Highlights of the Finance Bill, 2021

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The Finance Bill, 2021 was published on 05 May 2021 and tabled in the National Assembly on 11 May 2021. This is consistent with the Public Finance Management Act, which requires the Bill to be assented into law by the end of June 2021. The Bill proposes amendments to the following statutes; the Income Tax Act, the Value Added Tax Act 2013 and the Tax Procedures Act 2015, among other statutes.

We are glad to provide our highlights of the changes introduced by the Finance Bill, 2021 that have a direct bearing on your business in Kenya and may come to effect by 1st July 2021.

AMENDMENTS TO INCOME TAX ACT, CAP 470

1. Removal of the Tax Loss Carry Forward Limitation
The Bill proposes to delete section 15(4) of the Income Tax Act (ITA), which caps the carrying forward of tax losses to 10 years. This means that tax losses can be carried forward indefinitely.

This amendment is likely to have been influenced by the introduction of the minimum tax in the Finance Act, 2020. This is due to the fact that minimum tax is a base income tax payable by all persons, regardless of whether in a profit or tax loss position.
While this is a welcome move, with the current petition against minimum tax in court and the push to abolish the minimum tax, the limitation may be reintroduced in future.
Proposed effective date: 1 July 2021

2. Thin Capitalization Provision (Interest Deduction Restriction)
The Bill proposes to amend the thin capitalization provision in section 16 (2) (j) of the ITA, to restrict the interest expense claimable to 30% of earnings before interest, taxes, depreciation and amortization (EBITDA). This proposal shall apply to interest payable to both related persons and third parties. The Bill further provides that the EBITDA amount should exclude any income, which is exempt from tax. In addition, the interest restriction will also apply to payments that are economically equivalent to interest and expenses incurred in connection with raising the finance.

Highly geared entities that are generating little EBITDA, will be adversely affected by the changes envisaged due to the low threshold, 30% of EBITDA, for disallowing interest expense. The proposed changes represent a significant overhaul of the current provisions relating to “thinly capitalized” companies. Currently, interest payments are disallowed proportionately if the sum of all loans is more than three times the aggregate of positive revenue reserves and share capital.
Proposed effective date: 1 January 2022

3. Tax Rebate for Graduate Apprenticeships
The Bill proposes to expand the tax rebate scheme to employers who engage graduates from Technical and Vocational Education and Training (“TVET”) for a period of 6 to 12 months. Currently, the tax rebate scheme is only available to employers who engage university graduates as apprentices. The rebate available is equivalent to 50% of the amount of salaries and wages paid to at least 10 apprentices over a period of 6 to 12 months.

With the current emphasis on technical and vocational training to solve the unemployment problem, this is a welcome move, as it will encourage employment of not only those with university education, but also those that have technical and vocational training skills.
Proposed effective date: 1 January 2022

4. Introduction of NHIF Insurance Relief
The Bill proposes to allow individual taxpayers claim insurance relief on contributions made to the National Hospital Insurance Fund (“NHIF”) in a year of income.

The amount of relief to be claimed shall be equivalent to 15% of the contribution to NHIF and insurance premiums paid, subject to a maximum relief of Ksh 5,000 per month or Ksh 60,000 per annum. Currently, only policyholders of education, health and life policies, enjoy insurance relief.

The proposed amendment is a welcome move as it provides relief to employees on NHIF contributions from taxation.
Proposed effective date: 1 January 2022

5. Investment Allowance
The Bill proposes to amend the second schedule to the ITA, to change the basis of calculating investment allowance from reducing balance basis to straight-line basis. This is a welcome move because it will accelerate the rate at which taxpayers can claim investment allowances.

The Bill also proposes to expand the definition of the term “manufacture” in the Second Schedule of the ITA to include generation, transformation and distribution of electricity, both via the national grid and other private grids. What this implies is that an investment in electricity generation for private business use or for sale shall be eligible for investment allowance on qualifying costs. Currently the investment allowance is only applicable to electricity producers who supply electricity through the national grid.

Further the Bill proposes to re-introduce the definition of the term “civil works” in the second schedule of the ITA to include roads and parking areas, railway lines and related structures, water, industrial effluent and sewerage works, communications and electrical posts and pylons and other electrical supply works, and security walls and fencing. The definition of the term “civil works” was deleted by the Tax Laws (Amendment) Act, 2020, which introduced the new second schedule to the ITA. The reintroduction of civil works definition in the second schedule implies that civil works shall be part of the costs qualifying for investment deduction.
Proposed effective date: 1 January 2022

6. Taxation of Extractives Industries
The Bill proposes to align the provisions of the investment allowances provided for companies in the extractives industries under the ninth schedule, taxation of extractive industries, to mirror similar provisions under the second schedule, investment allowance, of the ITA.

