FINANCE ACT, 2018: THE IMPACTOF CHANGES TO TAX PLANNING

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FINANCE ACT, 2018: THE IMPACT OF CHANGES TO TAX PLANNING PAGE ii

IntroductionThe National Assembly passed the Finance Bill, 2018 (the Bill) on 30 August 2018 and presented it to the President for assent on 13 September 2018. Under Article 115 of the Constitution of Kenya, the President instead issued his reservations in a Memorandum. The National Assembly had a special sitting on 20 September 2018 to debate and vote on the reservations.

In the interim, in a case filed by a public interest activist, the High Court has ruled that the provisions of the Bill cannot be implemented before it has been passed by the National Assembly and assented to by the President.

The case had been instituted following the imposition of the new taxes proposed in the Bill and instigated primarily by the imposition of VAT on petroleum products. The imposition of tax was effected through the Provisional Collection of Taxes and Duties Order, 2018 (the Order) issued by the Cabinet Secretary for National Treasury and Planning under the provisions of the Provisional Collection of Taxes and Duties Act (the PCTDA). The High Court in its ruling on 19 September 2018 declared the PCTDA and the Order unconstitutional. All provisions of the Bill, including those of taxation, were in effect barred from implementation before the Bill became an Act of Parliament.

Following Presidential assent of the Bill on 21 September 2018, we highlight the changes which have been introduced by the Finance Act, 2018 (the Finance Act), particularly those which had not been proposed in the Bill. We note that the intention is that no taxes would be due before the date of publication, but that it would be ideal for industry players in different sectors to liaise with the Kenya Revenue Authority (the KRA) on this specific question.

Click here to read our previous alert where we had provided a comprehensive analysis of the Bill.

The content of this alert is intended to be of general use only and should not be relied upon without seeking specific legal advice on any matter

FINANCE ACT, 2018: THE IMPACT OF CHANGES TO TAX PLANNING PAGE 1

Betting, Gaming, Lotteries and Prize Competition Taxes The Finance Act introduced a new broader definition of “winnings” to include winnings of any kind. Previously under the Income Tax Act (the iTA) the definition of “winnings” as amended by the Tax Laws (Amendment) Act, 2018 meant the positive difference between pay-outs made and stakes placed in a given month, for each player, as payable to punters by bookmakers licensed under the Betting, Lotteries and Gaming Act (the BLGA).

The previous definition limited the withholding tax of 20 percent charged on winnings to net payments. Additionally, reference to bookmakers meant that the withholding tax was in respect to winnings from betting only and excluded winnings from gaming, prize competition and lotteries thus narrowing the tax base.

The expanded definition of winnings applies to the entire sector while expanding the taxable value from net winnings to gross winnings. This expanded definition may be a challenge to implement as it pre-supposes that all punters have net positive winnings on all their stakes, which is often not the case. Punters may end up being taxed even in scenarios where they are in a net negative position at the end of the month.

Effective Date: 1 July 2018

In addition, the Finance Act amended the BLGA by reducing the 35 percent betting, gaming, lottery and prize competition tax (Betting Tax) introduced by the Finance Act, 2017 to 15 percent of turnover. This follows the expanded definition of winnings and the introduction of a 20 percent withholding tax on winnings. The reduction of the tax to 15 percent ensures distribution of the tax burden between industry players and punters.

All proceeds from the Betting Tax are to go to the Sports, Arts and Social Development Fund (the Fund), established under the Public Finance Management Act, 2012, to fund, among other things, universal healthcare, identified as a Vision 2030 flagship project. Also transferrable to the Fund is 16 percent of the excise duty due in respect of money transfer by cellular phone service providers.

Effective Dates: 1 October 2018 for amendments to lottery tax and prize competition tax 1 July 2018 for amendments to betting tax and gaming tax

Housing: Part of the Big Four Agenda As part of the Government’s pledge to provide affordable housing, the Finance Act amended the Employment Act, 2007 by requiring every employer to deduct and pay to the National Housing Development Fund (the NHDF) 1.5 percent of the employee’s earnings with an equivalent contribution being made by the employee, subject to a maximum monthly contribution of KES 5,000 (total of employer and employee contributions). The NHDF is under the control of the National Housing Corporation.

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The contributions shall be remitted by employers to the NHDF on or before the ninth day of the following month and failure to do so shall attract a penalty of 5 percent for each month the contributions remain outstanding.

It is important to note that this contribution is not a tax deductible expense for the employee and is applicable to all employees, with no minimum salary grade provided. We also note that there is no mention of an employee voluntarily withdrawing from the NHDF before the end of the 15 year period and as such more clarity may be needed.

