FINANCE BILL 2017THE WINNERS & THE LOSERS

ALERT

BOTSWANA

ETHIOPIA

KENYA

MADAGASCAR

MALAWI

MAURITIUS

MOZAMBIQUE

NIGERIA

RWANDA

SUDAN

TANZANIA

UGANDA

ZAMBIA

REGIONAL OFFICE:UAE

ASSOCIATE FIRM:SOUTH AFRICA

FINANCE BILL 2017 - THE WINNERS & THE LOSERS PAGE 2

The National Budget was presented by the Cabinet Secretary (CS) to the National Treasury on 30 March 2017. The Finance Bill 2017 (the Bill) has subsequently been published, pending tabling before the National Assembly for debate and approval. We have analysed the key changes that have been proposed for introduction to the taxation regime by the Bill.

It is expected that the Bill will be enacted into law later in the year, although pur-suant to the Provisional Collection of Taxes and Duties Act, the Bill has effect on the effective dates specified in the Bill as if the Bill were passed into law. We have stated these where relevant under each section below.

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.

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With the aim of encouraging industrialization and job creation, the Bill proposes to amend the Third Schedule of the ITA to reduce the corporate rate of tax for new assemblers from 30% to 15%.

The lower corporate tax rate will apply for the first five years from the date of commencement of operations.

Although this tax incentive is a welcome move, it does not fully appreciate the commercial

INCOME TAX ACTAMMENDMENTS TO THE

INCENTIVES FOR THE AUTOMOTIVE SECTOR

BOOSTING INDUSTRIALIZATION THROUGH SPECIAL ECONOMIC ZONES

realities in the automotive sector as investments are capital intensive and most investors may take between 3-5 years to break even. To fully achieve its purpose of attracting investment to this sector, the exemption should ideally have been granted for a longer period (e.g. 10 years from commencement of operations) to mirror the tax incentives in other sectors, such as Special Economic Zones operators. Effective Date: 1 January 2018.

The Government has demonstrated a commitment towards successful implementation of the Special Economic Zones (SEZ) regime through the establishment of the SEZ Authority to operationalize the SEZ Act which came into force in late 2015.

In a bid to promote foreign direct investment, the Bill proposes to amend the ITA to exempt and introduce lower rates of withholding taxes on various payments to non-resident persons as set out in the table below:

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Income Stream Old rate New rate

Interest 15% 5%

Dividends 10% 0%

Management and professional services 20% 5%

Royalty 15% 5%

Witholding Tax

Effective 1 January 2018.

Similarly, SEZ enterprises will be exempted from Import Declaration Fees (IDF) which are currently charged at the rate of 2%.

The Bill also proposes to introduce a new paragraph 24C in the Second Schedule to the ITA to allow enterprises licensed under the SEZ an investment deduction of 100% of capital expenditure on building and machinery in the first year of use.

To further enhance the attractiveness of SEZs, the Government should consider abolishing compensating tax (which would be applicable at a rate of up to 42.86%) and thin capitalization restrictions for SEZ operators, developers and enterprises.

Effective Date: 1 January 2018.

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Domestic transactions between related entities are not subject to transfer pricing regulations. The Government has now proposed to bring certain transactions involving domestic companies in preferential tax areas within the ambit of transfer pricing.

The Bill introduces a new section 18A to the ITA that brings in a requirement for transactions between an entity in a preferential tax regime and related resident entity outside the preferential tax regime to be based on ‘’arm’s length’’ prices. In other words, the prices as between the two entities should be at a price similar to arrangements between independent entities.

The term ‘’preferential tax regime’’ has been broadly described to refer to the applicability of a preferential rate of taxation including reduction in the tax rate or tax base.

The most common types of preferential tax regimes in Kenya would be those applicable to SEZs and EPZs although they could extend to other types of regimes with a tax rate lower than the corporation tax rate of 30%. It appears that the purpose of this amendment is to ensure that the Government guards against the abuse of preferential tax regimes.

Effective Date: 3 April 2017.

TRANSFER PRICING ON DOMESTIC TRANSACTIONS RELATING TO SEZ, EPZ AND RELATED ENTERPRISES

INCREASED SCOPE FOR TAX ALLOWABLE DONATIONS

Under the ITA, cash donations are only tax deductible when made to recipients with a current tax exempt status, and subject to fulfilling certain requirements.

In order to encourage contribution by the private sector during national disasters, the Bill introduces a new section 15(2) (aa) to the ITA which grants an allowable deduction for

expenditure on donations for alleviation of distress during national disasters, provided such donations are channeled through the Kenya Red Cross, the County Governments or any other institution responsible for the management of national disasters declared as such by the President.

Effective Date: 3 April 2017.

