The Finance Act, 2022 ( the “Act”) was assented into law on 21st June 2022. The Act introduces material changes to the tax regime in Kenya and is largely aimed at enhancing revenue collection, promoting investments and bringing alignment to the current tax laws. Most of the changes will take effect from 1st July 2022. We highlight below some of the key amendments in the Act.

Income Tax

Under the Act, gains derived by non-residents from financial derivatives which are not traded at the Nairobi Securities Exchange will be subject to income tax at the rate of 15%. A Kenya resident who enters into a financial derivatives contract with a non-resident person is required to deduct this tax on the payments made to the non-resident.

Prior to the Act, the exemption from the application of interest restriction rules (generally referred to as “thin capitalisation rules”) only applied to banks or other institutions licensed under the Banking Act or Micro and Small Enterprises Act. The Act extends the exemption of the thin capitalisation rules to other entities including;

  • those licensed under the Microfinance Act, 2006, the Hire Purchase Act, 2012,
  • non-deposit taking institutions involved in lending and leasing business and holding companies regulated under the Capital Markets Act,
  • companies engaged in the manufacture of vaccines and companies with significant capital investment engaged in manufacture (i.e., cumulative investment in the preceding five years of at least KES 5 billion or investment of a similar amount outside Nairobi City County or Mombasa County).

Further, the Act extends the scope of application of the arm's length principle to cover transactions undertaken by a resident persons with entities located in preferential tax regimes, or with associated enterprises or permanent establishments of such entities. The term “preferential tax regime” is very broadly defined and covers:

  • any jurisdiction which does not tax income or taxes income at a rate that is less than 20%;
  • does not have a framework for the exchange of information;
  • does not allow access to banking information or lacks transparency on corporate structure;
  • ownership of legal entities located therein;
  • beneficial owners of income or capital; and
  • financial disclosure or regulatory supervision.

Going forward, resident entities may, therefore, be required to maintain transfer pricing with non-related parties where the above conditions are met.

In addition, the Act extends Country-by-Country (“CbC”) reporting obligations to resident constituent entities or resident surrogate parent entities (“SPE”) of multinational enterprise (“MNE”) groups with gross turnover of KES 95 billion. Previously, there was no threshold for CbC reporting which was only applicable to a resident ultimate parent entity (“UPE”) of a MNE. The Act requires UPEs to file CbC reports with the Kenya Revenue Authority (“KRA”) within twelve months from the end of an accounting period.

Prior to the end of an accounting period, however, a constituent entity of a MNE falling in this turnover threshold is required to notify the KRA whether or not it is the UPE or SPE of the group, and where it is not the UPE or SPE, to provide the identity of the constituent entity which is the UPE or SPE and the tax residence of that entity. In addition to the CbC reporting, a UPE or a constituent entity are required to file a master file and a local file with the KRA within six months from the end of an accounting period.

The rate of capital gains tax (“CGT”) has been increased from 5% to 15% of the net gain realised on disposal of properties. It is noteworthy that while the Act has increased the CGT rate, there are still no provisions for indexation / inflation relief.

The Act allows flexibility for reduced rates to be provided to certain strategic investments ie. companies: engaged in business under a special operating framework arrangement (“SOFA”) with the Government; incorporated for purposes of undertaking the manufacture of human vaccines; or whose capital investment is at least KES 10 billion. In addition, companies undertaking the manufacture of vaccines are exempted from various taxes e.g. tax on income, withholding taxes on payments such as dividends, interests, deemed interest, etc.

From a capital allowances perspective, the Act reintroduces the 150% investment allowance on investments of at least KES 2 billion cumulatively for the preceding four years or succeeding three years. To qualify, the investment should be outside Nairobi City County or Mombasa County.

The Act has reverted the exemption from withholding tax on dividends paid out by special economic zone (“SEZ”) enterprises which had previously been deleted and extended the withholding tax exemption to include dividends paid by other SEZ entities i.e., developers and operators.

Other relevant changes include: -

  • Non-resident digital services providers who have permanent establishments in Kenya will not be required to pay digital service tax. The rationale for this is that the income of the permanent establishments would already have been subjected to corporate income tax.
  • The Act extends the deductibility of cash donations to any charitable organisation that is exempt from income taxes or that is an approved project. Previously, a deduction was only granted where cash donations were made to entities registered under the Societies Act or the Non-Governmental Organisations Coordination Act.
  • Going forward, the tax on gains arising from employee share ownership plans will be based on the difference between the offer price, per share, at the date the option is granted by the employer and the market value, per share, on the date when the employee exercises the option.

Value Added Tax (“VAT”)

The VAT status of exported services has been reclassified from “exempt” to ‘taxable' at the standard rate of 16% (with the exception of business process outsourcing services which will be subject to VAT at zero rate). This means that the costs of procuring services from Kenya for a non-resident will be higher. However, service providers in Kenya will now be able to claim VAT incurred in providing exported services.

In addition, the Act provides clarification that any non-resident person providing taxable digital services should register for VAT in Kenya or appoint a tax representative to account for VAT on their behalf, regardless of: (a) the value of supplies made by them; or (b) whether supply is made in a business-to-business or business-to-customer transaction. Going forward, importers of digital services will not be required to account for VAT on imported digital services through the reverse charge mechanism.

