The Cabinet Secretary responsible for the National Treasury released his budget statement on April 7, 2022. In this warning, we summarize the Cabinet Secretary’s key tax proposals.
1. Is the National Tax Policy Framework really on the way?
In his 2021 budget statement, the Cabinet Secretary indicated that he had initiated a process to develop a national tax policy framework that “…should not only improve the administrative efficiency of the tax system, but also ensure consistency and certainty in tax legislation and expenditures.” “.
Almost a year later, the guideline has yet to be published, but the Cabinet Secretary has again promised it will be shared with stakeholders “soon” to solicit input.
There is no telling when this will happen and it is difficult to predict the place of the policy framework in the context of the Constitution and existing tax laws.
2. Tax Administration Procedure
No money, no justice!
The Cabinet Secretary has proposed a radical change to the Tax Appeals Tribunal Act 2013, requiring taxpayers who lose disputes before the Tax Appeals Tribunal (Tribunal) to escrow 50% of the disputed tax before appealing to the High Court. The amounts paid in would be returned to taxpayers only if the matter is finally decided in favor of the taxpayer by the higher courts. This does not inspire confidence given taxpayers’ recent experience in obtaining refunds due to them.
This proposal raises several questions, including the constitutionality of restricting access to justice to those taxpayers who can afford to pay for it. In addition, taxpayers have full rights of appeal to the High Court, the Court of Appeal and, in some cases, the Supreme Court. It always takes several years to get a matter through the appeals process, and when taxpayers tie up 50% of disputed taxes, this becomes inevitable lead to significant cash flow problems for companies. It is also currently unclear whether interest will be paid on the amounts paid in. If also the amounts paid in are returned in every case where a taxpayer succeeds in the higher courts, which happens when a taxpayer loses at the tribunal, succeeds on appeal at the High Court, loses at the Court of Appeal but ultimately succeeds is before the Supreme Court?
Currently, a taxpayer who has lost a tax dispute and intends to appeal is required to provide security for the disputed taxes. This is often a percentage of the tax at issue. It is also unclear how the proposed provisions interact with this security requirement.
No more limitless requests for information
Once a taxpayer has submitted a valid declaration of objection, the Kenyan Revenue Service (KRA) has 60 days to make an appeal decision unless it requests the taxpayer to provide additional information. In this case, the period of 60 days to make an appeal decision runs from the day on which KRA receives the requested additional information. The KRA has abused this applicable law to extend its time limit for an appeal decision. The Cabinet Secretary has proposed to fill this gap by requiring the KRA to issue an appeal decision within a 60-day cycle from the date of receipt of a valid appeal notice.
We believe this is a positive step that will expedite the process leading to the KRA issuing an appeal decision and matters escalating to the tribunal.
Additional collateral for unpaid taxes
Applicable law allows KRA to use land or buildings owned by a taxpayer as collateral for unpaid taxes. The Cabinet Secretary has proposed expanding the type of assets that can be used as collateral to include ships, aircraft, motor vehicles and other assets.
It remains to be seen what exactly the Cabinet Secretary meant by “other qualities” as that term is very broad.
The tax subsidiarity right does not expire after 10 years
The Statutory Instruments Act, 2013 provides for statutory instruments to expire automatically after 10 years from the date of their publication. This has a direct impact on tax subsidiarity law. The Cabinet Secretary has proposed amending the Statutory Instruments Act to exempt tax-related auxiliary legislation from the automatic expiry period.
This is a step in the right direction as it will bring certainty and continuity to tax legislation.
3. Income Tax Act
Relaxation of deduction rules for cash donations to unregistered non-profit organizations
Donations of money are currently only tax-deductible to non-profit organizations
are registered under the Companies Act or the Non-Governmental Organizations Coordination Act and satisfy the conditions of the Income Tax (Charity Contributions) Regulations 2007. The Cabinet Secretary has proposed extending the scope of allowable deductions to cash donations to non-profit organizations not registered under the Associations Act or the NGO Coordination Act.
This is a welcome move for taxpayers who donate to unregistered charities and who do not currently benefit from the fact that those donations are tax-deductible.
New Kid on the Block – Taxation of non-resident gains from financial derivative transactions
Following the launch of the Nairobi Securities Exchange Derivatives Market (NEXT) on 4 July 2019 and in light of the increasing use of financial derivatives, the Cabinet Secretary has proposed taxing the profits accruing to non-residents from transactions in financial derivatives in Kenya, including hedging, contract futures and contract options. The taxation of financial derivatives has presented a challenge to various tax authorities including those in more advanced jurisdictions and it will be interesting to see how this develops in Kenya considering that financial derivatives are evolving rapidly.