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MORE WINS FOR LOW INCOME EMPLOYEES

Inflation has been on the rise and this has had a significant impact on food prices. To cushion lower income earners against the spiraling cost of living, the Government has proposed to further review the current income tax brackets which were expanded by 10% last year. In addition to expanding the tax bands by another 10%, the Government has also proposed to further increase the personal relief by 10%

from the current KES 15,360 per annum (KES 1,280 per month) to KES 16,896 (KES 1,408 per month).

The Bill also proposes to replace the current tax brackets with the following individual rates of tax:

Rate of tax % Old monthly taxable pay (KES) New monthly taxable pay (KES

10% 1-11,180 1 - 12,298

15% 11,181 - 21,714 12,299 - 23,885

20% 21,715 - 32,248 23,886 - 35,472

25% 32,249 - 42,781 35,473 - 47,059

30% Excess of 42,781 Excess of 47,059

Monthly PAYE Bands

With the expansion of the tax bands by 10%, the lowest taxable income for low income earners will rise from KES 11,180 per month to KES 12,298 per month. This is expected to

cushion low income employees from the high cost of living.

Effective Date: 1 January 2018.

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BETTING, LOTTERY AND GAMING - TAXED TO DEATH?

The Finance Act, 2016 introduced taxes on betting, lottery, gaming and prize competition revenues at the rate of 7.5%, 5%, 12% and 15%, respectively.

The Bill has proposed to amend these tax rates by the introduction of a uniform tax rate of 50% for all categories. Tax proceeds from these activities will be set aside for the newly created National Sports, Culture and Arts Fund to support development of sports, culture and arts in Kenya.

While this increase in tax is aimed at discouraging the youth and vulnerable

members of society against participating in betting, it may negatively impact the sector’s attractiveness to investors.

In addition, noting that the proposed 50% tax is on the profits of the betting, lottery, gaming and prize competition entities, and not on the winnings, it is difficult to understand how this will achieve the policy objective of discouraging the youth and vulnerable members of the society from participating in betting.

Effective Date: 1 January 2018.

ISLAMIC FINANCE PRODUCTS RECOGNIZED IN THE TAX LEGISLATION

The Bill proposes to amend the tax statutes to provide for equivalent tax treatment of Islamic finance products with the conventional financial products. In this respect, definitions of the following new terms have been introduced in section 2 of the ITA: “Islamic Finance Arrangement”, “Islamic Finance Return” and “Sukuk”. Similarly, the issuance of Sukuks is exempt from VAT.

We will circulate a more detailed analysis prepared by our Islamic Finance team on these proposed amendments and their possible impact on the Islamic finance landscape in Kenya.

Effective Date: The effective dates range from 3 April 2017 to 1 January 2018.

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ACT, 2015 (TPA)AMENDMENTS TO THE TAX PROCEDURES

POWERS OF KRA OFFICERS ENHANCED

TAX AMNESTY – FURTHER UNCERTAINTY CREATED

The Bill proposes an amendment to section 7 of the TPA to empower KRA officers to initiate prosecution and produce seized evidence in the Tax Appeals Tribunal or Court of Law. While this could be effective from the KRA’s perspective, it would lead to a conflict of interest as the KRA cannot be both a party to a High Court matter and at the same time the prosecutor.

More efficient co-operation between the KRA and the National Police should be explored to enable the KRA to achieve its objectives.

Effective Date: 3 April 2017.

In a welcome move, the CS has proposed to extend the tax amnesty by 6 months from 31 December 2017 to 30 June 2018. In our recent analysis of the tax amnesty, we highlighted a number of concerns which should be considered if the Government is committed towards a successful tax amnesty.

The mechanism through which repatriation will be undertaken is a key issue and the Bill has proposed a requirement for the repatriated funds to be remitted back to Kenya for a taxpayer to qualify for the amnesty. Physical repatriation of assets is a complicated area

and the Government should provide further guidance on this matter, especially noting that Kenya does not have a foreign exchange control regime which would prevent transfer of funds out of the Country. In addition, a realistic time period of between 2 – 3 years should be considered to provide ample time to taxpayers to re-organise their affairs and make disposals (e.g. real estate) where required.

Effective Date: 3 April 2017.

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REVISITING WITHHOLDING VAT

Withholding tax was re-introduced in 2014 amid resistance from most taxpayers due to its administrative burden and impact on cash flows.

The Bill proposes various amendments to the withholding VAT regime: i. remittance of VAT withheld by a

withholding VAT agent should be remitted to the KRA within 14 days, ostensibly to enhance Government’s cash flows; and

ii. as a means of reducing the cash flow impact and administrative burden, taxpayers in a VAT credit position for more than 24 months can now apply to be exempted from withholding VAT.

The 14 day period will enhance the administrative burden as there could be multiple remittances required to be made by a taxpayer in a month.

The KRA should therefore continue to engage stakeholders to assess how the compliance burden for the withholding VAT system can be further reduced.

