Income Tax Bill 2018: A new era for the income tax regime in Kenya

published on May 28, 2018

The current Income Tax Act (“Act”) has been in existence since 1974. This Act has over the years undergone various piecemeal changes after every annual national budget cycle. In the year 2016, the Kenyan Cabinet Secretary in-charge of the National Treasury announced in his national budget speech his intention to review the entire Act and table a Bill in the year 2017 as part of the Government’s tax reform agenda.​

A similar promise was made in his 2017 budget speech which promised to publish the draft Act for public input in accordance with the Constitution. Finally, a draft Income Tax Bill was released to the public on 15 May 2018 with a call for comments prior to finalization and submission of the Bill to Parliament.
 
In this issue we have highlighted some of the major proposals and will avail our detailed analysis of all proposed changes in a separate bulletin.

Is the Income Tax Bill 2018 a new law?

A Bill becomes Law upon approval by Parliament and assent by the President. We expect the Income Tax Bill 2018 (“Bill”) to be tabled in Parliament during this year’s national budget reading in June 2018. The approval process also requires public participation as conducted during the year 2017 after the National Treasury’s call to the public for views on the Act in accordance with the Kenyan Constitution. Currently, the Bill has been published to allow further public scrutiny and submissions before 24th May 2018. Rödl & Partner Kenya is available to assist clients, taxpayers or organized groups that may wish to submit their comments and/or lobby papers to the National Treasury before the set deadline.

Proposed changes on individual income tax

• Introduction of new tax scale with a rate of 35 per cent for high income earners pocketing over Kes 9 million p.a (Kes 750,000 p.m.);
• Definition of Residency: An individual’s permanent home has now been defined to include a place where personal and economic interests are closest. This is the definition used in modern double tax agreements to guide the taxation of cross-border employees;
• Taxation of non-cash benefits: The tax free limit of Kes 3,000 p.m. has been abolished;
• Medical benefit: The tax free benefit has now been extended to include insurance covers not approved by the Commissioner of Insurance. This embraces regional employees and expatriates with global medical covers;
• Taxation of Per diems: The tax free limit of Kes 2,000 p.m. has been replaced with the prescribed public service rates. These rates are economically realistic bearing in mind that the official trips made by public service employees closely mirror those of employees serving multinational employers;
• Introduction of presumptive tax at 15 per cent of single business permit fee charged by County governments, for sole proprietors (also applies to business forms other than companies and income from rental business or management/ professional services) with an annual turnover not exceeding Kes 5 million;

Proposed changes on Corporate tax

1. Introduction of graduated tax scales: The tax rates for both residents and non-residents (including permanent establishments) are now 30 per cent for taxable income below Kes 500 million and 35 % for all income over Kes 500 million;

2. Increase of Capital Gains Tax (CGT) rate from 5 to 20 per cent and inclusion of an index factor adjusting for inflation in computing the taxable value for CGT;

3. Abolishing of tax holidays for Special Economic Zones (SEZ) and Export Processing Zones (EPZ) investors in place of 10 per cent rate (first 10 years) and 15 per cent (next 10 years);

4. Abolishing of 150 % investment allowance and reduction of various capital allowances on buildings and machinery used in manufacturing, commercial real estate, film and education sectors;

5. Scrapping of tax exemptions on specified institutions and income currently numbering to over 50 (including govermental enterprises) and introduction of a new list of 21;

6. Development of Regulations to guide the taxation of enterprises involved in the digital economies; 

Proposed changes on cross-border taxation

1. Application of reduced tax rates in double taxation agreements (DTAs) limited to enterprises with less than 50 per cent non-resident ownership. In addition the rates will not apply to fees charged for cross-border intercompany shared services;

2. Introduction of withholding tax on repatriated profits at a rate of 10 per cent;

3. Revision of the thin capitalization threshold from the current debt-equity ratio of 3:1 to 2:1;

Proposed Transfer Pricing changes

1. Arm’s length pricing requirements now extended to cross transactions between a resident entity and an independent nonresident in a ‘preferential tax regime’ or where the transaction lacks ‘economic substance’;

2. Arm’s length price for commodities whose prices are available at public commodity markets or exchange markets shall be the quoted prices subject to appropriate supported adjustments. In the case of exported goods where the ultimate customer pays a price higher than quoted price, then the agreed price will be the transfer price;

3. Introduction of a substantial penalty of 2 per cent of transaction value for failure to disclose Transfer Pricing documentation;

4. Country-by-country reports to be filed with the taxman within 12 months after the financial year-end of the group.