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published on 30 April 2020 | reading time approx. 3 minutes
The Kenyan Government recently announced a number of measures which are designed to cushion the public and business from the adverse impact of Covid-19.
As a follow up to the announcement the Tax Laws (Amendment) Act 2020 (the Act) was assented to by the President on 25 April 2020.
A keen scrutiny of the Act reveals that the new tax changes not only cover the key Covid-19 proposed fiscal measures, but it also contains additional measures that may have a major impact on tax legislation in Kenya.Key changes that may generate a lot of interest in business and personal income include changes on the corporation tax rates by resident companies and the new PAYE tax bands. We have summarised key changes below:
The new Act has reduced the corporation tax rate from 30 percent to 25 percent per annum. This applies from the financial year of income 2020 going foward. This is a welcome adjustment and that will attract foregn direct investment especially for investors that operate as subsidiaries in Kenya.
From an East African perspective - this is the lowest corporate tax rate in East Africa and therefore favourably improves Kenya’s rating on ease of doing business index.
For existing resident companies, the new rate provides temporary cushion although the long term impact will be felt by tax payers post Covid-19 when companies will be back to profitability or hopefully back on the growth trajectory.
It is important to note that the non-resident tax rate remains 37.5 percent , this is applicable to branch companies and Permanent Establishment’s of foregn companies.
Another key change on income tax is the extension of turnover tax registration threshhold and range. This will now apply to companies that have a turnover of between KES one Million to KES Fifty Million. The turnover tax rate has also been reduced to one percent from the previous three percent. This is good news for small business, although a number of clarifications will still require to be made on the status of businesses that make an annual turnover of below one Million and other proffessional services.
Other notable changes include an overhaul of capital allowances.
As was proposed by the President, the PAYE rates applicable to salaried taxpayers have been amended. The rates and new bands now cushion taxpayers with income below Kenya shillings 24,000 per month. The maximmum rate now is 25 percent on those with annual income above Kenya shillings 688,000. This has the net effect of increasing disposable income to salaried workers.
The amendments to the tax bands also applies on payments or withdrawals from pension scheames.
Another key change is the increase of withholding tax rate on dividend payments made by resident companies to non-resident shareholders from 10 percent to 15 percent. Lower rates would still be applicable in instances where Kenya has a Double Tax Arrangement with the recipients country of resident.
Additional Withholding Tax (WHT) changes have been made on other services such as professional marketing ,re-insurance business and on road transportation which were previously not covered.
From a Value Added Tax perspective the new VAT rate of 14 percent is now confirmed and legislated into law. A closer look at the new Act also reveals that the VAT net has been widened to include sectors such as insurance and security brokerage services.
All in all, in terms of Covid-19, the proposed lower tax rates such as PAYE and the corporation tax will come in handy to the business community and on personal income when the economy will be back on a recovery path after Covid-19. It is evident in many contries that lower and simpler tax rates lead to a higher rate of compliance and tax yield.
Coronavirus: What you need to know
George Maina
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