Effective Date: 3 April 2017.

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(VAT)VALUE ADDED TAX

VAT EXEMPT STATUS EXTENDED TO MEDICAL EQUIPMENT

A DRIVE TOWARDS CLEAN ENERGY

MORE FOCUS ON THE AIRLINE SECTOR

The Bill has proposed various amendments to the Value Added Tax Act, 2013 (the VATA). VAT exempt status has been introduced for a number of goods and services such as medical apparatus and equipment for specialised hospitals that have a minimum bed capacity of 50 patients.

This is expected to promote private investments in the health sector and to further promote the equipping of private and public hospitals with modern medical equipment. Effective Date: 3 April 2017.

Liquefied petroleum gas (LPG) and taxable goods used in the manufacture of LPG cylinders by licensed manufacturers are proposed to be tax exempt. This is expected to reduce the

Over the last few years, the Government has been introducing a number of tax incentives targeted towards reducing operating costs for airline companies.

The Bill proposes to exempt from VAT aircraft

final cost of LPG in a bid to promote access to clean energy by the lower income earners.

Effective Date: 3 April 2017.

spare parts imported by aircraft operators or persons engaged in the business of aircraft maintenance upon recommendation by the Kenya Civil Aviation Authority.

Effective Date: 3 April 2017.

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FURTHER VAT INCENTIVES FOR FINANCING ARRANGEMENTS

A BOOST FOR TOURISM

ESSENTIAL COMMODITIES ZERO RATED FOR VAT

In a welcome move, transactions related to transfer of assets and other transactions into Real Estate Investment Trusts (REITS) and Asset Backed Securities (ABS) have been proposed to be VAT exempt. It is hoped that this will diversify the sources of infrastructure financing. Similarly, any service in connection with an Islamic Finance Arrangement is proposed to be exempt from VAT.

Specially designed locally assembled motor vehicles for transportation of tourists will be VAT exempt subject to licensing requirements with the relevant tourism authorities.

For the VAT exemption to be applicable, the vehicles are required to be used exclusively in the transportation of tourists and have fittings for camping, rescue and first aid equipment, luggage compartments and communication.

The Bill has proposed to introduce a zero rate status for bread and maize flour, allowing manufacturers, wholesalers and retailers to claim input VAT and therefore be in a position

As mentioned earlier, a more detailed analysis by our Islamic Finance team will look at these issues in greater detail and delve into the changing landscape for Islamic Finance products in the Country.

Effective Date: 3 April 2017.

Tourism has been on a steady rise over the last few years and such incentives should assist in reducing the operating costs for tourism operators and further enhance the attractiveness of this sector to local and foreign investors.

Effective Date: 3 April 2017.

to lower the cost of production for these commodities.

Effective Date: 3 April 2017.

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OTHER NOTABLE AMENDMENTS

The Bill has also made the following proposals:

▶ Zero rating of taxable goods supplied to marine, fisheries and fish processors, which is expected to boost growth in this sector.

▶ VAT exemption on inputs used for the manufacture of pesticides upon recommendation by the Cabinet Secretary in charge of agriculture. This is expected to reduce the cost of pesticides.

Effective Date: 3 April 2017.

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DUTYEXCISE

Traditionally, the Government has always looked at increasing the tax rates on alcohol as a mechanism of boosting tax revenues. This well-trodden path has been followed by the Government this year.

The Bill has proposed an increase of the tax rate of high value spirits (Spirits of undenatured ethyl alcohol; spirits liqueurs

SIN TAXES

and other spirituous beverages of alcoholic strength exceeding 10%) from KES 175 per litre to KES 200 per litre.

To reduce the cost of plain cigarettes and promote equality in the excise duty regime for cigarettes, a two-tier taxation of cigarettes has been proposed from the single rate of KES 2,500 per mille as follows:

Description Rate of Duty (KES/mille)

Cigarettes with filters (hinge lid and soft cap) 2500

Cigarettes without filter (plain cigarettes) 1800

Excise Duty

Effective Date: 3 April 2017

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SUBSIDISING LOCAL PAINT MANUFACTURERS

To support the local manufacture of paint and resin, a refund of excise duty paid on imported illuminating kerosene which is a key component in the manufacturing of paints and resin has been proposed. The refund will however only be available to registered manufacturers.

This is expected to reduce the cost of paint and resin and will support the continued growth of the vibrant real estate sector in Kenya.

Effective Date: 3 April 2017.

THE TEAM

Daniel NgumyPartner

E: dng@africalegalnetwork.com

Kenneth NjugunaSenior Associate

E: kkn@africalegalnetwork.com

Should you have any queries or need any clarifications with respect to the Finance Bill 2017, please do not hesitate to contact Daniel Ngumy or Kenneth Njuguna.

Click here to read Daniel’s profile Click here to read Kenneth’s profile

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