Spotlight on Kenya – Highlights of the 2023 Income Tax and VAT amendments

This year Kenya has made some significant changes to its tax laws and today we summarise the key changes.

The zero rating of exported services has been reinstated which is a very welcome development. In a not-so-welcome change, expenses not supported by an eTims compliant invoice will now no longer be deductible and the buyer can only claim input tax where sure that supplier has declared the transaction for VAT. This assumes that eTims is fully functional, otherwise this new provision could penalise the buyer.

There is an amnesty for penalties and interest relating to taxes that should have been paid up to 31 December 2022. This is an opportunity to regularise past tax affairs and must be applied for, and the tax paid before 30 June 2024. Apart from this amnesty scheme, the Kenyan Revenue no longer has the ability to waive taxes, interest or penalties so if you’re being audited – be very careful!

Two higher tax bands have been introduced for individuals. A marginal tax rate of 32.5% applies for monthly income above KES 500,000 and 35% for monthly income above KES 800,000 (about USD 65,000 per year).  The Act also introduced a new Affordable Housing Levy at a rate of 1.5% of the employee’s gross monthly salary for the employee and 1.5% of an employee’s gross monthly salary for the employer.

The new Digital Asset Tax (DAT) provides that the owner of a platform or the person who transfers a digital asset must charge tax at a rate of three per cent of value of the asset.

Non-resident persons who own such platforms must register under the simplified tax regime. A digital asset has been defined very widely and includes anything of value that is not tangible, including cryptocurrencies and non-fungible tokens.

The new tax seems to be aimed primarily at non-resident platform owners which are used by residents to trade in these assets, but it also applies to Kenyan platforms. Residents who trade in these assets should currently be declaring them as income or as a capital gain and if they declare these gains, the new tax will introduce double taxation, as it appears to be an additional tax rather than an advanced payment of income tax or CGT. The tax could be punitive for a person who exchanges an asset at a loss, and there is no provision for tax credits or adding the tax to the cost base of the asset. Where residents use cryptocurrencies that have a stable value, (such as USDT and USDP) to pay foreign creditors, this method will no longer be viable if these platforms register and deduct the tax. Tax, and all withholding tax (WHT) except that on betting, has to be paid within five days of the transaction which will be bureaucratic for any business making lots of payments or entering into many transactions. This could involve having to lodge returns every day. Betting excise duty now has to be paid within 24 hours.

Comments have been made that this new tax could stifle innovation and dissuade Kenyans from adopting new ways of doing business. It will also discourage foreign platforms from offering their services to Kenyan residents, and will hamper the development of Kenyan platforms to trade crypto assets.

Foreign residents transferring crypto assets on a Kenyan platform may be protected from the tax by a Double Taxation Agreement, if they are resident in a country which has such an agreement with Kenya. They may, of course, still be liable to tax on the transaction in their home country.

A new withholding tax (WHT) has been introduced on “digital content monetisation” (DCM). DCM is described as the offering for payment entertainment, social, literal, artistic, educational or any other material electronically through any medium or channel, “in any of the following forms…” including types of website advertising, sponsorship, marketing and subscription services.

The WHT rate is 20% for non-residents and 5% for residents. The tax on residents is not a final tax and can be credited against income tax payable.
The tax targets Kenyan residents earning such fees, from local or foreign sources and non-residents earning fees from Kenyan companies.

As is the case for DAT mentioned above, some Double Tax Agreements (DTA’s) entered into by Kenya may prevent the taxation of a non-resident service provider as only the business profits from a permanent establishment of a non-resident can be taxed in terms of the relevant article of the DTA.

Kenya now taxes gains on the disposal of shares and other vehicles, if, at any time during the preceding year the shares derived more than 20% of their value directly or indirectly from immovable property situated in Kenya. Immovable property has been comprehensively defined.

The 20% threshold is quite low. There is also an element of retrospectivity to this, in that the full gain is taxed, not just the gain from when the law changed.

Kenya now also taxes the gains on the disposal of shares in a Kenyan company if the seller, at any time during the preceding year, directly or indirectly held at least twenty per cent of the capital of that company. This will apply, for example, where a Kenyan resident owns shares in a foreign company, and that foreign company owns a Kenyan company which it then sells.

These provisions are contrary to most of Kenya’s DTA’s which only allow Kenya to tax the disposal of shares where more than 50% of their value is directly or indirectly derived from immovable property.

The wording of these provisions is not entirely clear, which is likely to cause confusion and argument. Further difficulties will arise from the need to value shares and ascertain if 20% of their value is derived from Kenyan immovable property.

There is also an anti-avoidance provision that applies where an asset is sold and that transaction is not subject to CGT, and the asset is sold again within 5 years. The amount used as base cost for the second disposal is the base cost for the first transaction, and this provision recaptures the gain that was not taxed previously. This is something for buyers to be aware of if they are thinking of selling again within five years.

There is now a group reorganisation provision that exempts transactions from CGT, but it is very limited. The parties must have been part of the same group for 24 months at the time of the transaction.

CGT is payable on the earlier of receipt of full purchase price, or registration of transfer, which gives the taxpayer very little time to compute the gain and make the tax payment.

This amendment subjects a non-resident person who carries on business in Kenya through a permanent establishment (PE) to tax on so-called repatriated income and is in addition to tax chargeable on the income of the PE under the normal charging provisions of section 4 of the ITA. To mitigate this, the corporate tax rate applicable to branches has been reduced from 37.5% to 30%

The repatriated income is not an actual amount paid, but is a deemed amount calculated in terms of a formula as repatriated profit = A1 + (P – T) – A2A1 is the net assets at the beginning of the year, not including revaluation of assets, P is the net profit for the year and T is the tax payable and A2 is the net assets at the end of the year.

This change is only effective on 1 January 2024.

Some of Kenya’s DTA’s limit the additional tax payable, for example the DTA with Canada states that the additional rate of tax applicable to the profits of PE’s shall not exceed 7.5 percent, which may limit this additional tax.

Previously gross interest paid or payable to persons and related parties was restricted to amounts not exceeding thirty per cent of earnings before interest, taxes, and depreciation. Now only non-residents are subject to this rule, and the excess can only be claimed in the following three years of income (subject to the same rule being applied in each year). This effectively creates a thin capitalisation rule only for non-residents which is more in line with usual transfer pricing rules applying in most countries, and is therefore a welcome change.

So, lots of changes afoot in Kenya which will impact both individuals and companies.  If you’d like to discuss how these changes could impact you, contact us today.

This article was written by our man in Africa, Russell Eastaugh. Russell has extensive African experience, in particular in Kenya. Contact Russell at reastaugh@reganvanrooy.com