than the 2008 financial crash and even the Great Depression of the 1930s.

Kenya too saw its economy contract in 2020. If Covid-19 continues to push the country into periodic lockdowns, the economy will likely face an uphill challenge this year as well. The Finance Bill, 2021 was tabled in the National Assembly at the end of last month in this context with government expenditure that is spiralling and high-interest payments required to service the country’s escalating debt.

Although the government has continuously stated that it is pursuing fiscal austerity measures, the reality is entirely different.

Following the additional support from the International Monetary Fund (IMF), the expectation was that radical tax changes, including increasing rates, would be the order of the day.

As it transpired, the majority of the amendments have been directed towards strengthening tax administration and addressing challenges encountered by the tax authority on cross-border transactions.

There are some changes to rates but mainly in the area of value-added tax and excise duty and the extractive industry.

Perhaps this is a recognition of the hardship many are facing in the current economic climate or maybe the fact that there will be an election in less than 18 months.

The Income Tax Act has seen several amendments largely directed at Multi-national Entities (MNEs), based in Kenya, which follows global moves towards looking at the taxation of such companies and in particular at shifting profits to low tax jurisdictions. MNEs with turnovers exceeding a prescribed rate (yet to be set) will, if the Finance Bill is passed as is, be required to file returns describing the group’s financial activities in all jurisdictions where there is a taxable presence not later than 12 months after the last day of the financial reporting year of the group. The returns will also contain information relating to profit or loss before tax, profit after tax, income tax paid, tangible assets and number of employees.

This system, known as the country by country reporting, is already in place in many parts of the world. There have also been amendments to definitions of control and thin capitalisation rules. The recently introduced Digital Service Tax, which taxed, at a fixed rate, the gross transaction value in a digital marketplace has been amended probably as a result of how ambiguous it was when first introduced.

Key among the changes is that the tax will only apply to non-residents, which is good news for Kenya’s nascent, but rapidly growing, technology sector. The amendments, however, extend the tax to include that income accruing from a business carried out over the internet or an electronic network including through a digital market place.

Several other clarifications have been introduced by the Finance Bill. The same amendments to definitions have been made in the Value Added Tax Act.

In an interesting move, businesses with tax losses will now be able to carry forward the losses indefinitely up from the previous nine years. While this is certainly good news, it must be remembered that businesses that do not pay taxes are now subject to a one per cent minimum tax on their gross turnover.

Clearly, those with losses will be affected by this so in effect the Finance Bill is robbing Peter to pay Paul! The VAT Act has been amended to remove some items from exempt or zero-rated status to taxable but has also reintroduced some of the exemptions (clean energy and medical

supplies among them) that were repealed during 2020. One key change is to make exported taxable services exempt rather than zero-rated. This will have a significant impact on marketing companies of overseas companies and those providing services for use or consumption outside Kenya, as they will no longer able to recover their input VAT resulting in increased costs. Claiming input VAT on the leasing or hire of passenger cars or minibuses is proposed to be restricted.

The Bill amends the VAT Act to prevent groups of companies from benefiting from group registration for the tax.

This is clearly a backward step given that cost savings on doing business will be lost.

The Excise Duty Act has also been amended with some additional taxes – 15 per cent on fully assembled imported motorcycle and a 20 per cent duty on bets wagered, among others – but with some reductions as well. The most interesting reduction allows bulk purchasers of data to offset the tax paid against the tax they charge end users, which should result in lower data charges for consumers. A recent East African Community court case ruled that Kenya could not impose import duty on glass bottles imported from member states and this is to be enshrined in the law if the Finance Bill is passed. Unfortunately, the processing fees on borrowing is planned to be subjected to excise duty at 20 per cent, another increase in the cost of doing business.

In December 2019, Kenya signed and ratified the Convention on Mutual Administrative Assistance in Tax Matters including the Common Reporting Standards (CRS). CRS provides for the rules governing the automatic exchange of information on tax matters in a bid to reduce tax evasion and improve tax transparency and compliance. The Finance Bill proposes an amendment to the Tax Procedures Act to implement the CRS regime. The Kenya Revenue Authority will be able to receive information concerning income received by Kenyan tax residents, which should assist in battling avoidance and evasion of tax. In addition, an amendment is proposed to increase the time period for maintenance of records and for assessments to raised from the current five years to seven years. With Covid-19 persisting and a lack of vaccines, the year ahead is likely to be challenging and it is debatable whether the Finance Bill and expenditure budgets have done enough to address this. If we can control the pandemic, the country will show sharply increased growth in 2021. Time will tell!

- The views expressed in this article are the author’s and not necessarily those of Bowmans Kenya