The Bill also proposes to increase the withholding tax rate for service fees paid by a contractor or a licensee to 10% from 5.625%. Further, the Bill proposes to reduce the withholding tax deductible by contractors in the extractives sector, on management, training or professional fees to 10% from 12.5%.
Proposed effective date: 1 July 2021

7. Digital Service Tax
The Bill proposes to delete section 3(2) (a) of the ITA, which brings to charge “Income accruing through a digital marketplace”. In its place, the Bill proposes to introduce the following provision: “Income accruing from a business carried out over the internet or an electronic network including through a digital marketplace.”

The Bill also proposes to replace the definition of the term “digital marketplace” appearing in section 3 (3) (ba) with the following definition: “Digital marketplace” means an online platform, which enables users to sell or provide services, goods or other property to other users.

The Bill also proposes to amend section 12E (1) of the ITA and explicitly provide that digital service tax shall only be payable by non-resident persons whose income from the provision of services is derived from or accrues in Kenya through a digital marketplace.
Proposed Effective date: 1 January 2022

8. Control in Body Corporates
The Bill proposes to amend the interpretation section of the ITA to include a new definition of the term “control”. The new definition reduces the threshold for control from 25% to 20% and broaden the definition of control, to include suppliers, consumers, financiers and guarantors with significant influence in a body corporate. The current definition of the term “control” comprises shareholding and voting power that influences the conduct of affairs of a body corporate.

The new definition of the term “control” appreciates the fact that over time, suppliers, consumers, financiers and guarantors have increasingly exercised control over pricing and related business affairs as well as taken positions in governance boards of body corporates.

This new provision will increase the compliance burden for the affected taxpayers in a bid to comply with the transfer pricing legislation in Kenya.
Proposed effective date: 1 July 2021

9. Permanent Establishment
The Bill proposes to amend the current definition of the term “Permanent Establishment (PE)” under the ITA, to include a new broad definition. The new definition provides clarity on activities that will culminate in a PE for non-resident entities and the relevant qualifying durations. The new definition further provides clarity on activities that do not constitute a PE in line with the OECD guidelines.

The provision also seeks to counter the artificial avoidance of PE status through the splitting of contracts, by aggregating the time spent on the various connected activities on construction and installation projects in determining the duration of a project. The risk of crystallising a PE will therefore increase, requiring persons to constantly monitor the time spent by employees and consultants in Kenya and the potential tax obligations. Taxpayers will also be required to assess their controlled transactions and ensure that transfer pricing outcomes are aligned with value creation.
Proposed effective date: 1 July 2021

10. Submission of Group Return by Multinational Enterprise Groups
The Bill proposes to introduce a Country-by-Country Reporting (CbCR) requirement on a Kenyan headquartered multinational enterprise group (MNEG), referred to in the proposed legislation as an “ultimate parent entity” (UPE).

The bill defines the term UPE as “an entity that is resident in Kenya for tax purposes, is not controlled by another entity, and owns or controls a multinational enterprise group.”

The term MNEG has been defined to mean “a group that includes two or more enterprises which are resident in different jurisdictions including an enterprise that carries on business through a PE or through any other entity in another jurisdiction.”

The Ultimate Parent Entity (UPE) of the MNEG shall submit to the Commissioner a return describing the group’s financial activities in Kenya and in all other jurisdictions where the group has taxable presence. The return shall be submitted no later than 12 months after the last day of the reporting financial year of the group.

The return shall contain information on the group’s aggregate information on revenue, profit and loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees and tangible assets with regard to each jurisdiction in which the group operates.

This proposed change has been introduced with a view of aligning with the OECD Base Erosion and Profit Shifting (BEPS) Action 13 on Country-by-Country Reporting (CbCR). This provision currently applies to multinational groups whose UPE is based in Kenya.
Proposed Effective date: 1 January 2022

 

AMENDMENTS TO THE VALUE ADDED TAX (VAT) ACT, 2013

1. VAT on Imported Services
The Bill proposes to amend section 2, the definition of the term “supply of imported services”, and section 10, “treatment of the imported services” of the VAT Act. The proposed amendments intends to remove ambiguities with regard to accounting for VAT on imported services, by entities and individuals receiving services from non-resident persons.

The amendments clarify that reverse charge VAT would be applicable to:
• Any person who is not registered for VAT and imports a service into the country. Reverse charge VAT in this case would be payable based on the full value of the imported service; and
• If the person who imports a service is registered for VAT, then reverse charge VAT would be applicable to the extent that the imported service is attributable to exempt supplies.
Proposed effective date: 1 July 2021

2. Deduction of Input Tax
The Bill proposes to amend section 17(1) by replacing the word ‘section’ with ‘Act’. In addition, the Bill proposes to amend section 17(4), which currently prohibits a registered person from claiming input tax on the acquisition of passenger cars or minibuses, and the repair and maintenance thereof including spare parts. The proposed amendment to subsection 4 will now include leasing or hiring of passenger cars or minibuses.