Exclusion of microfinance institutions from the scope of the thin capitalization rules
The Cabinet Secretary has proposed exempting microfinance institutions licensed under the Microfinance Act from the thin capitalization provisions. Microfinance institutions join the list of companies, including banks and other financial institutions, exempt from thin capitalization regulations. This allows microfinance institutions greater flexibility in their financing structures.
Increased reporting requirements for multinational companies
The Cabinet Secretary has proposed changes to require multinational companies with operations in Kenya to report their activities in Kenya and other jurisdictions to the KRA. This move aims to facilitate the implementation of the multilateral Convention on Mutual Administrative Assistance in Tax Matters, ratified by Kenya in July 2020. The move will facilitate the automatic exchange of tax information between the KRA and authorities in other jurisdictions. This is expected to lead to increased data-driven audits and KRA compliance checks by multinational companies.
4. Excise Duty
Restrictions on Annual Inflation Adjustments
The Cabinet Secretary has rightly acknowledged that the annual inflation adjustment may not be appropriate in all cases, particularly when prevailing economic and social factors are taken into account. However, the Cabinet Secretary has attempted to remedy this by authorizing the KRA to exclude products from the inflation adjustment after considering prevailing economic circumstances.
The Cabinet Secretary seems to have identified a valid problem but tried to address it with the wrong means. Giving the KRA wide discretionary powers to effectively set tax rates does not inspire trust.
Increased excise duty exemptions
The Cabinet Secretary has proposed expanding the scope of excise-exempt products to include:
- Hatching eggs imported from licensed hatcheries on the recommendation of the Cabinet Secretary in charge of Agriculture, Livestock, Fisheries and Cooperatives.
- Neutral spirit used by registered pharmaceutical manufacturers after approval by the KRA.
- Locally manufactured passenger cars. This should encourage investment in the local automotive assembly industry.
Advertising for alcoholic beverages and betting costs more
To discourage alcohol consumption, gambling and gambling, the Cabinet Secretary has proposed a 15% excise tax on fees charged by TV stations, print media, billboards and radio stations for advertising related to these activities.
Tobacco products have taken a hit in almost every budget since living memory. This year’s budget was no exception. The Cabinet Secretary has proposed changing the excise regime for liquid nicotine from the current shillings per unit to KES70 per millilitre.
10% increase in applicable excise duty rate on undisclosed products
The Cabinet Secretary indicated his intention to raise excise duty rates by 10% on certain products to generate additional revenue. However, he did not reveal which products are involved. The cabinet secretary only pointed to one product that would not be subject to the increase, namely petroleum products.
The Cabinet Secretary’s reluctance to specify which specific products are subject to the increased rates is telling. Expect pain. Alcohol, other fees levied by banks, and telecommunications products all line up.
5. Value Added Tax
Expanded scope of VAT exemptions
The Cabinet Secretary has proposed expanding the list of exempt supplies to include:
- Plant and machinery for use by manufacturers of pharmaceutical products.
- Medical oxygen supplied to registered hospitals, urine bags, adult diapers, artificial breasts and colostomy or ileostomy bags for medical purposes.
- Inputs and raw materials used in the manufacture of passenger cars and locally manufactured passenger cars.
6. Other Fees and Charges
The Cabinet Secretary has suggested the following:
- Exempting inputs and raw materials imported by manufacturers of pharmaceutical products from paying import duties and railway development taxes to encourage investment in the health sector and improve access to affordable health services.
- The reduction of the export tax on raw hides and skins from 80% or US$0.5 per kg to 50% or US$0.32 per kg.
7. Exit Kenya Revenue Authority and enter Kenya Revenue Service
The Cabinet Secretary has proposed changing the name of the Kenya Revenue Authority to the Kenya Revenue Service. Apparently, this rebranding will “change its public image and improve tax compliance through public relations and maintain a clear focus on taxpayer needs.”
For real? what’s in a name
For the proposals to be effective, they must be translated into law. After the publication of the Finance Act, taxpayers will have the opportunity to make their contribution through public participation. This will be crucial given some of the more controversial proposals.
Keep an eye out for more updates from us!