The benefits to an employee are to accrue as follows:

Employees who qualify for affordable housing: Contributions (by employer and employee) are to accrue to the employee and shall be used to finance the purchase of a home under the affordable housing scheme.

Employees who fail to qualify for affordable housing: Upon expiry of 15 years from the start of contributions or after attainment of the retirement age, whichever is sooner, employees can:

a. transfer their contributions to a pension scheme registered with the Retirements Benefits Authority;

b. transfer their contributions to any person registered and eligible for affordable housing under the NHDF;

c. transfer their contributions to their spouse or dependent children; or

d. receive their contributions in cash.

As contrasted with pension payments, whereby the first KES 600,000 lump sum commuted from a registered pension or individual retirement fund is tax free, all the cash contributions under this scheme are taxable. To make these contributions attractive, the National Treasury should consider making the employee’s contributions tax deductible and the withdrawal after 15 years or at retirement to be tax free. This is specifically with regard to employees who do not qualify for the affordable housing scheme, not to be unnecessarily burdened at withdrawal.

Effective Date:upon gazettement of regulations prescribing the requirements for qualification to the scheme by the Cabinet Secretary responsible for housing.

Mortgage FinancingTo strengthen the mortgage market and leverage the affordable housing scheme, the Finance Act empowers the Central Bank of Kenya (CBK) to license and administer the regulatory regime governing mortgage financing businesses. This will allow the CBK to prescribe capital adequacy standards, minimum liquidity requirements and supervise mortgage refinance companies, for instance on corporate governance, on an ongoing basis.

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Mortgage financing will allow for mortgage refinance companies to draw long term capital from Kenyan banks, government and international development partners, spreading risk of default and thus allowing for greater flexibility in deploying mortgage finance to otherwise ignored sectors of the market ordinarily considered more risky.

Effective Date: 1 October 2018

New Penalties under the Retirement Benefits Authority (the RBA)

Offence Penalty Person liable

Failure to submit a copy of audited accounts of the scheme to the Chief Executive Officer (CEO) of the RBA by the due date

KES 100,000 Where the returns remain un-submitted, a further fine of KES 1,000 for each day the returns remain un-submitted shall apply

Trustee

Failure to submit an investment return of a scheme to the CEO of the RBA by the due date

KES 10,000 Where the returns remain un-submitted, the fund manager, a further fine of KES 1,000 for every day the returns remain un-submitted shall apply

Fund Manager

Failure to submit contribution returns of a scheme to the CEO of the RBA by the due date

KES 10,000 Where the returns remain un-submitted, a further fine of KES 1,000 for every day the returns remain un-submitted shall apply

Administrator

Effective Date: 1 July 2018

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RBA’s power to recover unremitted contributions

1 Such as import declaration fees, petroleum development levy, petroleum regulation levy, railway development levy and road maintenance levy.

Where there is non-remittance of pension contributions by an employer to an RBA registered retirement benefits scheme, the employer is required to:

1. pay the contributions and interest accrued to the scheme in full within a specified period and a penalty of 5 percent of unremitted contributions or KES 20,000, whichever is higher, to the RBA;

2. pay the penalty above and submit to the RBA a remedial plan providing the period within which accumulated contributions and the interest can be offset;

3. immediately cease further deductions from employees’ emoluments and notify all members of the scheme of the cessation – provided that the RBA may lift the cessation order where the employer is able to remit the employee emoluments as they fall due. Where this is not the case, the RBA is empowered to take necessary action to protect the interests of members, including instituting summary proceedings to recover the amounts due; and

4. the employer may also be required to initiate the process of winding up the retirement benefits scheme and facilitate members to join individual schemes where their contributions may be remitted.

Effective Date: 1 July 2018

Amendment to the Value Added Tax, 2013

8 percent VAT on Petroleum ProductsThe Finance Act introduced VAT at the rate of 8 percent on the taxable value of petroleum products such as petroleum oils, illuminating kerosene and natural gas in gaseous state. These were previously listed as exempt goods in transition under the Value Added Tax Act, 2013 (the VATA). The VATA provided that these petroleum products would be exempt from VAT for a period of 3 years from 1 September 2013 (i.e. up to 1 September 2016). On 9 June 2016, the National Assembly through the Finance Act, 2016, approved a two year extension to the exempt status of petroleum products (i.e. up to 1 September 2018). Therefore with effect from 1 September 2018, these petroleum products were to be subjected to VAT at the rate of 16 percent.