The proposal if passed, will prohibit registered persons from claiming input VAT relating to hiring or leasing of passenger cars or minibuses, unless the vehicles are acquired exclusively for the purpose of making taxable supplies in the ordinary course of the business of dealing in or hiring of the vehicles.
Proposed effective date: 1 July 2021

3. Exported Services
The Bill proposes to change the VAT status of the exportation of taxable services from zero-rated to exempt. The proposed amendment aims to reduce the cases of VAT refund claims arising from the zero-rating of the exported services.
Proposed effective date: 1 July 2021

4. Due Date for VAT Payment
The Bill proposes to amend the provision relating to the due date for VAT payment to allow anyone who is liable to VAT to defer payment of the VAT to the 20th day of the month following the period in which the tax became due.

The proposed amendment is aimed at aligning the section on the payment due date with the other proposed changes relating to the definition of the term “supply of imported services” and “treatment of imported services”. The change clarifies that the due date for payment of VAT is the 20th day of the month following the month the tax becomes due. This applies to both registered persons making taxable supplies and to the importers of services into the country, subject to reverse charge VAT.
Proposed effective date: 1 July 2021

5. VAT Rate Changes
The Bill proposes to change the VAT rate on the supply of ordinary bread from 0% to 16%. The proposed change will increase the price of this product, which is a staple food in many Kenyans homes.

As a response to the Covid-19 pandemic, the Bill proposes to exempt medical equipment and inputs used to manufacture equipment such as ventilators, breathing appliances and medicaments from VAT. This move will lower the cost of production due to the lower cost of importation, which should lead to an increase in the capacity to fight the pandemic.

The Bill also proposes to exempt specialized equipment used for the development and generation of solar and wind energy, including photovoltaic modules, direct current charge controllers, direct current inverters and deep cycle batteries that use or store solar power, upon recommendation to the Commissioner by the Cabinet Secretary for Energy. Note that this is a reversal of the VAT on the specialized equipment, introduced by the Finance Act, 2020, which is a welcome move since it will promote the development of the clean energy industry, which has great social and environmental impacts.
Proposed effective date: 1 July 2021

 

AMENDMENTS TO THE TAX PROCEDURES ACT (TPA), 2015

1. Extension of Time for Maintenance of Records and Amendment of Assessments
The Bill proposes to make the following changes on timeframe for maintenance of records and amendment of tax returns:
• Extend the period taxpayers are required to maintain tax records from five years to seven years;
• Extend the period the commissioner is allowed to amend a tax return where there is no evasion, fraud or wilful neglect, from five years to seven years; and
• Extend the period within which a taxpayer can lodge an application for amendment of a self-assessment to seven years.

The proposal seeks to align the maintenance of records and retention periods with the Companies Act. However, this implies that in the event of a KRA audit, the taxpayers would be required to produce records for a longer period than they are currently doing.
Proposed effective date: 1 July 2021

2. Notice of Objection in Electronic Form to be Submitted even on Weekends or Public Holidays
The Bill proposes to allow for electronic submission of a notice of objection on a weekend or public holiday where the due date falls on such days. Currently, where a notice of objection falls due on a Saturday, Sunday or public holiday in Kenya, the due date is taken to be the previous working day.

The amendment will harmonize the requirement for the electronic submissions, as the law currently allows for electronic submission of returns and electronic payment of tax over the weekend or on public holidays via the iTax system.
Proposed effective date: 1 July 2021

3. Elimination of Exemption from Withholding VAT
The Bill proposes to delete the provision in the TPA, which allows the Commissioner to exempt a supplier from Withholding VAT if the supplier proves that they are going to be in a continuous credit position for a period of not less than 24 months.

The proposed amendment removes exemption from the application of withholding VAT. If passed, the amendment is likely to improve the government’s cash flow position but will result in cash flow challenges for taxpayers whose VAT is withheld, especially those in a perpetual refund situation.
Proposed effective date: 1 July 2021

4. Offsetting Tax Liabilities against Verified Refunds
The Bill proposes to empower the Commissioner to apply a refund against any other outstanding tax liability owed by the taxpayer. In such a case, once the Commissioner notifies the taxpayer of its intention to offset the verified refund application against existing tax liabilities, no interest and penalties shall accrue on the tax liabilities KRA intends to offset with the refund amount due. Where the refund applied is less than the outstanding tax, then the remainder of the outstanding tax continues to accrue interest and penalties. This proposed amendment seeks to alleviate the interest burden on taxpayers as KRA will first utilize the refund against any outstanding tax and in addition pursue penalties and interest on outstanding tax.
Proposed effective date: 1 January 2022

5. Digital Service Providers Required to Register for KRA PIN
The Bill proposes to amend the First Schedule of the TPA to include the selling of goods and services over a digital marketplace in the list of transactions for which a Personal Identification Number (PIN) is required.
Proposed effective date: 1 July 2021

Please do not hesitate to contact us, should you require further clarification on the Finance Bill, 2021.
Moses Mwendwa, Managing Director        mmwendwa@czmkenya.com
Benson Njiru, Director, Advisory & Tax     benson.njiru@czmkenya.com
Betty Komen, Tax Associate                        bettykomen@czmkenya.com

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