Other relevant changes include:

  • Reduction in the applicable VAT rate on liquefied petroleum gas including propane from 16% to 8%.
  • Going forward, deduction of input VAT will only be allowed where a taxpayer has filed a return for the period.
  • Participants in the Open Tender System importing petroleum products that have been cleared through a non-bonded facility will be required to provide the custom entry showing the name and personal identification number of the winner of the tender and the name of the other oil marketing company participating in the tender in order to claim input VAT.
  • Provision of clarity that the imposition of interests and penalties in respect of imported taxable goods shall be governed by the provisions of the Tax Procedures Act.
  • Goods purchased from duty free shops by passengers travelling out of Kenya will now be subject to VAT at the standard rate (these were previously zero-rated).
  • Inputs or raw materials locally purchased or imported by manufacturers of fertilizer as approved from time to time by the Cabinet Secretary responsible for Agriculture will now be zero-rated (previously, these were subject to VAT at the standard rate of 16%).
  • The Act empowers the Cabinet Secretary to exempt such capital goods as they may determine to promote investment in the manufacturing sector, provided that the value of such investment is not less than KES 2 billion (circa USD16.6 million at the time of writing) . In addition, the Act has reclassified the following items from standard rate to exempt: -
  • Taxable goods, inputs and raw materials (subject to approval of the Cabinet Secretary for National Treasury, on recommendation of the Cabinet Secretary for health) imported or locally purchased by a company which is:
  • engaged in business under a special operating framework arrangement with the Government; or
  • incorporated for purposes of undertaking the manufacture of human vaccines; and whose capital investment is at least KES 10 billion (circa USD 8.8 million at the time of writing).
  • Plant and machinery for use by manufacturers of pharmaceutical products upon recommendation of the Cabinet Secretary.
  • Inputs and raw materials used in the manufacture of passenger vehicles and locally manufactured passenger motor vehicles.
  • Medical oxygen supplied to registered hospitals.
  • Urine bags, adult diapers, artificial breasts and colostomy or ileostomy bags for medical use.
  • Fertilizers of chapter 31 (Animal or vegetable fertilizers and mineral or chemical fertilizers) have been reclassified from being VAT exempt to zero-rated.
  • The Act has reclassified the following items from VAT-exempt status to standard rated: -
  • Taxable goods for the direct and exclusive use in the construction and equipping of specialized hospitals with a minimum bed capacity of fifty, approved by the Cabinet Secretary for Treasury upon recommendation by the Cabinet Secretary responsible for health who may issue guidelines for determining eligibility for the exemption.
  • Taxable services for the direct and exclusive use in the construction and equipping of specialised hospitals with accommodation facilities upon recommendation by the Cabinet Secretary responsible for health who may issue guidelines for determining eligibility for the exemption

Excise Duty

The Act has also amended the excise duty rates to increase the rates of several products, some include:

  • fruit juices,
  • perfumes and makeup,
  • beer and wines,
  • cigars and cigarettes,
  • imported furniture,
  • fees charged by digital lenders; and
  • importation of mobile phones.

The Act also empowers the KRA, with the approval of the Cabinet Secretary for Treasury, to exempt specified products from inflation adjustment after considering the circumstances prevailing in the economy in that year in respect of such products. This move is targeted at cushioning consumers against rising costs of excisable products arising from inflation adjustments.

Tax Procedures Act

Trust structures are likely to undergo increased security. The registration of a trust is now a transaction that requires a tax registration. Further, the Tax Procedure Act (“TPA”) requires that every trust, whether in business or not, to notify the KRA about any changes in identity, address of the trustees or beneficiaries of the trust.

The TPA exempts withholding VAT registered manufacturers with an investment of at least KES 3 billion (circa USD 26.5 million at the time of writing) in the preceding three years from the commencement of the Act, 2022 (i.e., on 1 July 2022.)

In addition, the TPA has widened the scope of what is recoverable as security for unpaid taxes in a tax dispute. Previously, only land and buildings qualified as security. This power has been extended to include ship, aircraft, motor vehicles, and any other property that the KRA determine can serve as security for unpaid taxes.

Where a taxpayer has a tax overpayment, the TPA allows such a taxpayer to apply to the KRA to offset the overpaid tax against the taxpayer's future tax liabilities or to apply for a refund. The TPA prescribes a time limit of 90 days for the KRA to review and determine the application, failure to which it will be deemed to have been approved.

A taxpayer aggrieved by the KRA's decision may appeal the decision to the Tax Appeals Tribunal within 30 days of being notified of the decision. Also, the KRA may refund any taxes paid in error (including where such taxes arise from zero-rated or exempt supplies due to circumstances beyond taxpayer's control) if satisfied that the amounts should not have been paid. The refund process should be similar to that applicable to tax overpayments.

Another important change in the TPA is that the period for providing a response to a taxpayer's objection by the KRA (i.e., an objection decision) has been capped to 60 days from the day of receiving a valid objection by a taxpayer. The TPA provides a 14-day window for the KRA to notify a taxpayer if a notice of objection has been validly filed. In the event that the KRA do not provide an objection decision within the 60-day timeline, the objection is deemed to have been allowed. Previously, the 60 days would reset and start from the date of any subsequent request for additional information made by the KRA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.