However, the Finance Act reduced the VAT rate from 16 percent to 8 percent and in addition amended the taxable value of the petroleum products to specifically exclude excise duty, fees and other charges. However, in light of section 13 (3) (c) of the VATA, which includes duties and levies1 as forming part of the “taxable value”, it would be ideal for industry players to seek clarity from the KRA on this specific question. This is in light of the Energy Regulatory Commission having issued minimum wholesale and retail pump prices factoring in VAT.

Effective Date:upon enactment of the Supplementary Appropriation (No. 2) Act, 2018

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Food Security: Zero-rating of maize and wheat flourWith the aim of promoting food security, the supply of maize flour, cassava flour, wheat or meslin flour and maize flour (containing cassava flour by more than 10 percent in weight) are now zero-rated. Previously, these items were exempt from VAT. The main difference between zero rated and exempt supplies is that the suppliers of zero rated goods and/or services can still claim all their input VAT, but suppliers of exempt goods are either not registered for VAT and if they are, cannot claim their input VAT. We expect traders in this industry to lower or maintain their price margins (subject to the VAT component in their value chains) in light of their capacity to now set off input VAT as opposed to passing the VAT input cost to consumers.

Effective Date: 1 July 2018

VAT exemption on hearing aidsAs a move to make hearing aids accessible to those in need of them, the Finance Act further amended the VAT Act to extend VAT exempt status to hearing aids, excluding parts and accessories, of tariff No. 9021.40.00. While this is a welcome move, it would have been ideal to include hearing aid parts and accessories as these are an essential part of alleviating challenges faced by the hard of hearing and corresponds to the zero percent import duty charged at importation.

Effective Date: 1 July 2018

VAT exemption on personal vehicles being imported by a specific public officer returning to Kenya from a foreign missionThe importation of one personal motor vehicle, excluding buses and minibuses of seating capacity of more than 8 seats, imported by a public officer returning from a posting in Kenya’s mission abroad and another motor vehicle by his or her spouse is now exempt from VAT. The exemption shall only apply where the vehicle is imported within ninety days of the date of arrival of the officer or spouse or such longer period, not exceeding 360 days from such arrival as the Commissioner may allow.

Effective Date: 1 July 2018

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Amendments to the Excise Duty Act, 2015

Excisable Service

Previous Excise Duty Rate

New Excise Duty Rate

Comment Effective Date

Telephone and internet data services

Not previously subjected to excise duty

15 percent of the excisable value

Replaces the excise duty on mobile cellular phone services which was taxed at the rate of 10 percent.

This tax is set to affect subscribers, who rely primarily on internet data and voice services for communication.

1 July 2018

Fees charged by banks, money transfer agencies and other financial service providers for money transfer services.

10 percent 20 percent of the excisable value

Previously, excise duty on fees charged for transfer of money by banks and other financial service providers was charged at the same rate as excise duty on fees charged for mobile money transfer. Excise duty on fees charged for transfer of money through banks is now higher than excise duty charged on fees for mobile money transfer. This is likely to result in more consumers using mobile money transfer as opposed to bank transfers.

1 July 2018

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Excisable Service

Previous Excise Duty Rate

New Excise Duty Rate

Comment Effective Date

Fees charged by cellular phone service providers for money transfer services (mobile money transfer services)

10 percent 12 percent of the excisable value

16 percent of the excise duty paid in respect of money transfer by cellular phone service providers shall be paid into the Sports, Arts and Social Development Fund to support social development including universal health care.

This move targets products like mobile money which are consumed by a vast majority of Kenyans and effectively widens the tax net whilst spreading the burden of taxation.

1 July 2018

Other fees charged by financial institutions

10 percent 20 percent of the excisable value

This increase is likely to discourage consumers from transferring money through formal financial institutions since the excise duty rate is higher compared to mobile money transfer.

1 July 2018

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Amendment to the Tax Procedures Act, 2015

Late payment interest and late payment penaltyTaxpayers can heave a collective sigh of relief as late payment interest remains at 1 percent after a proposal to increase it to 2 percent under the Bill was rejected by the National Assembly. This interest is calculated as simple interest. A proposal to introduce a late payment penalty of 20 percent of the tax due has also been reduced to 5 percent. KRA is empowered to remit in whole or in part, late penalty payment or interest where they are satisfied that the remission is by reason of consideration of hardship or equity or impossibility or undue difficulty or expense in the recovery of the tax. Where the penalty or interest exceeds KES 1,500,000, there will be need to seek prior approval from the Cabinet Secretary for National Treasury and Planning. The Commissioner shall also be required to make quarterly reports to the Cabinet Secretary for National Treasury and Planning on the remissions granted.

