Kenya: 2023 Tax updates NITA and NSSF changes

published on 15 February 2023 | reading time approx. 4 minutes

The New Year 2023 has been characterized by an adverse economic environment with a reported current inflation rate of 9.5 per cent and persistent uncertainties such as fluctuating forex rates. From a tax perspective, the changes that took effect from 1st January 2023 also reflect these adverse conditions.

In this issue we have outlined the changes under Finance Act 2022 which took effect from 1st January 2023. Furthermore, the pending case on the new NSSF rates was recently determined by the Court of Appeal.

Lastly, we have observed the ongoing implementation of changes under the Industrial Training (Amendment) Act, 2022, by the National Industrial Training Authority (NITA) and Kenya Revenue Authority (KRA).

2023 Income Tax Act changes
2023 Excise duty Act changes
Revised NSSF Contribution rates
Changes under the Industrial Training (Amendment) Act, 2022

2023 Income Tax Act changes

Taxation of gains made from Commodity Markets outside Kenya

The gains from financial derivatives (excluding those traded at the NSE) will be taxed at a rate of 15 per cent.

Comment: This is a measure recommended under Action 2 of the BEPS Action Plans that will prevent exemption of payments made to outside Kenya from financial derivatives contracts whose obligations are deductible by the Kenyan payor. Secondly it will boost the local market for financial derivatives.

Capital Gains Tax

The Act has increased the capital gains tax rate from 5 per cent to 15 per cent. However the old rate will apply for firms certified by the Nairobi International Financial Centre Authority that

invest Kes. 5 billion in Kenya; and
the transfer of such investment is made after 5 years.

Comment: This will increase the transaction costs of capital transfer, especially on shares and land. The 300 per cent increase may appear too high and should justify the ever increasing call for recognition of factors such as inflationary adjustments on the purchase cost of assets.

Changes in Preferential Tax Regime concept

The taxation of businesses in a preferential tax regime will be extended to include:

an associated enterprise of a non-resident person located in a preferential tax regime; and
a permanent establishment of a non-resident person operating in Kenya where the non-resident person is located in a preferential tax regime

The new definition of a preferential tax regime will be:

any Kenyan legislation, regulation or administrative practice which provides a preferential rate of tax to such income or profit, including reductions in the tax rate or the tax base; or
a foreign jurisdiction which

(i) does not tax income.

(ii) taxes income at a rate that is less than 20 per cent.

(iii) does not have a framework for the exchange of information.

(iv) does not allow access to banking information; or

(v) lacks transparency on corporate structure, ownership of legal entities located therein, beneficial owners of income or capital, five financial disclosures, or regulatory supervision.

Comment: These changes will fully embrace the recommendations under the OECD BEPS Action Plan 5 that counters harmful tax practices by taking into account transparency and requiring substantial activity for any preferential regime.

2023 Excise duty Act changes

Power to exempt specified products from inflationary adjustment

The KRA, with approval from the Treasury Cabinet Secretary, will have the powers to exempt specified products from inflation adjustment based on prevailing economic conditions.

In a public notice dated 17th January 2023, the Commissioner General invited interested members of the public and stakeholders to submit their inputs and comments for consideration in the finalising of the above regulations.

Comment: This is a safeguard that is set to cushion prices of basic commodities that currently feed inflation, such as food and fuel.

Revised NSSF Contribution rates

The much-awaited Court of Appeal judgement on the case that sought to challenge the new contribution rates in the National Social Security Fund (NSSF) Act No. 45 of 2013 was issued on 3rd February 2023. According to the ruling, the judges argued that a lower court did not have the powers to hear a case challenging the validity of the new rate.

The 2013 law essentially increased the contribution rate to 6 per cent of earning but capped between a Lower Earning Limit (LEL) and Upper Earning Limit (UEL). LEL is defined as the amount gazetted by the Cabinet Secretary from time to time as the average statutory minimum monthly basic wage for the top urban centres, second tier urban centres and rural areas for that year. UEL is defined as the level of earnings equal to four times National Average Earnings.

We have noted pronouncements in the public media that put the UEL as Kes 50,000 and LEL as Kes. 15000, hence leading to a contribution ceiling of Kes. 3,000 and floor of Kes. 900. However, we are still checking on the lowest contribution amount of Kes. 350 that has been quoted by some media houses.

We have summarized the new rates as below:

Contribution band	Employee Deduction	Employer contribution	Total pension
On the First Kes 15,000	6% of pensionable earnings	6% of the pensionable earnings	12% of the pensionable earnings
On the Next Kes 35,000	6% of pensionable earnings	6% of the pensionable earnings	12% of the pensionable earnings
Any amount in excess of Kes 50,000	3000	3000	6000

Comment: The new rates are effective immediately after the date of the ruling.

Changes under the Industrial Training (Amendment) Act, 2022

The Act was assented to on 4th April 2022 with an effective date of 22nd April 2022. It notably introduced the following changes to the principal Act:

Revenue Collection: The Commissioner-General of the Kenya Revenue Authority will be responsible for the assessment and collection of training levies from employers and shall exercise all the powers conferred under the Kenya Revenue Authority Act and Income Tax Act.
Payment deadline for Training Levy: An employer shall pay the training levy to the Commissioner-General at the time when an employee's salary is payable and shall be remitted to the Commissioner-General not later than the fifth day of the month following the month in which the levy becomes due. Training levy shall not be deducted from the emoluments of the employee.
Compliance and Powers of enforcement: The Income Tax Act and the Kenya Revenue Authority Act shall apply in collection and enforcement of training levies. This includes payment and recovery of the levies and penalties, assessment of levy payable, filing of returns, furnishing of information and production of documents; and keeping of records.

Comment: It is important for taxpayers to familiarize with the new PAYE Excel template that incorporates NITA’s training levy. The new deadline also implies that payment slips for NITA levy must be generated separately and settled before the new date.

Rödl & Partner is willing to provide assistance in complying with the new filing deadline for NITA levies.