In addition, where a taxpayer submits a VAT or excise duty return late, the penalty payable shall be the higher of 5 percent of the amount under the return or KES 10,000. For income tax and any other tax, the penalty payable shall be the higher of 5 percent of the tax payable or KES 2,000 for an individual and the higher of 5 percent or KES 20,000 for corporates.

Effective Date: 1 July 2018

Clean Energy: Anti-adulteration levyIn a bid to curb pollution and the adulteration of automotive diesel with kerosene, the rising consciousness in tailpipe emission levels has prompted some action. The Finance Act introduces an anti-adulteration levy (AAL), at the rate of KES 18 per litre, on all illuminating kerosene imported into the country for home use. AAL shall be paid by the importer at importation.

AAL will hit poor households the hardest as they rely on kerosene to power cooking stoves and lantern lamps, along with artisanal fishermen who use kerosene lamps for night-time fishing. In light of the current ban on logging and the government’s reversal of a plan to subsidise Liquid Petroleum Gas in the wake of recent austerity measures, the introduction of AAL may have the unintended consequence of further impoverishing already economically vulnerable households.

Effective Date: 1 October 2018

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Special Economic Zones: Stamp DutySpecial Economic Zones (SEZs) continue to receive equal status to that of Export Processing Zones (EPZs) as instruments relating to the business activities of SEZ enterprises, developers and operators are now exempt from Stamp Duty, as is the case of EPZs.

Effective Date: 1 October 2018

Interest Rate Cap The Finance Act has retained the interest charged on credit facilities at 4 percent above the CBK rate but removed the lower rate for interest on deposits held in interest earning accounts. This allows banks to make higher spreads by lowering the interest rates offered to depositors. It remains to be seen if banks will use this opportunity to lend to riskier borrowers as their increased spread will allow them to accommodate this range of borrowers.

Effective Date: 1 October 2018

Power of the CBK to prescribe conditions on deposits or withdrawalsThe Finance Act provides that the CBK shall prescribe in regulations, conditions on deposits or withdrawals by customers in banks and financial institutions and that the CBK shall (within 30 days of coming into force of the Finance Act) prescribe regulations setting out conditions for deposit and withdrawals by customers in banks and financial institutions.

The section further provides that no other person or body other than the CBK shall have the power to make regulations relating to deposits and withdrawals and further provides that any existing guidelines or regulations prescribing conditions on deposits or withdrawals by customers shall cease to be operational within 14 days of coming into force of the CBK regulations. With the coming to force of this section banks will no longer have the power to issue regulations on customer deposits and withdrawals, however, any regulations made by the CBK will have to be endorsed by the National Assembly (through the Committee on Delegated Legislation) in order to have the full force of law.

Effective Date: 1 October 2018

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Requirement for banks to maintain next of kin’s registerBanks and financial institutions are required to maintain a register containing particulars of the next of kin of all customers. This register shall be updated annually. This amendment was informed by the difficulty faced by the next of kin of a deceased person in getting access to the deceased’s bank account where the deceased account holder had not given the bank details of the authorised next of kin.

Effective Date: 1 October 2018

Provisions in the Finance Bill not contained in the Finance Act

Removal of the “Robin Hood” TaxBanks, mobile transfer agencies and financial service providers successfully lobbied for the removal of the proposed excise duty rate of 0.05 percent on the transfer of funds above KES 500,000. The stakeholders strongly opposed the tax as it was seen to be a hindrance to the flow of funds and would have the counterproductive effect of curbing investments.

Removal of export levy on copper wasteAn export levy of 20 percent on copper waste and scrap metals was proposed under the Finance Bill, in a bid to support local value-addition and tame vandalism of copper wires, electricity wires and public infrastructure such as the Standard Gauge Railway. The National Assembly however rejected this proposal on the basis that the export of scrap metal is illegal under the Scrap Metal Act 2015 and the government cannot seek to tax an illegality as that would amount to regularising it.

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THE TEAM

Daniel NgumyPartner

E: dng@africalegalnetwork.com

Paul MutegiPrincipal Associate

E: mmp@africalegalnetwork.com

Should you require more information, please do not hesitate to contact Daniel Ngumy at dng@africalegalnetwork.com, Paul Mutegi at mmp@africalegalnetwork.com or the Tax team at taxteam@africalegalnetwork.com

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